ORIGINAL REPORTING: Drivers Behind Solar Price
Why the installed price of distributed solar keeps dropping; Module prices are flat but the industry is cutting soft costs, a new Berkeley Lab report finds
Herman K. Trabish, September 10, 2015 (Utility Dive)
Editor’s note: Since this piece was written last fall, the ITC was extended for five years and a boom in the utility-scale solar building began, driven by all-time low prices. Over half the contracts for big solar are now coming from utilities not to meet policy dictates but because prices are so low.
The decline in the installed cost of solar should have slowed down two or more years ago, and the fact that it hasn't is surprising even the most experienced energy analysts.
After 2008, the cost of solar modules started falling precipitously, sending the installed cost of solar tumbling as well. When module prices started flattening out around 2012, many expected the installed cost to do the same. But that never happened.
The national average installed cost of residential solar fell 9% from 2013 to 2014, and 8% in the first half of 2015, a pace similar to price declines when module prices were also plummeting, according to "Tracking the Sun VIII," the annual survey of U.S. photovoltaic solar prices from the Lawrence Berkeley National Laboratory (LBNL).
“We have concluded that we are seeing the results of all the focus from the industry on soft costs,” explained LBNL Electricity Markets and Policy GroupResearch Scientist Galen Barbose.
The 2013 to 2014 drop in the residential system cost was almost entirely due to soft costs, which include “marketing and customer acquisition, system design, installation labor, permitting and inspection costs, and installer margins,” the paper reports.
Inverter and racking costs have declined, but “they are nowhere close to the total aggregate cost drop in system prices,” Barbose said.
“There are a lot of diffuse soft cost impacts that are hard to be precise about, but it is pretty easy to conclude the effort in the industry and in the Department of Energy (DOE) SunShot soft costs program is driving the cost drops,” Barbose added.
Downward pressure on soft costs was also key to a 10% drop in the small non-residential system installed cost and a 21% drop in the large (over 500 kW) non-residential system installed cost from 2013 to 2014. The pattern continued in the first half of 2015, with those costs dropping 13% and 6% compared to the same period the year before.
Led by SunShot grants, the solar industry has moved to bring all the soft costson the list down. Information technology has helped with marketing, customer acquisition, and system design. Time motion studies have reduced installation labor time and helped reduce installer margins. Efforts to standardize permitting and inspection have had smaller, though some, impacts.
There are two broader, higher-level trends driving soft costs down, Barbose said. One is increases in system size. The other is increases in module efficiency.
“Bigger systems spread fixed, per-system soft costs over a larger number of kW,” he explained. “Increased module efficiency spreads area-related costs that can scale with physical dimensions, like installation labor, over a larger number of watts.”
Five things utilities ought to know
Though many utilities may think of the residential and non-residential sectors of the solar business as somewhat tangential to their concerns, they might want to think again, according to Solar Electric Power Association(SEPA) VP Bob Gibson.
As an increasingly dynamic expression of customer choice, the former NRECA executive explained, utilities can benefit from an awareness of trends in solar.
“Growth in customer-sited solar affects utility planning and operations,” he said. “Customers see their utilities as the energy experts, and expect to get informed answers to questions about electricity, including solar."
Five key points are particularly relevant as the Obama administration’s Clean Power Plan, increased state renewables mandates, and a rising opportunity in community shared arrays push utilities toward more solar.
There is no doubt about economies of scale. Median prices for residential systems between 8 kW and 10 kW were about 15% lower in cost in 2014 than those between 2 kW and 4 kW. Non-residential systems over 1,000 kW were about $2.70 per watt in 2014, 36% less costly than non-residential systems of less than 10 kW, which had a median price of $4.20 per watt. “Even greater economies of scale may arise when progressing to utility-scale systems,” the study reports.
“Larger systems cost less than smaller systems and nobody debates it,” Barbose said. “The only matter of debate is how the benefits compare. Those who advocate for policy support for smaller systems argue they offer greater benefits that compensate for the greater cost.”
Second, modules of over 18% efficiency cost a premium of $0.80 per watt in 2014, both in residential systems and non-residential systems of over 500 kW. Though solar researchers are urgently pursuing higher module efficiency, that premium is greater than balance of system (BOS) and array size savings.
Third, microinverters, which have captured a third of the residential market and a fifth of the below 500 kW non-residential market, similarly come with a premium that is greater than any soft cost savings they defray.
Fourth, racking that tracks the sun across the sky has captured about 20% of the large non-residential market. It boosts costs about 15%, or $0.40 per watt, over fixed-tilt, ground-mounted systems, and 19%, or $0.50 per watt, over roof-mounted projects. The data suggests that cost premium about matches the increased electricity generation.
Finally, incentives from states and utilities, in the form of upfront rebates for system expenditures or as returns for system performance, have also “fallen substantially since their peak a decade ago,” the paper reports. The incentives drop has tracked a “roughly 70% to 120%” installed cost drop.
Though incentives have supported the installed cost drop in solar, their decline is an indication of the success of policymakers’ deliberate strategy to use predictable, transparent incentive reductions to signal the industry of the need to keep downward pressure on soft costs. That pressure, Barbose said, “pushes the entire industry toward greater efficiencies and reduced margins.”
What does falling price variability mean?
“Our data reinforces the notion of tremendous variability in PV system pricing that is a reflection of many different underlying differences between systems, installers, geographies, data reporting conventions, and many other factors,” Barbose said. “But," he noted, "the variability has narrowed over time.”
Since about 2010, the data shows a slow but steady narrowing in dispersion of prices, he said. “One interpretation is that markets are maturing.”
Customers are becoming more informed and installers are becoming more competitive, Barbose said. “These are things we would expect to see in a maturing market. But the data is not granular and specific enough to make that interpretation with certainty.” LBNL researchers are working to better understand the drivers of price dispersion, he added.
The variability is not to be underestimated and is important to understand, Gibson said. California’s dominance of solar is shrinking as solar-supportive policies and incentives in a wider range of states help overcome solar resource limitations.
“Some of the most active markets have higher median prices,” Gibson noted, while “installed residential solar in states like Montana and Utah is below $3 per watt.”
To study variability more closely, LBNL focused on Arizona, California, Massachusetts, and New Jersey, the four biggest markets. It found huge installer level pricing variations in each state, Barbose said. But that variation had little to do with how active the installer was or whether the installer was doing third party-owned or customer-owned solar, he explained.
There is no escaping the variability, but the explanation for it is not clear, Barbose said. “The inability to find a relationship is not necessarily proof the relationship doesn’t exist. It may be washed out by other factors.”
One other version of variability was that LBNL’s 2014 national median installed prices were higher than prices found by other researchers. LBNL’s findings came out at a $4.30 per watt cost for residential systems, $3.90 per watt for non-residential systems smaller than 500 kW, and $2.80 per watt for non-residential systems bigger than 500 kW.
Other nationally recognized price benchmarks surveyed by LBNL came out at $2.80 per watt to $4.50 per watt for residential systems and $1.70 per watt to $4.10 per watt for non-residential systems.
LBNL’s prices reflect a diversity of data and methods but “should not be taken as indicative of ‘typical’ pricing in all contexts, and should not be considered equivalent to the underlying costs faced by installers,” the report explains.
The one unequivocal thing in the data is that the installed cost of solar has not stopped going down.
“I would not have been surprised if the drop tapered off, given the flattening of module prices,” Barbose said. “The fact that it has continued to decline at more or less the same pace is a little surprising. And I guess I will be a little more surprised if we see this same thing next year.”