TODAY’S STUDY: SOLAR IS NOW AFFORDABLE AND GETTING MORESO

Current and Future Cost of Photovoltaics; Long-term Scenarios for Market Development, System Prices and LCOE of Utility-Scale PV System

February 2015 (Fraunhofer ISE)

Key Insights

Our analysis aims at estimating the future cost development of solar photovoltaics to support further discussion

Following the surprising cost development in solar photovoltaics over the last decade, policy makers today are faced with a large uncertainty regarding the future role of this technology. We aim to contribute to a fact-based discussion by providing an analysis of the range of likely long-term cost developments in solar photovoltaics, based on today’s knowledge and technologies available today. We start our analysis with the current cost of a ground-mounted solar photovoltaic power plant in Germany, representing one of the most developed markets for photovoltaic power plants worldwide. Based on scenarios of global market developments, ranging from best-case to worst-case scenarios, we then apply the price-experience curve (also known as “learning curve”) to estimate future cost developments of solar photovoltaic modules and inverters. We thereby use a conservative approach that assumes no technology breakthroughs and builds only on technology developments within crystalline silicon technology already known today. Developments of other costs (“Balance of System”) are estimated for each component, assuming different scenarios of future module efficiency. The scenarios and estimations were developed by Fraunhofer ISE and discussed and refined intensively at workshops with experts from industry, science and policy.

Building on this in-depth analysis of future investment costs, future ranges of the levelized cost of electricity produced by large-scale solar photovoltaics in different countries are calculated, based on local climatic conditions and cost of capital. The analysis shows that solar power will soon be the cheapest form of electricity in many regions of the world.

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Solar photovoltaics is already today a lowcost renewable energy technology.

The feed-in tariff paid for electricity from large-scale photovoltaic installations in Germany fell from over 40 ct/kWh for installations connected in 2005 to 9 ct/kWh for those connected in 2014. This sudden reduction came as a major surprise to most industry experts and policy makers. Power produced by solar photovoltaics, long known as one of the most expensive renewable energy technologies, is today cost competitive with both wind onshore and power generated by fossil fuels in Germany. The feed-in tariff for largescale solar photovoltaic power plants in Germany installed in January 2015 is 8.7 ct/kWh, not adjusted for infl ation. This compares to a feed-in tariff for wind onshore, ranging from 6 to 8.9 ct/kWh in Germany, and to the cost of producing power through newly built gas- or coal-fi red power plants, ranging from 7 to 11 ct/kWh.

Even lower prices for solar power have been reported in sunnier regions of the world. A power purchase agreement for a 200 MW-solar farm in Dubai was recently signed for 5 ct/kWh (5.84 $ct/kWh). Projects under construction in Brazil, Uruguay and other countries are reported to produce at costs below 7 ct/KWh. These power generation costs largely confi rm the notion that the cost of building and operating a large scale solar photovoltaic power plant is comparable around the world, once market barriers are removed.

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Solar power will soon be the cheapest form of electricity in many regions of the world.

Our analysis of diff erent scenarios concludes that an end to cost reduction for power from solar photovoltaics is not in sight. Even in the most conservative scenarios for market development, without considering technology breakthroughs, significant further cost reductions are expected.

The following methodology was used to reach this conclusion: The starting point of the analysis was to derive consistent scenarios for the global photovoltaics market development between 2015 and 2050. These scenarios were discussed and revised in expert workshops and represent a range from “very pessimistic” to “very optimistic” in terms of global photovoltaics market developments. In the most pessimistic scenario, annual additional photovoltaic installations would increase from ~40 GW in 2014 to 175 GW in 2050 (cumulated produced capacity until 2050 of ~6000 GW). In the most optimistic scenario (“breakthrough scenario”), 1780 GW of photovoltaic systems will be installed per year by 2050 (cumulated produced capacity by 2050: ~36000 GW).

Based on these market scenarios, future prices for photovoltaic modules were estimated using the “photovoltaic learning curve,” which builds on the historic experience that with each duplication in the total number of modules produced, the price per module fell by roughly 20 percent. Based on expert discussions at the workshop, we varied the future learning rate between 19 and 23 percent and introduced the conservative assumption that prices will fall with a learning rate of only roughly 10 percent in the next years, until a total (cumulated) capacity of 5000 GW is produced. This approach results in module costs decreasing from approximately 550 EUR/kW today to 140-210 EUR/kWp by 2050 in the breakthrough scenario, and to 270-360 EUR/kWp in the most pessimistic scenario. A similar approach was applied to estimate the future cost of solar inverters, resulting in investment costs falling from 110 EUR/kWp today to between 23 and 39 EUR/kWp by 2050.

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To estimate the future cost of other components (“balance of system cost”), current cost, cost drivers and cost reduction potentials were discussed for each component at the expert workshops and three scenarios for future module eff iciency were developed (24, 30 and 35 percent in 2050). Largely driven by increased module eff iciency, balance-of-system costs are expected to fall from around 340 EUR/kWp today to between 120 and 210 EUR/kWp by 2050.

The cost of solar generation can be derived on the basis of these fi gures. Depending on annual sunshine, power costs of 4-6 ct/kWh are expected in Europe by 2025, reaching 2-4 ct/kWh by 2050. For the next decade, this represents a cost reduction of roughly one third below the 2015 level. This near-term price development includes the conservative assumption that module prices will return to the trajectory determined by the historic price-experience curve in our analysis. In the long term, a reduction of roughly two thirds compared to the current cost is expected.

Our analysis has identifi ed increasing module eff iciency as a key driver of cost reductions in the long term: The expected duplication of module eff iciency until 2050 will allow twice as much power to be produced from the same surface area and thus will reduce the cost of many components (within the balance-of-system cost) by half.

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These results indicate that in future, power produced from large-scale solar photovoltaic plants will be cheaper than power produced from any conventional technology in large parts of Europe. The cost of electricity produced in conventional, large-scale power plants typically ranges between 5 and 10 ct/kWh. Cost competitiveness will thus be achieved under optimal conditions before 2025 and full cost competitiveness even under non-optimal conditions by 2050 at the latest. Further research is needed to analyze the cost competitiveness of diff erent technologies in country and regional contexts and at diff erent penetration rates.

In other regions of the world with higher solar irradiation, solar power will be even cheaper than in Europe. Our results indicate that solar power will become the cheapest source of electricity in many regions of the world, reaching costs of between 1.6 and 3.7 ct/kWh in India and the Mena region (Middle East and North Africa) by 2050. Cost competitiveness with large- scale conventional power plants will be reached in these regions already within the next decade, at a cost for solar power by 2025 ranging between 3.3 and 5.4 ct/kWh.

In North America, costs for large scale solar photovoltaics will reach 3,2 to 8.3 ct/kWh in 2025 and 1.5 to 5.8 ct/kWh in 2050, the wide cost range due to significant geographical differences within the region. In Australia, costs will reach 3.4 to 7.1 ct/kWh in 2025 and 1.6 to 4.9 ct/kWh in 2050. In both regions, cost competitiveness of solar photovoltaics at the best sites will be reached within the next decade and cost competitiveness for all sites only a number of years later.

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In view of the likely cost competitiveness of solar power in many areas of the world, further research is needed, especially on the competitiveness of other energy applications beyond the power sector, such as transport, heating and cooling, as well as the cost competitiveness of power systems with very high shares of photovoltaic power. Financial and regulatory environments will be key for reducing costs in the future.

The cost of hardware sourced from global markets will decrease irrespective of local conditions. Solar photovoltaic modules and inverters are traded already today on global markets, similar to commodity products, and costs for other components are similarly global. While regional differences may exist due to the very young nature of utility-scale solar photovoltaic markets in different parts of the world, it is very unlikely that large differences in investment costs between different regions of the world will persist in the future.

However, the cost of capital is and will remain a major driver for the cost of power from solar photovoltaics. Producing power from solar photovoltaics requires a high up-front investment, but subsequently allows power production for 25 years and more at a marginal cost of close to zero. It is thus a very capital-intensive power-generation technology, and the interest paid on both debt and equity has a large eff ect on the total cost of a large-scale photovoltaic project.

This eff ect of diff erent cost of capital may even have a larger impact on power generation cost than the diff erence in solar resources, which is commonly considered key for the quality of a country’s or region’s potential to produce power from the sun. Our sensitivity analysis shows that higher cost of capital may increase cost of power by close to 50 percent in an extreme case. In the illustrative example comparing southern Germany and southern Spain, this capital cost eff ect alone could make solar power prices in southern Germany and southern Spain equal, even though southern Spain has 50 percent more sunshine hours than southern Germany.

The regulatory environment will thus be key for reducing the cost of power from solar photovoltaics in the future, as the cost of capital is largely driven by the risk perceived by investors. Reliable long-term power purchase agreements help to reduce the cost of capital for project developers, as experiences in Germany and in other countries show. A lack of such long-term contracts or even the fear of retroactive changes in regulatory regimes may lead to a signifi cant increase in cost of capital.

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Most scenarios fundamentally underestimate the role of solar power in future energy systems.

A large body of scientifi c literature, as well as publications by national and international institutions, describe possible developments of future power systems. Most of these scenarios foresee only a small contribution of solar power to future national, regional or global power systems. In many cases this can easily be explained by the use of outdated cost estimates for solar photovoltaics, leading to only a minor contribution of solar power in cost-optimal pathways. The massive cost reduction in solar photovoltaic systems in recent years has outpaced most forecasts for the next decade, often just within the time it took to publish a peer reviewed paper.

The results of our analysis indicate that a fundamental review of cost-optimal power system pathways is necessary. While not the only factor, the cost of power production is the key driver that determines the cost-optimal mix of diff erent power generation technologies within a power system. As an example, the long-term scenarios of the German government foresee only a minor contribution of solar photovoltaics in the future German power system. These scenarios are based on an analysis conducted about fi ve years ago, when solar photovoltaics was certainly one of the more expensive renewable energy technologies, together with wind off shore and biomass. Recent cost developments, as well as expected future developments, indicate that in a cost-optimal power system, the role of solar photovoltaics should instead be similar to that of wind onshore, which is similarly cheap but so far plays a much more prominent role in the scenarios. The same applies to a wide body of analysis and scenarios in various regions across the world.

A fundamental review of the future role and potential contribution of photovoltaics is also required for scenarios focusing not only on the power sector, but also on the heating and cooling and even the transport sectors, indicating that solar will play a major role in future global carbon-emission cost curves as well as regional decarbonization strategies in many parts of the world.

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