TODAY’S STUDY: DROPPING PV COST DRIVES SUN GROWTH

Tracking the Sun IV; An Historical Summary of the Installed Cost of Photovoltaics in the United States from 1998 to 2010
Galen Barbose, Naïm Darghouth and Ryan Wiser, September 2011 ()

Executive Summary

As the deployment of grid-connected solar photovoltaic (PV) systems has increased, so too has the desire to track the installed cost of these systems over time and by location, customer type, system characteristics, and component. This report helps to fill this need by summarizing trends in the installed cost of grid-connected PV systems in the United States from 1998 through 2010, with preliminary data for 2011, and includes, for the first time, installed cost trends for utility-sector PV. The analysis is based on installed cost data for approximately 116,500 behind-the-meter (i.e., residential and commercial) and utility-sector PV systems, totaling 1,685 megawatts (MW) and representing 79% of all grid-connected PV capacity installed in the United States through 2010…

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It is essential to note at the outset the limitations inherent in the data presented within this report. First, the cost data are historical, focusing primarily on projects installed through the end of 2010, and therefore do not reflect the cost of projects installed more recently (with the exception of a limited set of results presented for behind-the-meter projects installed in the first half of 2011); nor are the data presented here representative of costs that are currently being quoted for prospective projects to be installed at a later date. For this reason and others (see Text Box 1 within the main body of the report), the results presented herein likely differ from current PV cost benchmarks. Second, this report focuses on the up-front cost to install PV systems; as such, it does not capture trends associated with PV performance or other factors that affect the levelized cost of electricity (LCOE) for PV. Third, the utility-sector PV cost data presented in this report are based on a small sample size (reflecting the small number of utility-sector systems installed through 2010), and include a number of relatively small projects and “one-off” projects with atypical project characteristics. Fourth, the data sample includes many third party-owned projects where either the system is leased to the site-host or the generation output is sold to the site-host under a power purchase agreement. The installed cost data reported for these projects are somewhat ambiguous – in some cases representing the actual cost to install the project, while in other cases representing the assessed “fair market value” of the project.2 As shown within the report, however, the available data suggest that any bias in the installed cost data reported for third party- owned systems is not likely to have significantly skewed the overall cost trends presented here.

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The report separately describes cost trends for behind-the-meter PV systems and utility- sector systems. Key findings regarding the installed cost of behind-the-meter PV systems are as follows:

The capacity-weighted average installed cost of all behind-the-meter systems installed in 2010 – in terms of real 2010 dollars per installed watt (DC-STC)3 and prior to receipt of any direct financial incentives or tax credits – was $6.2/Watt, and was $1.3/W (17%) below the average for systems installed in 2009.

Partial data for the first six months of 2011 indicates that installed costs have continued to rapidly decline, with the capacity-weighted average installed cost of projects funded through the California Solar Initiative falling by an additional $0.7/W during the first half of 2011, amounting to an 11% drop from average costs in 2010.

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The recent decline in installed costs is, in large part, attributable to falling wholesale module prices, which fell by $0.9/W from 2008 to 2009, by $0.5/W from 2009 to 2010, and which have fallen further still in 2011 (based on Navigant Consulting’s Global Power Module Price Index). The fact that average installed costs remained flat from 2008 to 2009, before dropping significantly in 2010, illustrates that movements in global wholesale module prices do not necessarily translate into an immediate, commensurate change in the cost borne by the final system owner; a time lag is apparent.

The recent decline in installed costs is also attributable to falling non-module costs. Based on component-level cost data reported by installers to PV incentive programs, non-module and non-inverter costs (which may include such items as mounting hardware, labor, permitting and fees, shipping, overhead, taxes, and installer profit) fell by roughly $0.6/W from 2009 to 2010.

PV installed costs exhibit significant economies of scale, with systems ≤2 kW completed in 2010 averaging $9.8/W, while >1,000 kW behind-the-meter systems averaged $5.2/W (or about 47% less). The cost of utility-sector systems was even lower, as discussed further below. These economies of scale partially explain the long-term decline in average installed costs, as the size distribution of PV systems has shifted towards larger systems over time.

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Large systems exhibited the greatest year-over-year cost declines from 2009 to 2010. For example, the average installed cost fell by $1.9/W (26%) for behind-the-meter systems in the >500 kW size range, but fell by a lower $0.9/W (11%) for ≤5 kW systems.

The growing prevalence of third party owned PV systems has introduced some distortion into the underlying cost trends, but at least at an aggregate sample-wide level, the magnitude of the distortion is likely to be relatively modest. Among systems of all sizes installed in 2010, the capacity-weighted average installed cost of third party owned systems was $0.3/W higher than for customer-owned systems, though the differences are somewhat larger when comparing within specific system size categories.

Average installed costs vary widely across states; among ≤10 kW systems completed in 2010, average costs range from a low of $6.3/W in New Hampshire to a high of $8.4/W in Utah. The country’s largest state PV markets, California and New Jersey, were near the center of this range, suggesting that, in addition to absolute market size, other state and local factors (e.g., permitting requirements, labor rates, the extent of third party ownership, and sales tax exemptions) also strongly influence installed costs.

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International experience suggests that greater near-term cost reductions in the United States are possible, as the average installed cost of 3-5 kW residential PV installations in 2010 (excluding sales/value-added tax) was significantly lower in Germany ($4.2/W) than in the United States ($6.9/W), where cumulative grid-connected PV capacity in the two countries through 2010 totaled roughly 17,000 MW and 2,100 MW, respectively.

The new construction market offers cost advantages for small residential PV systems. Among 2-3 kW residential systems (the size range typical for residential new construction) installed in 2010 and funded through California’s incentive programs, new construction systems cost $0.7/W less, on average, than comparably sized residential retrofit systems (or $1.5/W less if comparing only rack-mounted systems).

Systems with crystalline (multi- or mono-crystalline) modules had lower average installed costs than those with thin-film (amorphous silicon or non-silicon) modules, when focusing on <100 kW systems installed in 2010, but average installed costs were nearly identical for crystalline and thin-film systems within the >100 kW size range.

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As to be expected, systems with tracking equipment had higher installed costs than fixed-tilt systems, with a difference of $1.0/W in average installed costs for 10-100 kW systems installed in 2010 (insufficient data were available for larger system sizes).

The drop in installed costs in 2010 was partially offset by falling incentives. State/utility cash incentives continued their historical decline, with average residential incentives falling by $0.5/W to $1.6/W and average commercial incentives falling by $0.3/W to $1.8/W (all on a pre-tax basis).4 The average dollar-per-watt value of the federal investment tax credit (ITC) or Treasury cash grant in lieu of the ITC also fell in 2010, due to the decline in installed costs.

The capacity-weighted average net installed cost faced by PV system owners – that is, installed cost minus the combined after-tax value of state/utility cash incentives, the federal ITC (or Treasury grant), and any available state ITCs – stood at $3.6/W for residential PV and $3.0/W for commercial PV in 2010, in both cases an historic low.

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This report separately summarizes installed cost data for utility-sector PV projects, but these data must be interpreted with a certain degree of caution. First, the sample size is small (31 projects in total, including 20 projects installed in 2010), and includes a number of small wholesale distributed generation projects as well as a number of “one-off” projects with atypical project characteristics. The cost of these small or otherwise atypical projects is expected to be higher than the cost of many of the larger utility-scale PV projects currently under development. Second, the installed cost of any individual utility-sector project may reflect component pricing one or even two years prior to project completion, and therefore the cost of the utility-sector projects within the data sample may not fully capture the steep decline in module prices that occurred over the study period. With these important caveats in mind, several key trends for utility-sector PV systems emerge from our analysis:

The installed cost of utility-sector systems varies significantly across projects. Among the 20 utility-sector projects in the data sample completed in 2010, installed costs ranged from $2.9/W to $7.4/W, reflecting the wide variation in project size (from less than 1 MW to 34 MW), differences in system configurations (e.g., fixed-tilt vs. tracking and thin-film vs. crystalline modules), and the unique characteristics of individual projects.

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Current cost benchmarks for utility-sector PV are generally at the low-end of the range exhibited by the 2010 projects in the data sample, with various entities estimating an installed cost of $3.8/W to $4.4/W, depending on system size and configuration for utility sector systems installed at the end of 2010 or beginning of 2011.

The installed cost range of utility-sector systems in the data sample declines with system size, consistent with expected economies of scale. For example, among fixed-tilt, crystalline systems installed over the 2008-2010 period (we include a broader range of years here in order to increase the sample size), costs ranged from $3.7-$5.6/W for the five 5-20 MW systems, compared to $4.7-$6.3/W for the three <1 MW systems. Similarly, among thin film systems, the installed cost of the two >20 MW projects completed in 2008-2010 ranged from $2.4-$2.9/W, compared to $4.4-$5.1/W for the two <1 MW projects.

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Installed costs are lowest for thin-film systems and highest for crystalline systems with tracking. Among >5 MW systems installed from 2008-2010 (we again include a broader range of years in order to increase the sample size), installed costs ranged from $2.4-3.9/W for the five thin-film systems, compared to $3.7-$5.6/W for the five crystalline systems without tracking and $4.2-$6.2/W for the four crystalline systems with tracking. To more comprehensively compare the cost of these alternate system configurations, one would need to also consider differences in performance and the related impact on the LCOE.

The wide distribution in the installed cost of utility-sector systems in the data sample is partially attributable to the presence of systems with unique characteristics that increase costs. For example, among the 2010 installations in the data sample are a 10 MW tracking system built on an urban brownfield site ($6.2/W), an 11 MW fixed-axis system built to withstand hurricane winds ($5.6/W), and a collection of panels mounted on thousands of individual utility distribution poles totaling 14.6 MW ($7.4/W).

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Conclusions and Policy Implications

The number of PV systems installed in the United States has grown at a rapid pace in recent years, driven in large measure by government incentives. Given the relatively high historical cost of PV, a key goal of these policies has been to encourage cost reductions over time. Available evidence confirms that the installed cost of PV systems has declined substantially since 1998, though both the pace and source of those cost reductions have varied over time. Prior to 2005, installed cost reductions were associated primarily with a decline in non-module costs. Starting in 2005, however, cost reductions began to stall, as the supply-chain and delivery infrastructure struggled to keep pace with rapidly expanding global demand. Starting in 2008, global wholesale module prices began a steep downward trajectory. Those reductions in module prices began to drive the average installed cost of PV systems installed in the United States significantly lower in 2010, when average installed costs fell by 17%.

In addition, average non-module costs also fell significantly in 2010, after several years of apparent stagnation. Trends in non-module costs may be particularly relevant in gauging the impact of state and utility PV deployment programs. Unlike module prices, which are primarily established through global markets, non-module costs consist of a variety of cost components that may be more readily affected by local programs – including deployment programs aimed at increasing demand (and thereby increasing competition and efficiency among installers) as well as more-targeted efforts, such as training and education programs. Both the long-term and more recent reductions in non-module costs suggests that PV deployment policies have achieved some success in fostering competition within the industry and spurring improvements in the cost structure and efficiency of the PV delivery infrastructure.

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Preliminary cost data for the first half of 2011, as well as current cost benchmarks published by a variety of other entities, indicate that installed costs have continued to decline. Notwithstanding this success, further cost reductions will be necessary if the U.S. PV industry is to continue its expansion, given the expectation that PV incentive programs will also continue to ratchet down financial support. Lower average installed costs in Germany suggest that deeper near-term cost reductions in United States are, in fact, possible and may accompany increased market scale. It is also evident, however, that market size alone is insufficient to fully capture potential near-term cost reductions, as suggested by the fact that the lowest-cost state markets in the United States are relatively small PV markets. Targeted policies aimed at specific cost barriers (for example, permitting and interconnection costs), in concert with basic and applied research and development, may therefore be required in order to sustain the pace of installed cost reductions on a long-term basis.

Finally, installed costs vary substantially across system sizes, market segments, technology types, and applications. Policymakers may wish to evaluate whether differential levels of financial support are therefore warranted (e.g., to avoid over-subsidizing more cost-competitive installations while providing sufficient support for promising but less mature technologies and applications).