TODAY’S STUDY: COMPARING SOLAR IN JAPAN AND THE U.S.
Comparing Photovoltaic (PV) Costs and Deployment Drivers in the Japanese and U.S. Residential and Commercial Markets
B. Friedman, R. Margolis, J. Seel, July 2014 (National Renewable Energy Laboratory)
Japan has reemerged in 2013 as one of the world’s fastest-growing and largest photovoltaic (PV) markets (Renewable Energy World 2013). The annual growth rate in Japanese installed capacity during the first half of calendar year 2013 was about 270%. Japan’s PV market was on pace to triple in 2013 compared with 2012, with approximately 2.7 GW installed during the first half of 2013 (compared to about 1.6 GW in the United States). This places Japan among the world’s largest PV markets, along with China, Germany, and the United States.
This report explores details of the rapidly changing Japanese market as well as similarities and differences between the Japanese and U.S. markets. We collected data from a diverse group of Japanese PV installers, and we gathered additional Japanese and U.S. data from published sources as well as internal analyses. Specifically, we compare hardware costs, soft costs, and installed system prices for residential (less than 10 kW) and small commercial (10–50 kW) PV systems in Japan and the United States. The analyzed soft costs include customer acquisition; installation labor; and permitting, inspection, and interconnection. In conjunction with these data, we analyze Japanese and U.S. policies and market characteristics to explore the factors that are driving PV economics and accelerating or impeding PV deployment in each country.
Our key findings are as follows: Japanese PV system prices were 6% less than their U.S. counterparts in the residential ($4.64/W versus $4.92/W) and 20% less in the small commercial ($3.59/W versus $4.51/W) sectors in the first half of 2013. To explore this difference, we analyze PV hardware costs as well as a subset of soft costs in both countries. Japan’s substantially higher module costs make its total hardware costs higher than U.S. costs: about 60% higher ($0.98/W difference) in the residential sector and 44% higher ($0.67/W difference) in the small commercial sector (in the first half of 2013).1 The interplay between Japan’s PV market and energy policies drives the country’s PV economics and growth. Installed system price is a major aspect of this, and the increased sales volumes and competition stimulated by Japan’s energy policies are among the many factors determining system price.
In part because of Japan’s higher hardware costs, soft costs account for a significantly smaller proportion of system prices in Japan than in the United States (Figures ES-1 and ES-2).
In the first half of 2013, soft costs accounted for 44% of Japanese residential PV system prices versus 67% of U.S. prices, and they accounted for 39% of Japanese small commercial PV system prices versus 66% of U.S. prices.
Among the specific soft costs we examined, customer acquisition and system design account for the largest difference between Japanese and U.S. costs. Japanese costs in these two soft cost areas combined are approximately 50% lower ($0.23/W difference) in the residential sector. The difference is far more pronounced in the small commercial sector, where Japanese costs in the two categories combined are only 7% of those in the United States ($0.25/W difference).
Two of the key drivers of the Japanese market are the practice of cross-selling PV by companies already selling other products and services to prospective PV customers and the use of standardized PV system designs. These market characteristics increase the economic attractiveness of PV and represent potential cost-reduction opportunities for U.S. companies and policymakers. In both the residential and commercial sectors, customer acquisition is eased by Japanese installers’ preexisting relationships with non-PV customers. Japanese installers typically cross-sell PV to customers already purchasing other products and services from the installers’ other business lines, such as appliances, home renovations, and even cars. Customer- acquisition costs are also eased by the strong public support for PV in Japan following the Fukushima nuclear disaster of March 2011 as well as policy-driven improvements in project economics. Japan’s residential system-design costs also are a fraction of U.S. costs because installers there use standardized design programs produced by major Japanese module manufacturers, resulting in typical residential design times of less than an hour.
The ability to combine the benefits of a number of policies—the feed-in-tariff (FiT), the national cash subsidy, and local incentives—has played an important role in making PV economically attractive to Japanese consumers. We modeled the economic return due to the FiT and national cash subsidy. We found that residential owners of 5-kW PV systems in our base case might expect an 8% rate of return (RoR) and a net present value (NPV) of $1,892. These returns, however, are sensitive to a number of assumptions including insolation, post-FiT PV payments, system price, and energy consumption. Higher (and, in some cases, lower) household energy consumption, lower insolation, or a lack of excess-electricity payments in years 11–25 of the PV system’s lifetime could result in a negative RoR for residential PV. Commercial PV, on the other hand, receives more generous terms than does residential PV under Japan’s FiT (as does utility-scale solar, referred to in Japan as “mega” solar), and our modeled commercial returns are highly favorable under a range of assumptions: our base case has an NPV of $129,103 and an RoR of 74%, and these never drop below about $100,000 and 48% under the assumptions we modeled.
The differential FiT returns among sectors are shifting Japanese PV deployment toward commercial and mega solar systems. This is an intentional policy shift, based on the government’s renewable energy capacity-addition targets as well as the Japanese market’s ability to deploy low-cost hardware in non-residential sectors. Commercial market growth—which seems to have been slowed somewhat by issues such as labor shortages and land-acquisition and interconnection problems—likely will be strong for 2013–2015 as these issues are addressed.
Our discussions with Japanese installers and other market stakeholders suggest that the Japanese PV market will slow to a stable average annual market of about 2.5–3.5 GW by 2016.
This report explores why PV is economically attractive in Japan and thus is experiencing rapid growth. The interplay between Japan’s PV market and energy policies—which have similarities with the U.S. market and policies but also major differences—drives the country’s PV economics. In addition to providing insight into an important global PV market, understanding Japan’s strategies illuminates challenges and opportunities for the growing U.S. PV market. Installed system price is a major driver of PV economics, and the increased sales volumes and competition stimulated by Japan’s energy policies are among the many factors determining system price. Although non-module hardware costs are lower in Japan, Japan’s substantially higher module costs make its total hardware costs higher than U.S. costs. Japanese module prices are higher because its consumers and installers prefer domestic brands, which are more expensive than the global average module, and Japan’s complex module distribution network incurs additional supply-chain costs. However, as Japan’s PV policies boost module demand and encourage price reductions, the dominance of its domestically produced modules and the distribution system controlled by domestic manufacturers are waning. The entrance of cheaper foreign modules—as well as pure-play PV installers choosing the lowest-cost options—likely will push Japanese module costs downward.
In part because of Japan’s higher hardware costs, soft costs account for a smaller proportion of system price in Japan than in the United States. Soft costs constitute 44% of residential PV system prices in Japan versus 67% in the United States, and they constitute 39% of Japanese commercial system prices versus 66% of U.S. prices. Figure 29 displays the soft costs analyzed in this report, showing Japan with a $0.16/W lower cost in the residential sector and a $0.53/W lower cost in the small commercial sector.
In each case these costs constitute only part of total soft costs. For residential PV, soft costs not shown in this figure amount to $1.05/W for Japan and $2.22/W for the United States. For commercial, they amount to $1.12/W for Japan and $2.25/W for the United States. These non-analyzed soft costs include operating profit and sales tax.
Among the soft costs we examined, customer acquisition and system design account for the largest difference between Japanese and U.S. costs. Japanese costs are $0.23/W lower in the residential sector and $0.25/W lower in the small commercial sector (comparing 1H13 Japanese costs with 1H12 U.S. costs). In both sectors, customer acquisition is eased by Japanese installers’ preexisting relationships with customers through other business lines and by the attractive policy-driven economics and public support that enable PV to “sell itself.” Japan’s system- design costs also are a fraction of U.S. costs because installers there use standardized design programs produced by major Japanese module manufacturers, resulting in typical design times of less than an hour. Cross-selling PV within non-PV industries, increasing the economic attractiveness of PV, and standardizing the PV system-design process all represent potential cost- reduction opportunities for U.S. companies and policymakers.