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The Capital Cost of Solar Photovoltaic

Dr John Constable: GWPF Energy Editor

Data published by the UK’s Department of Energy and Climate Change this week suggests that the capital cost of small-scale (≤ 4kW) solar photovoltaic has begun to rise in the first part of 2016, reversing the downward trend of previous years. It is now questionable whether the earlier reductions were due to fundamental technological improvement, or simply overheating and oversupply created by excessive subsidy.

The only, and still questionable justification for subsidies to renewable energy technologies (indeed any technology) is that such support will accelerate the reduction of capital cost, and thus produce a net benefit to the public. The doubts arise in many areas, prominent among them being that:

a) Subsidies may actually weaken the incentive to industry to reduce costs, since the subsidising consumer has taken on some of the risk;

b) The industry may exaggerate its capital costs when negotiating subsidies, thus allowing for the later creation of illusory reductions; and

c) Capital costs for renewables are highly variable from site to site, and subsidies can only rarely be sufficiently fine-grained to eliminate significant over-support for the cheaper sites in the same subsidy band.

This latter point is particularly troublesome if the subsidies are in fact also being used by government to meet a quantitative target for the deployment of a particular technology, as is the case with support for renewables in the European Union, and in the UK.

All these questions hang over the extremely rapid deployment of solar photovoltaic generation in the United Kingdom. Feed-in Tariffs (FiTs) were introduced by Ed Miliband when Secretary of State for DECC in 2010, largely as an attempt to steal the thunder of the Conservatives, then claiming that FiTs were a more efficient mechanism that the Renewables Obligation.

The subsidy levels that Ed Miliband’s scheme offered to small photovoltaic were dramatically in excess of need, with the tariff for domestic scale applications set at over £400/MWh, more than ten times the wholesale price of electricity from conventional sources. These levels have since been cut, but remained generous and created remarkably rapid adoption. In January 2010 there were 3,000 solar pv installations of 50 kW capacity or under, with a total capacity of about 6 MW. By April 2016, according to DECC’s latest data published this week, this figure had risen to 3,177 MW spread over 851,188 sites, the vast majority of these sites, over 800,000 of them being very small scale with a capacity of less than 4 kW. By any standards that is extremely rapid growth, and considering the modest nature of the UK’s solar resource, a fact evident in the poor load factors achieved by small-scale installations, at about or under 10%, it is quite breath-taking.

Subsidies to these sites will total upwards of £500 million a year at present. To offset this cost and deliver a net benefit to the subsidising consumer it would be necessary to see significant and lasting cost reductions. However, the facts, evident in the dataset just published are not that encouraging. Mean capital costs from April 2013 to late 2014 were about or just over £2,000 per kW installed. Costs started to fall from about November 2014 onwards, with a low of about £1,587 per kW in January 2016. But since then costs have risen sharply, with the March figure being £1,911 per kW, not far short of the levels seen in 2014.

Even if the downward trend is resumed, and it may be, this sort of hesitant pattern suggests that the cost reduction trend of small-scale photovoltaic is neither rapid nor robust, and in view of the subsidies so far paid and committed for the future, and the very large quantities installed here in the UK, to say nothing of the astonishing capacities now on household roofs in other places in the world, Japan for example, this must be regarded as disappointing.

Indeed, it is not too early to ask whether a very large part of the cost reductions observed both globally and in the UK over the last few years are the result of initial exaggeration of capital costs, and  temporary effects arising from market oversupply due to excess subsidy in the global markets. Even if these effects do not explain all the observed reduction, they would reduce the trend to a modest level that would lead us to infer that the subsidies have not had the market transforming effect that can alone justify their use.

And it should not be forgotten that modest cost reductions are simply not good enough in themselves. Marketing babble about ‘levelised cost’ and ‘grid parity’ is meaningless for the consumer, since the grid management costs of solar and wind are so high that even if the capital cost of the panels and the wind turbines were almost $0/MW, the energy generated would still struggle to compete with that from Combined Cycle Gas Turbines at current prices.