Why Are Residential PV Prices in Germany So Much Lower Than in the United States? A Scoping Analysis (with Updated Data on Installation Labor Requirements)
Joachim Seel, Galen Barbose, and Ryan Wiser, February 2013 Revision (Lawrence Berkeley National Laboratory)
Note for the February 2013 Revision
The original September 2012 briefing included the results of a survey of 24 German PV installers conducted in early 2012
One of the more surprising results was the extraordinarily low number of installation labor hours reported by survey respondents
LBNL conducted a follow-up survey of 41 German installers in October 2012, focused solely on installation labor requirements
The results of the follow-up survey are more in line with expectations (a mean response of 39 man-hours per system for on-site installation labor, compared to 7.5 hours per system in the original survey)
This revised briefing includes the results of this follow-up survey, as well as a limited number of other updates (including Q3 2012 data on system pricing and market size)
Motivation, Scope, and Limitations
The installed price of residential PV is significantly lower in Germany than in the U.S., due primarily to differences in “soft” costs
– But relatively little is known about how/why soft cost components differ
In order to better characterize the nature of these differences, LBNL:
– Fielded two surveys of German PV installers, adapted from NREL’s survey of U.S. installers, to collect data on residential PV soft costs
– Comprehensively reviewed public and private consultant data relevant to the cost structure of residential PV in Germany
Focus is the pre-incentive price paid for customer-owned systems
– Residential PV in Germany is almost entirely customer-owned; substantial third-party ownership in U.S. but pricing sometimes impacted by appraised values
Analysis here is intended to be a “first cut” and serves to highlight specific areas where further research could reveal additional insights
– Survey focus was on quantifying differences in specific business process costs
– Additional research needed to confirm and characterize differences in more detail, as well as to link observed differences to underlying market drivers
Germany’s 2011 Additions ~4x Greater, and Cumulative Additions More than 5x Greater, than United States
*Annual Residential Installations in Germany 2.5x Greater (9.4x Greater on per Capita Basis) than in the United States
* Cumulative Residential Installations in Germany 3.6x Greater (14x on per Capita Basis) than in United States
Varied Data Sources Are Available for U.S. and German PV System Pricing
LBNL Tracking the Sun (TTS): Installed prices for ~70% of PV capacity installed in the U.S. from 1998-2011
NREL Cost Modeling Team: Quarterly bottom-up installed price benchmarks based on interviews with installers and modeling
EuPD: Project-level price quotes collected through quarterly survey of German installers (since 2008); used for BSW price reports
Photon, other consultants: Installed price benchmarks based on interviews with installers or other market research
Miscellaneous: Schaeffer et al., 2004, “Learning from the Sun”; Haas, 2004, “Progress in Markets for Grid-Connected PV Systems in the Built Environment”; Credit Agency for Reconstruction (KfW); IEA National PVPS reports; Langen 2010
* Residential PV System Prices Have Often Been Higher in the U.S. Than in Germany
* Installed Price Gap Was $2.8/W in Q4 2011 and Differential Continued Through 2012
* Installed Prices in the U.S. Are Also Much More Varied Than in Germany
Learning Curve Analyses of BoS Costs
Question: To what extent are lower BoS costs in Germany potentially due to larger overall market scale and associated learning-induced cost reductions?
Traditional PV learning curve analyses often focus on PV modules and relate global module production to module prices
Some business process costs (e.g., installation labor, customer acquisition) may also be subject to local learning effects
We compare the relative impact of local BoS learning in the U.S. and Germany based on implied non-module costs for less than 10 kW PV systems and cumulative national PV capacity installed
BoS progress ratios may help predict future U.S. price reductions that accompany larger market scale
Differences in Market Size Alone May Explain Roughly Half of the Price Gap
Total non-module costs in 2011 were ~$2.8/W higher in the U.S. than in Germany
But, 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.
One might (crudely) infer that the remaining $1.5/W of the total gap in 2011 non-module costs may be due simply to the larger base of German experience
Soft-Cost Learning for less than 10 kW Systems Occurs More Slowly in the U.S. and Is Less Effective
The development of non-module costs is less correlated with market growth in the US than in Germany (52% vs. 9% explained by other factors)
The learning rate for non-module costs (proxy for soft costs) is lower in the US than in Germany (7% vs. 15%)
Regular FiT Adjustments Pressure German Installers to Reduce Prices
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 “valuebased” prices, even for customer-owned systems
Hypotheses Explored for Why German and U.S. Residential PV Prices Differ
General:
– Residential systems are larger in Germanyà yes
– US installers develop projects more slowly à yes (semi-addressed)
– US installers have higher profit margins, after recovering all overhead expenses à uncertain (semi-addressed)
Component costs:
– Hardware component costs are lower in Germany à possibly true for inverters, but
uncertain (semi-addressed) – US has a lower share of cheaper Chinese modules à no
Customer acquisition:
– US installers have higher customer acquisition costs à yes
– US installers have lower customer success rates à yes
– US installers have higher marketing and advertising costs à yes
Installation labor:
– US installers need longer for the installation process à yes
– US installers have higher wages à yes for installation labor, no for other labor (semiaddressed)
Permitting, Interconnection and Inspection Costs
– US installers have higher labor hour requirements for PII à yes
– US has higher permitting and interconnection fees à yes
Taxes
– The US charges higher sales taxes on PV systems than Germany à yes
Additional Hypotheses Not Explored Here
Overhead costs
– US has higher business overhead costs (e.g. insurance costs, material storage costs)
– German installers have higher sales volume per year, spreading fixed costs over larger
denominator and profiting from economies of scale, allowing for volume discounts
– US installers have higher cost of capital for their own business operations
– US installers face higher transaction costs associated with arranging financing for
customers
– US has a longer supply chain for PV modules and other hardware
Profit margins
– US has a lower degree of competition among installers, maintaining higher profit margins
– Value based pricing allows for higher prices in the US, given better irradiation, high retail rates in some regions, and more generous subsidies
Regulatory issues
– US requires each panel and rack component to be grounded to the DC switchbox leading to higher material costs and installation labor hours
– Germany has less onerous requirements for roof mounting structures
Installation timing
– US systems are installed more steadily throughout the year, whereas German
installations were traditionally concentrated at the end of the year when prices are lower,
leading to lower annual average prices
Exchange rate dynamics are more beneficial for German system costs
A Small Body of Literature Explores the German-U.S. PV Price Gap
Few have sought to explain the underlying reasons behind the German-U.S. PV price
gap or to quantify differences in specific soft costs
– Photon 2011a, Photon 2011b, BNEF 2012, Langen 2010, Podlowski 2008, Goodrich et al. 2012
Possible reasons for the price gap that have been postulated:
– “Value-based pricing” in the U.S. (e.g., associated with more generous subsidies and/or less competition among installers)
– Preference for premium products in the U.S.
– Lower customer-acquisition costs in Germany due to simpler/more certain value proposition (FiT), critical mass of demand, and economies of scale
– Lower installation labor costs in Germany due to greater experience and economies of scale
– Lower permitting costs in Germany due to fewer requirements and greater standardization
– Less onerous electrical requirements and interconnection processes in Germany
Our analysis complements that literature by:
– Deriving estimates for specific business process costs via two surveys of German residential installers
– Using large samples of system prices to compare price developments and distributions
– Estimating the impact of differences in project development times on reported prices
– Analyzing residential module market composition
Complements NREL cost modeling team’s in-depth interviews with installers
Overview of Initial Survey Approach
German survey focuses on standard DOE soft cost categories:
Customer acquisition
Permitting, interconnection, inspection
Installation labor
Adapted from NREL survey of U.S. installers to allow comparisons
Average labor hours per system for PII and installation
Total annual expenditures on customer acquisition…
Follow-Up Survey on German Installation Labor Hours
LBNL conducted a second survey of German installers in October 2012, focused solely on installation labor requirements
The survey asked 7 questions about German residential PV installations completed during the preceding 12 months.
Survey was fielded online (between October 9th and November 5th 2012) in German in collaboration with www.photovoltaikstudie.de...
Raw Sample Characterization
Most respondents in both surveys are small volume installers
– Most installed <50 systems per 12-month period
– Median installations/yr = 25 for 2011, 26 for 2012
Average system sizes are a bit smaller in 2012 German survey
– Average of 6 kW per system (compared to 8 kW in German 2011 survey)
– Less variation in average system size
* Total Soft BoS Costs + Profit Represent Roughly $0.62/W or 20% of System Price
* Survey Responses Are Generally Consistent with Estimates Reported Elsewhere
* Soft Costs for Residential PV in Germany Are ~$2.7/W Lower Than in the U.S. -- Total soft costs for residential PV in Germany, including margin, are just 19% of the implied soft costs for U.S. residential PV ($0.62/W vs. $3.34/W)
* Labor Rates Are Higher in Germany Than in the U.S. for Some Functions, but Lower for Others
Residential Customer Acquisition Costs Average $0.07/W in Germany
Most respondents reported customer acquisition costs <$0.15/W; several small volume installers reported somewhat higher costs
On average, customer acquisition labor includes 3 hrs/system for sales representative and 2 hrs/system for design engineer
Customer Acquisition Costs in Germany Are $0.6/W Less Than in the U.S.
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
PII Costs Are Negligible for Residential PV in Germany
Total PII costs of $0.03/W on average
Fewer than 10 hours of labor required for all PII activities, and no fee
– Average labor requirement of 5 hrs (confirmed by PV legal survey, lowest for all European countries)
– Permit requests and incentive application are done online; usually no permit inspection required
Grid upgrade costs for German residential PV systems are paid by Grid Operator (SEPA 2012)
PII Costs Account for Roughly $0.2/W of the German-U.S. PV Price Gap Differences due to both PII labor costs and permit fee
PII labor costs are $0.12/W lower in Germany
Remainder of gap ($0.09/W) is associated with permit fee (assuming an average of $430 per system in the U.S.)
Langen (2010) estimates PII costs for the US at $.80/W, and Germany at $.10/W
PV Grid (2012) reports 2.5h for interconnection, 1.5h for interconnection permits and .7h for other legal-administrative processes in Germany
SunRun (2011) estimate of $.50/W in the U.S. includes sales & marketing costs & variations in building requirements
Installation Labor Costs in Germany Average $0.23/W
German follow-up survey shows higher labor hours than original survey, more in line with expectations:
– Mean installation labor = 39 man-hours/system (vs. 7.5 hours in original survey)
– Responses generally ranged from 25-50 hours/system
– Respondents to original survey likely misinterpreted the question (i.e., confusion between hours-on-site vs. man-hours)
No obvious economies of scale with respect to installer annual sales volume
German Installations Are Faster and Cheaper than in the United States
Updated survey results show a sizable gap between the United States and Germany in
installation times (36h)
Installers in Germany rely even more on (cheaper) nonelectrician installation labor than in the US (77% vs. 65%)
Differences in Installation Labor Partly Stem from Different Mounting Practices
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
Follow-up survey also asked about the usage of roof-to-inverter conduits for wiring and about the location of grounding for German residential PV – But no clear trend that might explain differences in labor requirements compared to U.S. systems
Nationwide Sales Tax Exemptions in Germany Further Reduce Soft Costs
Survey respondents confirmed that German residential PV systems are effectively exempt from revenue taxes/ sales taxes/ value added taxes – Regular tax rate of 19% can be exempted either via “Kleinunternehmer” or “Vorsteuererstattungs” clause 35
In the United States, 23 states assess sales tax on residential PV systems, usually 4-8% of system prices, as do many local governments
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
* PII, Customer Acquisition, and Installation Labor Total Just $0.33/W for Residential PV in Germany - For residential PV in Germany, PII, customer acquisition, and installation labor are estimated to represent 53% of all non-hardware costs and 11% of
the total system price.
* Summary of Soft Cost Differences for Residential PV in the U.S. and Germany
* Summary of Soft Cost Differences for Residential PV in the U.S. and Germany
Secondary Analyses… Longer U.S. Project Development Time Contributes to Apparent Price Gap… German Residential Systems Are Generally Larger Than U.S. Systems… If the Size Distribution of U.S. Residential Systems Were the Same as in Germany, Median Prices Would Be $0.15/W Lower… Installer Purchase Prices for Chinese Modules Are Lower than for Non-Chinese Modules in Germany… The Price Gap Is Not Due to Differences in Chinese Module Market Share…
Summary of Findings from Survey of German Installers
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
Summary of Findings from Secondary Analysis
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 between Germany and U.S.
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
Policy Implications
Reducing residential PV prices in the United States may require policies that enable:
A large and durable market size
A concentrated market->minimize fragmentation
A simple, transparent, certain incentive structure/value proposition
Simple interconnection, permitting, and inspection requirements
Regular incentive declines to drive & follow cost reduction…
Your intrepid reporter
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