Tuesday, January 6, 2009


One of the main arguments heard from critics of solar electricity is that its costs are not yet competitive with those of conventional power sources. This is partly true. However, in assessing the competitiveness of photovoltaic power a number of considerations should be taken into the solar electricity.

  • Competitiveness of consumer applications

    PV consumer applications do not receive any subsidies and have been on the market for a long time. They have therefore already proved their competitiveness. Consumer applications not only provide improved convenience, but they also often replace environmentally hazardous batteries.

  • Competitiveness of off-grid applications

    Off-grid applications are mostly already cost-competitive compared to the alternative options.PV is generally competing with diesel generators or the potential extension of the public electricity grid. The fuel costs for diesel generators are high, whilst solar energy’s ‘fuel’ is both free and inexhaustible.

    The high investment costs of installing renewable energy systems are often inappropriately compared to those of conventional energy technologies. In fact, particularly in remote locations, a combination of low operation and maintenance costs, absence of fuel expenses, increased reliability and longer operating lifetimes are all factors which offset initial investment costs. This kind of lifecycle accounting is not regularly used as a basis for comparison.

    The other main alternative for rural electrification, the extension of the electricity grid, requires a considerable investment. Off-grid applications are therefore often the most suitable option to supply electricity in dispersed communities or those at great distances from the grid. However, although lifetime operating costs are much lower for off-grid PV than for other energy sources, initial investment costs can still be a barrier for people with little disposable income.

  • Competitiveness of grid-connected applications

    hows the historical and expected future development of solar electricity costs. The falling curves show the reduction in costs in the geographical area between central Europe, for example northern Germany (upper curve), and the very south of Europe (lower curve). In contrast to the falling costs for solar electricity, the price for conventional electricity is expected to rise. The utility prices for electricity need to be divided into peak power prices (usually applicable around the middle of the day) and bulk power. In southern Europe, solar electricity will become cost-competitive with peak power within the next few years. Areas with less irradiation, such as central Europe, will follow suit in the period up to 2020.

    illustrates the significant variation and high peak prices for household electricity in the Californian market.

    It should also be pointed out here, that the prices for conventional electricity do not reflect the actual production costs. In many countries, conventional electricity sources such as nuclear power, coal or gas, have been heavily subsidised for many years. The financial support for renewable energy sources such as PV, offered until competitiveness is reached, should therefore be seen as a compensation for the subsidies that have been paid to conventional sources over the past decades.

  • External costs of conventional electricity generation

    The external costs to society incurred from burning fossil fuels or from nuclear generation are not included in most electricity prices. These costs have both a local and a global component, the latter mainly related to the consequences of climate change. There is uncertainly, however, about the magnitude of such costs, and they are difficult to identify. A respected European study, the ‘Extern E’ project, has assessed these costs for fossil fuels within a wide range, consisting of three levels:

    Low: $4.3 per tonne of CO2
    ✜ Medium $20.7 – 52.9/tonne CO2
    ✜ High: $160/tonne CO2

    Taking a conservative approach, a value for the external costs of carbon dioxide emissions from fossil fuels could therefore be in the range of $10–20/tonne CO2. As explained in the chapter ‘Solar Benefits’, PV reduces emissions of CO2 by an average of 0.6 kg/kWh. The resulting average cost avoided for every kWh produced by solar energy, will therefore be in the range of 0.25 – 9.6 US cents/kWh.

  • Factors affecting PV cost reductions

    The cost of producing photovoltaic modules and other system inputs has fallen dramatically since the first PV systems entered the market. Some of the main factors responsible for that decrease have been:

    ✜ Technological innovations and improvements
    ✜ Increasing the performance ratio of PV
    ✜ Extension of PV systems’ lifetime
    ✜ Economies of scale

    These factors will also drive further reductions in productions costs. It is clearly an essential goal for the solar industry to ensure that prices fall dramatically over the coming years. Against this background, EPIA has laid down specific targets for technological improvements.

    A further extension of system lifetime will have a positive effect on the generation costs of PV/kWh, as the electricity output will increase. Many producers already give module performance warranties for 25 years. Twenty-five years can therefore be consideredas a minimum module lifetime. An extension of their lifetime to 35 years by 2010, was forecast in the 2004 ‘EPIA Roadmap’ study.

    Another very important driver for PV cost reduction is economies of scale. Larger production volumes enable the industry to lower the cost per produced unit. Economies of scale can be realised during the purchasing of raw materials through bulk buying, and during the production processes by obtaining more favourable interest rates for financing and by efficient marketing. Whilst only a decade ago cell and module production plants had capacities of just a few MWp, today’s market leaders have 1 GWp capacity plants within their reach. This capacity increase is expected to decrease costs per unit by approximately 20% for each time production output is doubled.

  • Winners and losers

    The rapid rise in the price of crude oil in recent years, and the subsequent knock-on effect on conventional energy costs across the global domestic and industrial sectors, has once again highlighted the urgent need for both industrialised and less developed
    economies to rebalance their energy mix. This increase in oil price is not just the result of concerns about security of supply. It also reflects the rapidly rising demand for energy in the emerging economies of Asia, particularly China. Oil production can no longer expand fast enough to keep up with demand. As a result, higher oil prices – and consequently higher energy prices in general - are here to stay and world economies will have to adjust to meet this challenge.

    It is against this background of runaway energy prices that those economies which have committed themselves to promoting the uptake of solar electricity,
    are starting to differentiate themselves from those countries that have relied heavily or almost exclusively on conventional energy sources. There are clear signs that the next decade will see many countries having to rapidly reduce their dependence on imported oil and gas. This abrupt transition will be felt hardest by those that have paid little attention so far to the role that solar electricity can play. However, on the positive side, there is still time for them to catch up if they introduce innovative policies quickly to promote solar electricity use.

    The extension of customer choice in the electricity sector to embrace solar power, however, requires a commitment to creating an appropriate framework to allow consumers to access solar power in an efficient and cost-effective way.

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