The whole “Why is German solar about half the price of U.S. solar?” question is one of the most important solar questions of the day. Lawrence Berkeley National Laboratory (LBNL) has probably most extensively studied this matter. In a recently updated version of its analysis, LBNL examines why a residential German solar system goes for $3.00/watt and a residential U.S. solar system goes for $6.19/watt.
As no surprise to anyone who follows this matter, LBNL still concludes that the massive price differences above are basically due to soft costs. But the updated study also digs into the reasons why the soft costs are (or might be) so much lower. As LBNL rightly noted, relatively little has been known about how or why various soft cost differ.
First of all, let’s quickly run down how LBNL conducted this study:
- It conducted two surveys of German PV installers (the first one, conducted in September, included 27 installers; while the second one, conducted in October, included 41 installers). LBNL’s studies were “adapted from NREL’s survey of U.S. installers, to collect data on residential PV soft costs.“
- The installations the study were focus on were customer-owned residential solar systems (not 3rd-party-owned solar systems, which dominate the U.S. residential market).
- The study also “Comprehensively reviewed public and private consultant data relevant to the cost structure of residential PV in Germany.”
Also, before getting into the results, here’s a quick reminder of the differences between German and U.S. solar power growth:
Alongside the differences in solar growth in the past several years, German solar has also been considerably cheaper for awhile now:
The specific question LBNL is trying to delve into is whether the lower solar power system costs in Germany are primarily due to its more mature market, or to what extent BoS costs are due to “larger overall market scale and associated learning-induced cost reductions.”
1. LBNL notes that about half the price difference described above may be due to market size in each of the countries.
One thing LBNL notes is that “non-module costs in 2011 were ~$2.8/W higher in the U.S. than in Germany” and that “at the same cumulative capacity that the U.S. had installed at the end of 2011 (4 GW), non-module costs for residential PV in Germany were only $1.3/W less than in the U.S.” A basic inference from that might be that only about half the difference in soft cost prices could be related to market size. However, it should also be noted that Germany is much smaller and has a much smaller but more densely concentrated population. So, 4 GW in Germany represents a much greater solar market saturation per capita or relative to many other relevant socioeconomic metrics.
2. Solar incentives may also be highly important (something Jigar Shah premised in a guest post on CleanTechnica in October). From LBNL:
- BNEF (2012) indicates the presence of value-based pricing in both the US and Germany.
- Following this hypothesis, the iterative reduction of the FiT presses German installers to lower system prices to maintain attractive investments for their customers
- Similar forces may operate less efficiently in the U.S., yielding higher “value-based” prices, even for customer-owned systems
3. A whole bunch of other possibilities.
As stated at the top, not much research has been conducted in this arena. There are a large number of reasons why the difference in prices occur. Of course, they aren’t mutually exclusive — it’s like a combination of many or all of these. Here are some hypothetical reasons noted by LBNL:
Specific Results of LBNL Study
When it comes to labor rates, there’s a lot of variation between the countries, with some jobs paying less in the U.S. and some paying less in Germany.
Customer acquisition costs are considerably lower in Germany (about 62¢/watt lower):
Some considerations why that might be, from LBNL, are:
- Mean bid success rate is slightly lower in the US (30% in US vs. 40% in Germany)
- German installers leverage partnerships with equipment manufacturers
- Langen (2010) points to simpler and more certain value proposition in Germany (i.e., FiT), installer learning, and critical mass for word of mouth
Many have speculated that permitting costs are the main culprit of the prices differences, but that only comes to about 20¢/watt of the difference (not negligible, but not as much as customer acquisition).
Labor costs represent another considerable difference in price, which is largely due to how long it takes to install the solar systems in each country, but is also due to greater use of cheaper labor in Germany.
- Large majority of German installers either never or rarely install systems requiring roof-penetration
- Roof penetration is much more common in the United States, due to differences in roofing materials and higher wind speeds in some regions
Through a couple of available mechanisms, basically all residential solar systems are exempt from revenue taxes, sales taxes, or value added taxes.
Not the case in the U.S. “23 states assess sales tax on residential PV systems, usually 4-8% of system prices, as do many local governments.”
The final conclusion from LBNL: “Given the spatial distribution of PV systems, and accounting for sales tax exemptions in some states, state and local sales taxes added $0.21/W to the median price of US residential PV in 2011.”
Other Soft Costs
Beyond the soft costs LBNL closely examined, a number of other soft costs apparently accounted for another $1.32/watt. These could include overhead, profit (seems to be unlikely), or other costs.
LBNL notes: “‘Overhead, proﬁt, and other residual sow costs’ is calculated as the diﬀerence between total sow costs and the sum of the individual business process costs quantiﬁed through the German and U.S. installer surveys. This residual term includes such items as property-related expenses (rent, utilities, etc.), inventory-related costs, additional insurances and fees, and general administrative costs. Our estimate of $1.61/W for ‘overhead, proﬁt and residual sow costs’ is generally consistent with the ﬁndings of CPF (2012). Research by Woodlawn Associates (2012) suggests that proﬁt margins for many U.S. installers are low or non-existent, implying that the diﬀerences shown for the ‘overhead, proﬁt, and other residual sow costs’ category is not the result of much higher proﬁt margins in the U.S.”
Longer Project Development Times
Aside from the longer installation period noted above, longer overall project development is also a reason for higher solar system costs in the U.S.
- Based on TTS data and German survey responses, residential projects take 126 days to develop in the U.S. vs. 35 days in Germany
- When comparing German and U.S. system prices based on installation date, some of the difference is due to the longer development time in the U.S., i.e., German system pricing is effectively “shifted” one quarter relative to the U.S.
- In Q4 2011, this effect contributes ~$0.18/W ($3.26 minus $3.08) to the apparent price gap
- Larger or smaller impacts in other quarters, depending on speed of price declines
German installations go up much faster, but they’re actually larger.
Based on this, LBNL projects that there’s a 15¢/watt difference due to Germany’s larger systems.
The U.S. and Germany use Chinese solar modules (which are cheaper) to a similar degree, so that is not considered one of the reasons for the differences in price.
So, here’s a summary of LBNL’s findings (from LBNL’s Germany surveys and from secondary data):
- Total non-hardware costs for residential PV in Germany are ~$2.70/W lower than in the U.S.
- Customer acquisition costs average just $0.07/W in Germany, or roughly $0.62/W lower than in the U.S.
- Installation labor requirements reportedly average 39 hours for German systems, leading to $0.36/W lower costs than in the U.S.
- PII processes require 5 hours of labor, on average, in Germany, with no permitting fee, resulting in PII costs roughly $0.21/W lower than in the U.S.
- German residential systems are exempt from sales/value-added tax, while U.S. systems are subject to an average sales tax of roughly $0.21/W (accounting for sales tax exemptions in many U.S. states)
- The remaining gap in soft costs between Germany in the U.S. (~$1.32/W) is associated with overhead, profit, and other residual soft costs not captured in the categories above
- Shorter project development times in Germany contribute to apparent price gap (e.g., ~$0.2/W effect for Q4 2011 installations)
- Residential PV systems are larger in Germany (partly due to differences in policy design), benefitting from economies of scale ($0.15/W effect)
- Not additive to the differences in soft costs presented previously, but rather helps to explain those differences (e.g. larger system sizes in Germany are partly why marketing costs, on a per Watt basis, are lower)
- Market share of Chinese modules is similar for customer-owned residential systems in Germany and U.S., and thus does not contribute to price gap
“Possible Market Drivers for Soft Cost Differential”
Getting back to the root of the matter. What are the market drivers that result in the cost differences above? Here’s what LBNL concludes are possibilities:
- Greater market-wide deployment and longevity in Germany allow for cost reductions based on installer experience
- Lower market fragmentation (one contiguous market and regulatory framework) and higher population density in Germany allow for lower overhead, transport, and supply chain costs.– In the US, at least 50 markets exist – many more when considering local permitting-inspection-interconnection rules.
- Larger and more concentrated markets in Germany (as well as cultural differences with the US) facilitate bandwagon effects and customer acquisition by word of mouth, leading to lower customer acquisition costs
- Less onerous permitting-inspection-interconnection processes (e.g. online registration, no permitting fee or inspection by county officials) and installation practices (e.g. easier grounding, roof penetration) in Germany
- Simpler, more certain and more lasting value proposition in Germany allow for both lower customer acquisition + overhead costs, and larger average system sizes– FiT guaranteed for 20 years in Germany vs. varying value of net metering + state incentives + federal tax incentives in the US
- Regular declining FiT and high competition among installers yield pressure for price reductions and lower margins in Germany, while larger incentives, opportunities for higher value-based pricing, and less installer competition allow for higher prices and margins in US
So, lastly, some of the policy implications of the above are as follows:
Of course, a lot more research in this arena needs to be conducted. LBNL’s study is just the beginning. But it certainly opens up a lot of windows and alot of opportunity for improvement.
To see LBNL’s full report (which includes the images above and many more, as well as an extensive bibliography), go to: “Why Are Residential PV Prices in Germany So Much Lower Than in the United States?” [PDF].