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Published on January 29th, 2015 | by Giles Parkinson

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Solar Costs Will Fall Another 40% In 2 Years. Here’s Why.

January 29th, 2015 by  

Originally published on RenewEconomy.

It’s been one of the big themes at the World Energy Future Conference here in Abu Dhabi. Solar, and other technologies such as wind power, are no longer more expensive than traditional fossil fuels in many parts of the world. Indeed, they are cheaper.

The big oil and gas players recognise this. Dr Adaba Sultan Ahmed al Jabber, the minister of state of the United Arab Emirates, said at the lavish opening on Monday that the cost of solar was competing with traditional sources of energy, and would not be derailed by the plunge in the oil price.

He saw that as an opportunity to call for the removal of fossil fuel subsidies, which he noted outstripped those of renewables by a factor of 5:1 in 2013. “If we have courage and opportunity to saying yes to thinking differently, could deliver better future,” he told the conference. This from a country which is in the top eight oil producers in the world, and the top seven in gas reserves.

A day earlier, the International Renewable Energy predicted that solar costs would fall substantially in coming years, underlying its competitiveness with fossil fuels. If government policy makers did not understand this, IRENA said, then they risked making bad decisions about their energy future.

Last week, the Saudi Arabian power company ACWE, with some $24 billion in assets, set a world record low for the price of solar in the world’s largest tender. Its CEO, Paddy Padmanathan, told RenewEconomy in an interview on Monday that the price of solar will fall by at least a third in coming years. He expects at least half of the 140,000GW of power capacity to be installed in the Middle East and north Africa in the coming decade to be solar.

Padmanathan’s prediction accords with our story from Deutsche Bank last week, which said that solar could extend its reach of “grid parity” to 80 per cent of global markets within the next two years, assuming a 40 per cent cut in solar costs by the end of 2017.

We will have more from the Padmanathan interview in coming days. But first, since our story about Deutsche Bank’s predictions of solar grid parity attracted such interest, we thought we would go into more detail about where Deutsche Bank analysts see the 40 per cent fall in solar.

The prediction is not really that outlandish, because of most manufacturers talk of efficiency and cost improvements all the time, and the likes of Padmanathan talk of economies of scale and the fall in financing costs.

So here’s a summary of what Deutsche Bank’s Vishal Shah, one of the leading and best connected analysts in the industry, says about the future of solar module costs. Much of it is focused on the rooftop market, but many of the learnings are the same for utility scale. And, in any case, most of the solar installed in developing countries with no grids will be distributed solar, and the big turning point in established energy markets in the arrival of parity for rooftop installations. (All $ are $US).

deutsche-solar-costs-590x415

The cost of production today

Deutsche notes that total module costs of leading Chinese solar companies have decreased from around $1.31 a watt in 2011 to around $0.50/W in 2014. It says this was primarily due to the reduction in processing costs, the fall in polysilicon costs and improvement in conversion efficiencies.

That represents a fall of around 60 per cent in just three years. Deutsche Bank says total costs could fall another 30-40 per cent over the next several years, with the greatest cost reductions are likely to come from the residential segments as scale and operating efficiencies improve.

It sees a precedent for this in the oldest major solar market in the world – Germany. “Costs today are well below costs in the United States and other less mature markets, and total installed costs have declined around 40 per cent over the last 3 years in the country. The exact drivers behind cost declines may vary between countries, but we believe the German example continues to prove that overall system costs have yet to reach a bottom even in comparatively mature markets.”

Total cost reduction will not come from polysilicon

While much of the cost reduction over the last 5-10 years has resulted from polysilicon price reductions, future cost reductions will necessarily come from non panel related balance of system costs. Polysilicon price reductions have accounted for significant portions of cost reductions, and were once the largest single cost component in panels, but this has changed drastically and rapidly over the last decade. It now represents no more than 10- 11 cents per watt so even if costs are halved, the effect on the total system cost would be incremental – not revolutionary.

Panels to fall in price to $US0.50/watt

Deutsche Bank says that while overhangs like trade cases or minimum price agreements could cloud the near term, market inefficiencies will be worked out over the long term and the clearing price will reach $0.50 or lower within the next several years.

Companies like SunEdison have publically targeted $0.40 cent per watt panels by the end of 2016, and many Tier 1 Chinese manufacturers are achieving sub $0.50/w already in 2014. :Given that most manufacturers are improving 1-2 cents per quarter, less than ten cents improvement (to reach $0.40) over the next 12 quarters is likely conservative.

If panels are sold at a 10 cent gross margin for a total cost of $0.50/w, manufacturers would achieve 20% gross margin – well above recent historic averages. Furthermore, transportation costs and ‘soft costs’ which inefficiently raise the price of panels should gradually improve as governments work through trade issues

Inverter and racking cost are also declining

Inverter prices typically decline 10-15 per cent per year, Deutsche Bank says, and it expects this trend to continue into the future. Large solar installers are already achieving $0.25/w or lower on large supply deals, and additional savings will be found over the next several years. Component cost reduction, next generation improvements, and incremental production efficiencies will drive savings on the manufacturing side, while new entrants and ongoing price competition will keep margins competitive.

Racking and other balance of system costs are often overlooked as a source of cost reduction, ongoing efficiency improvements, streamlining, and potential advances in materials to lead to incremental improvements, from around $0.25/w to around $0.17/w.

Installation costs will fall by one third in the US

Cost reduction on the installation side will come primarily from scale benefits, and could fall from $0.65/w to $0.45/w.  In fact, solar installation jobs are likely to increase substantially to keep pace with demand, but more experienced installers using better tools and techniques on larger systems are likely to more than offset any wage growth through efficiency gains,” Deutsche Bank says.

Sales/Customer Acquisition Cost will fall even further

Deutsche Bank sees substantial room for improvement over the longer term in cost per watt terms – from $0.50/w to $0.20/w – as solar gains mainstream acceptance, is recognized as a cost competitive source of electricity, and companies develop new/improved methods to interact with customers.

“Already, we are seeing domestic US firms develop automated online systems for customer sourcing, and these systems alone should allow substantial further automation as solar begins to ‘sell itself’. Although adoption is still in the early stages in most markets, we think costs could reach the level in the next several years where homeowners begin to recognize inherent value of solar self generation.

“We believe this will have two effects: 1) customers who prefer to own their own systems and have the ability to do so could finance their solar installation through multiple types of solar loans which are already gaining in popularity and 2) customers who focus on the monthly electricity bill will continue to sign PPA’s for solar priced below the retail electricity price curve.

“Furthermore, the wild card for a third prong of the solar explosion lies in the regulatory environment. If utilities begin to offer competitive solar installations regardless of credit quality (under a third party ownership model), this would open the market to another vast source of potential customers.”

Giles Parkinson travelled to Abu Dhabi as a guest of Masdar.

Reprinted with permission.

 
 
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About the Author

is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.



  • Texas Marty

    As the greenies call for the elimination of “subsidies” in the oil industry to help their cause, maybe they need to think of the big picture. The elimination of ALL subsidies in ALL energy production would best serve the tax payers. Then market efficiencies would best determine the winners and losers!!
    And in case the greenies look at my name and assume I’m on the side of oil, need I remind them that the great state of Texas leads the nation in wind powered energy production. The west Texas landscape is covered with those windmills.

    • Bob_Wallace

      “Greenies” would be very happy to see all subsidies go away.

      “Greenies” call for oil subsidies to be eliminated because of the moves to cut subsidies only for renewable energy.

      At the moment there no wind subsidies. That program has expired. Solar drops by 2/3rds next year and goes completely away a couple years later.
      Oil subsidies go on forever….

    • jeffhre

      Wind turbines?

  • CashMcCall

    Solar cells continue to be a total waste of money, not only expensive, wasteful, inefficient but must be tethered to batteries and inverters.

    The many government scams to promote their use demonstrates why politicians idiots.

    First Solar is not renewable. Solar cells unlike trees and plants, do not renew themselves. Batteries do not renew themselves. Inverters do not renew themselves.

    Secondly, solar is forever slave to the inverse square law rule and will NEVER be able to efficiently deliver a mere 100KW of power by comparison to standard electrical distribution from the power company.

    Third and most insulting. Is that solar is always subsidized just like ethanol which are both useless. The laughable notion that gov subsidies make useless technologies economically viable is insulting. Somebody has to pay for all this inefficiency and that is the Taxpayer and future generations.

    Fourth, Solar cells wear out faster than Utility company hardware and are prone to oxidation decay.

    There simply is not one compelling idea that makes Solar panels efficient.

    With that in mind, Passive hot water heating by the sun makes good sense and is very cost effective. HOWEVER various schemes are riddled with short term failures and are inefficient. A black polyethylene tank that feeds a hot water heater is relatively cost effective. But heat pump water heaters by themselves are not.

    If you greens are unwilling to do math and continue to miss the economics of energy, and misuse the definition of renewable and constantly demand taxpayers fund these insane schemes, you will never advance any effective cost reduction or efficiency.

    German leaned this hard lesson with their moronic push into wind farms. They finally abandoned the strategy as a total bust. At the bottom was a simple fact; it was not cost effective. The turbines did not even meet 40% of their claimed life expectancy. They all produced less energy than the hype and had to be slowed and serviced more frequently than expected.

    This is why intelligent people with physics degrees oppose the socialist street greens. Solar panels are simply a useless dead end. Only a simple sot like Obama would think they were a solution to anything.

    • Bob_Wallace

      Sometimes this job is worse than following the elephant parade.

      Some shit really stinks….

  • DazALot

    This article is from a person whose income depends on the success of renewable energy. The rest is for you to judge.

    • Bob_Wallace

      Actually the author is a journalist. If RE was to disappear Giles could do quite well writing on other topics, he’s got skills.

  • Gkiter

    Does it mean I should wait until April 2018 for my solar installation?

  • Mike

    Hurry up and lock yourself in on a PPA for the next 20 years…haha

  • Bill

    The end of 2017 is more like 3 years away.

    • jeffhre

      “Solar Costs Will Fall Another 40% In 2 Years. Here’s Why.”

      2015. 2016. 2017. Yup, three years. I looked it up on the calendar 🙂

    • MIXXX

      The beginning of 2017 is less than 17 months away.

      • Texas Marty

        This string is STUPID! As of this writing, Sept. 1, 2017 is EXACTLY two years away. There really is no cure for stupid!!!

        • Calamity_Jean

          The original article was written in January 2015.

  • Vensonata

    My own simple math tells me that in most places in the Western world at a modest production of 1500 kwh per year per kwp installed on a rooftop, every dollar of total installed cost, equals 2.5 cents kwh electricity produced. At $4 watt which is just recently the US national average, that’s 10 cents kwh. Basically it beats grid in most places.
    At $1.77 we are talking 4.5cents kwh! Nowhere in North America is there grid power for even twice that price. In the Sunny areas the rate approaches 3.5cents kwh.( Such as Arizona, New Mexico, etc.) Now, there is no getting around the word “revolution” since this is happening suddenly, over the next two years. “Evolution” would be appropriate for a change like this over a 30 year period.

    • mikey248

      You are ignoring the fact that solar produces only about 25 pct of its potential 24/7/365 full-sunlight capacity. I’m guessing you need to multiply your cost numbers by four.

      • neroden

        No, Vensonata had the numbers right. 1500 kwh per year accounts for that.

  • Kyle Field

    Removing fossil fuel subsidies could be a better lever than adding a tax to gas …to level the playing field. I’m still blown away just how much we subsidize industry, especially this one.

    On top of that, there should eventually be a carbon tax, but let’s get back to neutral first.

  • JamesWimberley

    The projected 40% reduction in US residential prices can be seen as the last phase of convergence with Germany. Distributed (<100 kw) prices have been flat for over a year now at ca. 1.6$/w, or €1.8/w. The long-term global trend rate of decline in costs has been around 10% a year.

  • tibi stibi

    i’m hoping the panels will get higher performance. when they go from 16% to 20% for the same panel price the installation and racking will go down 25%.

    • John Buck

      We should get over 25% efficiency by 2020. That’s 250 watts per square meter. Hopefully, they’ll get it to 40% at a cheap price quickly.

  • jburt56

    Basically there are no show stoppers to cost reductions to below the price of carbon, especially considering thermodynamic inefficiencies.

    • jeffhre

      …and political and economic friction!

    • DazALot

      that is until someone factors in the cost to replace solar panels and the batteries in less than a decade.

      • Bob_Wallace

        You have arrived with a load of misinformation on your back.

        Solar panels manufactured post 2000 are expected to lose between 0.1% and 0.4% of their output per year.

        Those panels mounted where they are subjected to high wind/snow loading and/or high UV levels should be outputting 92% or better after 20 years of use. 84% or better after 40.

        Panels mounted in benign environments should be outputting 95% of new at age 50.

        Our oldest panels are now about 40 years old. At age 35 they had lost about 0.1% per year.

        • DazALot

          There wasn’t any affordable solar panels 40 years ago. I presume you clean the panels more than once per week? You know what dust, snow, mildew, bird droppings and rain smudges do to efficiency?

          • Bob_Wallace

            I have no idea what the cost of solar panels 40 years ago has to do with how they are performing today.

            Panels cost a huge amount more 40 years ago. Now they are cheap.

            Panels built almost 40 years ago are still pumping out the power. Newer panels should hold up even better.

            I know all about snow, dust and bird droppings. I shovel off my panels when it snows and wash them a couple of times in dry season.

          • CashMcCall

            Solar panel aren’t cheap. The total cost of power generated from their effective lifetime is 100X that of the grid. They are utterly useless in supply energy needs for a modern household.

          • jeffhre

            Need to look up some prices from 2001 forward. And in 2013 prices were already down 80% from your 1990’s mindset. Since you wrote that comment back in 2015, prices are down another 12%. Don’t even think about looking at actual 2016 prices, that would make you even more unhinged from the facts that are exacerbating your cognitive dissonance.

        • CashMcCall

          There is not a single brand of solar panel that has ever lasted ten years let alone 50 years. What a sloppy assumption.

          • Bob_Wallace

            The panels in my yard have lasted over ten years. So right away we know that you’re posting junk.

            The very first solar panel manufactured is now over 50 years and still working.

            You’re posting rubbish, Cash. But I’m sure you know that.

            Troll fail….

          • stupidkitty84

            Just feel sorry for the guy. He’s about to lose his job in the fossil fuel industry. Lol.

          • neroden

            I’m still using a solar calculator produced in the 1970s. Solar panels last *practically forever*.

          • John Buck

            One from California made 30 years ago that still works.

  • Martin

    At least some oil producing countries think of the future, not like the one I live in, Canada.
    And maybe very soon everybody will go the right way, towards RE systems,.

    • Larmion

      Canada is using more renewable energy as a share of its consumption than almost any other oil producer (only Norway still handily beats you).

      The UAE are talking big, but have a 15% renewable electricity target by 2030. Canada gets 65% from hydro alone – still the lowest carbon renewable available as per the IPCC.

      Add in other renewables and you get a very impressive share indeed. Oh, and didn’t Canada just have a bumper year for new non-hydro capacity? 🙂

      Canadian politicians might talk up renewables, but they sure presided over an impressive boom. The polar opposite of the Gulf States, in other words.

      Oddly, that phenomenon is repeated on a global scale. The current conservative UK parliament has added more RE than ever before and adhered to strict efficiency targets, despite comments about ‘green crap’.

      Even in Germany this is repeated. The only state where the Green Party is a major political force, Baden-Würtemberg, is also an absolute laggard in the deployment of renewable energy.

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