Solar Technology Continues to get Better

Germany is hardly the world’s sunniest country. Yet for the past decade, its homeowners have put so many photovoltaic panels on their roofs, that last year they accounted for more than half of installations worldwide.

The German example demonstrates the power of policy, since a range of generous subsidies has driven the market. However, other factors lie behind the rise of solar power as a competitive form of energy.

First, the cost of the technology has fallen, partly because of increased production in China, where the price of photovoltaic equipment has dropped sharply.

But in addition, manufacturing techniques have improved and volumes have increased to meet growing demand, with European companies establishing large facilities in Singapore and Malaysia.

“Once prices go down, they stick,” says Jonathan Johns, director of Climate Change Matters. “And it’s easier technologically to reduce prices in solar than in other technologies. With wind, you have more conventional mechanical moving parts, as well as steel and other inputs.”

Solar power’s advantage is not limited to the cost of the equipment, however. The localised nature of solar power generation – on rooftops and in back yards – allows for the use of net metering, a system that lets consumers feed excess energy back into the electricity grid.

Innovative payment mechanisms have also helped increase the uptake of solar power by the commercial sector. In the US, this has been facilitated by the power purchase agreement model developed by SunEdison, an energy services company.

Under power purchase agreements, energy services companies install solar panels on the roofs of large factories or big-box retail stores such as Walmart and own and operate the technology, selling electricity to the building owner at prices that are lower than those offered by the utility.

The building owner has no capital investment or maintenance costs and can lock in rates for a certain period of time.

“It allows companies to go solar – which looks great on their annual report – and to save money,” says Rhone Resch, president and chief executive of the Solar Energy Industries Association. “And best of all, it becomes a physical hedge against rising electricity prices.”

These kinds of deals – as well as the introduction of smart grids and net metering – have helped solar power become more competitive in the US, which has until recently lagged behind Europe in fostering this energy source.

“In states that are employing smart-grid technology and structured pricing, solar is cost-effective,” says Mr Resch. “And in places such as California you see solar already being cost-effective on the commercial side, too.”

Of course, talk of solar power’s grid parity refers to its competitiveness against retail rather than wholesale prices.

For while a rooftop solar panel is relatively cheap to install and can immediately generate power for the building owner, other forms of renewable energy such as wind require transporting power from locations that are often far from where the energy will be used.

The same applies to fossil fuel sources. “With coal-fired and gas-fired power, it has to go into the grid, be transported around with losses and then be bought with a mark-up to cover the cost of capital of all that grid equipment,” says Michael Liebreich, chief executive of Bloomberg New Energy Finance.

“With a panel, you stick it on the roof and then you don’t buy retail power.”

Gil Forer, global cleantech leader at Ernst & Young, agrees. “When you talk about grid parity, it matters where you look – do you look at the point of sale or the point of generation?”

“At point of generation, it’s still difficult to compete with coal. But from the point of sale, which is the customer perspective, we are in a very competitive position between solar and fossil fuel sources.”

However, despite these advantages, a critical element underpinning solar power’s competitiveness is regulatory support in terms of subsidies.

These kinds of certainties have fostered investment. As a result, the more mature markets for solar power tend to be found where subsidies have been most generous – in US states such as California and countries such as Germany and Spain and parts of Japan.

Mr Resch cites the US example as demonstrating the power of policy to drive markets.

Following an uncertain regime of tax credits for many years, the American Recovery and Reinvestment Act guaranteed a federal tax credit for solar power until 2016.

“That resulted in an increase of more than 100 per cent in the residential solar market in 2009 despite the recession,” he says.

Given the power of policy, the question for governments is how and when to reduce subsidies, which are costly. Spain’s reduction of its solar power subsidy in 2008 dented the industry. And the crisis in public finances has prompted renewed discussions of a reduction.

Meanwhile, Germany has made subsidy cuts for solar power, albeit smaller ones than originally proposed. “The challenge for regulators will be managing the transition,” says Mr Johns.

But while experts and analysts acknowledge the importance of policy decisions on energy, most agree that solar power is likely to continue to increase its market share.

The International Energy Agency estimates solar electricity could represent 20 to 25 per cent of global electricity production by 2050.

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