Why Are Solar Energy Costs Dropping?

The Factors Behind Your New Solar Strategy

Solar energy costs are falling faster than anticipated. But why? And can these cost reductions continue?

There is no single factor that, on its own, explains the rate or scale of the fall in solar energy costs. But by greater understanding of the reasons behind falling costs, businesses will be better able to create a strategic plan that delivers their full potential.

Here we take a brief look at the drivers of cost reductions in the solar industry, and what this might hold for the future.

The Economy

While the cost of solar power has been declining almost from its first use, this year has highlighted the impact that the state of the economy has on energy costs. Coronavirus has brought the economy to a skidding halt, and demand for energy has plummeted.

With the global economy expected to shrink by around 5% this year, Wood Mackenzie has downwardly revised its estimates for the costs of residential and commercial solar systems. It now believes that:

  • Prices of residential systems with mono PERC modules will now drop by 17% (compared to 14% pre-coronavirus)
  • Prices of mono PERC commercial systems will fall by 16% (compared to previous forecasts of 13%)
  • Prices of mono PERC utility systems will fall by 20% (compared to previous forecasts of 16%)

But the supply versus demand equation does not fully explain falling solar energy costs.

Economies of Scale

As demand for solar energy has increased, the impact on solar costs has been to push them down. This is counterintuitive to the supply and demand equation, but is perfectly explainable.

Higher demand pumps more money into the solar ecosystem. This benefits everyone in the system, from research and development through to manufacturing, installation, and maintenance. As demand for solar energy has increased, solar plants have increased in size. This itself brings economies of scale – in much the same way as prices of new technology drop as the technology is onboarded in everyday life.

Higher demand has prompted many opportunities to benefit from economies of scale. The cost of solar energy drops because of this, and demand rises. Of course, the demand effect is not the only factor in falling solar prices, but is set to continue to play its part.

In its World Energy Outlook 2020, the International Energy Agency (IEA) predicts that ‘solar becomes the new king of electricity’. It forecasts that it will be solar energy that drives growth in the renewable energy market, setting records for deployment in each year after 2022.

By 2024, the IEA forecasts that renewable energy capacity will expand by 50%, and solar will account for 60% of this increase. The cost benefit of economies of scale looks likely to continue for some years to come.

R&D Will Continue to Provide Cost Reduction Opportunities

According to the International Renewable Energy Agency (IRENA), the cost of solar PV declined by 82% between 2010 and 2019. Concentrated solar power fell by 47%. This has been the decade when most advances have been made, due to the results of research and development.

Technology in solar has made tremendous headway. Systems are more efficient, easier to install and maintain, and longer lasting. Combined with greater efficiency of manufacturing processes spurred by demand, costs have fallen.

Advances in technology will not halt, and so we can expect continued downward pressure on costs.

Government Policy

An increasingly important factor in pricing of solar energy and solar systems is government policy. In a report in Energy Policy, MIT Associate Professor Jessika Trancik concludes that 60% of the cost decline is a result of government policies.

As global warming has moved up the scale of concern, governments around the world have enacted policies to stimulate demand for renewable energy. Solar has been a major beneficiary.

Governments have introduced emission targets, industry standards, tariffs, and subsidies, among other measures. They have funded research and development in the public sector, and provided tax breaks for R&D in the private sector.

Will Cost Reductions in Solar Continue?

We may have reached a stage where the pace of cost reductions will slow, but it’s likely that they will continue for the following reasons:

  • Government policy is likely to continue to focus on renewable energy as a driver of future growth, with positive environmental outcomes encouraging further publicly-funded R&D and subsidies for business and residential use.
  • As R&D develops new technologies in solar, efficiency and cost of manufacture will continue to improve, driving down costs further.
  • The economy will turn the corner, and recover from coronavirus. As it does so, renewable energy and solar power will increase in prominence and displace electricity generated by fossil fuels at a faster rate. The industry will need to beef up to increase the capacity needed to meet demand.

Are You Ready to Benefit from Higher Demand and Lower Costs?

The renewable energy sector is set for a new stage of growth. Coronavirus has put the spotlight on environmental issues as well as the economy. Governments are likely to take policy decisions that build further demand for solar energy.

As this demand builds, there will be a need for companies operating in the sector to improve their R&D delivery, reduce inefficiency in the manufacturing process, and install larger and more effective solar plants.

Winners in this solar energy-focused economy will be those whose employees and contractors can take their businesses to the next level. For help locating and hiring the talent you need to achieve your business’s full potential, contact TotalTek today.

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