The last time we checked, solar cell hardware accounted for only half the cost of a typical solar installation. Well, that’s nothing. The National Renewable Energy Laboratory (NREL) has come out with two new studies demonstrating that non-hardware “soft costs” now account for a whopping 64% of the total.
The overall cost of solar power is already dropping and the new NREL soft cost studies back up its recently released “road map” for accelerating that trend, so let’s take a look inside and see what’s up.
The Soft Cost Of Solar Power
First, a quick review. While solar cells are the heart of a solar installation, hardware is just one piece of an intricate dance before you get to the step where you flip the switch.
The other stuff, collectively called soft costs, includes everything else.
So, Did Soft Costs Go Up?
The new studies don’t necessarily indicate that soft costs have gone up over the past couple of years in and of themselves (see the benchmark 2010 NREL soft cost study for comparison).
They may simply indicate that soft costs have remained harder to budge when the cost of solar cells is dropping. In addition, NREL took some new approaches that pick apart soft costs in greater detail than in previous studies.
Part of the new approach was taken in response to the growing trend of third-party financing of solar installations, in which property owners lease their solar installation from a company rather than buying all the stuff themselves. This arrangement offers a number of benefits but can involve additional costs, at least in the short term.
Think of it like any other property improvement job and the cost-benefit balance is pretty clear. As a home or business owner, you could save some money if you do it all yourself, but that involves a lot of work and you’d have to learn a lot of new stuff that you might not ever need to apply again.
NREL lists three benefits of third-party financing (let’s note for the record that item #3 is more of a factoid than an individual benefit):
1. Third-party financiers offer additional services, such as shopping for systems, maintaining systems, and applying for incentives.
2. Third-party financing may effectively lower the levelized cost of energy over time through economics of scale.
3. Businesses offering third-party ownership of installations have gained approximately 70% of residential market share in the United States, driving much of the PV demand.
Picking Apart Soft Costs
As for the new studies, first let’s take a look at the one called “Benchmarking Non-Hardware Balance-of-System (Soft) Costs for U.S. Photovoltaic Systems, Using a Bottom-up Approach and Installer Survey – Second Edition.”
For this study, NREL interviewed 55 residential solar companies and 22 commercial companies, which collectively accounted for 93 megawatts of photovoltaic installation in the first half of 2012.
The basic finding was that residential soft costs were 64 percent of the total, with commercial coming in a little lower at 52 to 57 percent (generally, the larger the commercial installation, the lower the percentage of soft costs).
According to NREL, for residential installations the largest chunk of soft costs includes labor, acquisition, and back-office factors such as management and accounting. Costs relating to permitting, inspection, interconnection, subsidy applications and system design also contributed to the total.
The Benchmarking study also picked apart soft costs with a new “bottom-up” framework that involved five sub-categories, which NREL lists as “transaction costs, indirect corporate costs, installer/developer profit, supply chain costs, and sales tax.”
The impact of third-party ownership on soft costs becomes clear when you look at the details that NREL analyzed using a third-party model, which it had not deployed in earlier studies:
By modeling a third-party ownership structure — solar energy systems leased to homeowners, for example — the new approach captured costs of doing business that had not been previously quantified. Those costs include engineering, procurement, and construction; developer and finance department staff and overhead; professional and legal services; capital costs during construction; and other costs.
Now let’s take a look at the other new study, “Financing, Overhead, and Profit: An In-depth Discussion of Costs Associated with Third-party Financing of Residential and Commercial Photovoltaic Systems.”
As with the new Benchmarking study, this report picks apart a general category into subcategories, in order to assess the impact of finance-related factors such as indirect corporate costs and transactional costs.
The basic finding was that third-party ownership adds $0.78 per watt to residential systems, with commercial systems coming in at slightly less with $0.67.
The Next Step To Cheap Solar Power
The NREL studies support President Obama’s Sunshot Initiative (which btw was initially launched under the Bush Administration — just sayin’), which has the aim of achieving parity between solar power and fossil fuels.
Aside from funding numerous projects to kickstart the US solar industry and develop the next generation of high efficiency, low cost solar cells, SunShot has also been working with the industry to rein in soft costs, for example with its Most Affordable Rooftop Solar Prize.
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