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SOLAR GENERATION V -
2008
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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 account:
✜ The type of PV application -
grid-connected, off-grid or consumer goods.
✜ What exactly is PV competing with? What are the
alternatives?
✜ The geographical location, initial investment costs and
expected lifetime of the system.
✜ The real generation cost, bearing in mind that
conventional sources are heavily subsidised and their
‘external’ costs from pollution and other effects are not
accounted for.
✜ Progress being made in PV cost reduction.
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
p otential 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
Grid-connected applications, currently the biggest market
segment, are expected to remain so for the foreseeable
future. The generation costs of household PV systems, are in
most cases, not yet competitive with residential electricity
prices, unless there are support programmes. Electricity
prices vary greatly, even within the 27 EU countries, with
2006 residential prices ranging, according to Eurostat, from
between 7 and 24 Ðcents/kWh (including all taxes). The most
recent trend has also been a steady increase. From 2005 to
2007, electricity prices in the 27 EU countries increased by
an average of 16%. At the same time, PV generation costs
have been decreasing, a trend expected to accelerate over
the coming years.
The simplest way to calculate the cost per kWh is to divide
the price of the PV system by the number of kWh the system
will generate over its lifetime. However, other variables
such as financing costs may have to be taken into
consideration. Figures for the cost per kWh of
grid-connected systems frequently differ, depending on what
assumptions are made for system costs, sunlight
availability, system lifetime and the type of financing.
Table 4.1 includes financing costs (at a 5% interest rate)
and a lifetime of 25 years, which is the same as the
performance warranty period of many module producers. The
figures are based on the expected system prices under the
Advanced Scenario, where strong industrial growth is
expected to drive down prices.
The figures in Table 4.1, giving PV generation costs for
small distributed systems in some of the major cities of the
world, show that by 2020 the cost of solar electricity will
have more than halved. This would make it competitive with
typical electricity prices paid by end-consumer households.
One reason is that whilst PV generation costs are
consistently decreasing, general electricity prices are
expected to increase. As soon as PV costs and residential
electricity prices meet, ‘grid parity’ is achieved. With
grid parity, every kWh of PV power consumed will save money
compared to the more expensive power from the grid. Grid
parity is expected to be reached first in southern countries
and then spread steadily towards the north.
 Figure 4.1 shows 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.
In some countries with a more liberalised power supply
market, electricity prices are more responsive to demand
peaks. In California and Japan, for example, electricity
prices increase substantially during daytime, especially in
the summer, as demand for electricity is
 highest during that
period. Daytime, in particular in summer, is also the period
when the electricity output of PV systems is at its highest.
PV therefore serves the market at exactly the point when
demand is greatest.
During peak times, PV is already competitive in those
markets. Figure 4.2 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.
The Stern Report on climate change, published by the UK
government in 2006, concluded that any investment made now
to reduce CO2 emissions will be paid back easily in the
future, through avoiding the external costs of fossil fuel
consumption.
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:
Targets for crystalline cells
Crystalline Cz efficiency to reach 20% by 2010 and 22%
by 2020
Crystalline Mz efficiency to reach 18% by 2010 and 20% by
2020
Ribbon-sheet efficiency to reach 17% by 2010 and 19% by 2020
Targets for thin film technology
Thin film efficiencies to reach between 10% and 12% (for
a-Si/mc-Si, CIS and CdTe) by 2010 and then 15% by 2020
Building Integrated PV costs to fall between 2005 and 2010
by 50% and by a further 50% by 2020
Typical industrial PV processing area to increase from a
size of 1 to 3 m2 by 2010 and to 9 m2 by 2020
By increasing the efficiency of PV modules, both thin film
and crystalline, production costs per kWh will fall. At the
same time, less and less raw material will be used,
especially for crystalline technologies. The ability to
produce thinner wafers will reduce silicon consumption and
therefore costs, as well as the energy payback time of PV
systems.
 However, the improvement of existing technologies is not the
only factor that will drive down production costs. R&D
expenditures on PV are growing and delivering promising
results for new technologies, based on innovative production
processes or different raw materials. A good example of
significant production cost reduction has been through the
development
of thin film technologies. Similar breakthroughs can be
expected from future technologies such as organic cells or
nanotechnologies.
PV system quality is also a parameter which influences the
cost per kWh. The quality of the system is reflected in its
performance ratio. This is the ratio of the electricity
measured on the AC side of the electricity meter, compared
to the amount of electricity originally generated by the PV
modules. The higher the performance ratio, the lower the
losses between the modules and the point at which the system
feeds into the grid. The expected range of system
performance ratios is between 70% and 85%, but in recent
years the trend has been towards the upper part of this
range. This means that if losses and malfunctioning of PV
systems can be reduced further, the cost per kWh can also be
lowered.
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 considered
as 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 speed with which the solar electricity sector is
increasing its market share in those economies that have
committed themselves to promote this clean power source,
coupled with the transformation of its customers from power
recipients to power generators, represents a revolution
comparable to that in the telecommunications market over the
past decade. Such industrial revolutions produce winners and
losers. The undisputed winners in such industrial
revolutions are the customers who have access to greater
choice. Other winners include the market players who
recognise the potential of such an expanding market, and
those who have committed themselves to investment in the
sector. However, there are also many examples of innovative
products and services where offering customer choice has led
to their popular uptake at a price considerably higher than
that previously available.
Two examples of such innovative market entrants are mobile
phones, offering a service at a far higher price than
conventional fixed-line networks, and bottled mineral water,
a product which in the middle and higher price ranges costs
more per litre than petrol. With the right product -
offering customers the type of added value they are looking
for, coupled with innovative marketing - technologies such
as solar electricity should be able to compete with
conventional grid supplied power in industrialised
countries.
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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