Solar photovoltaic is the cheapest energy source to date in many countries around the world. One question frequently posed is: How are the costs so low? Within this blog post, we will answer this question, exploring the costs of solar PV and shedding light onto the only energy source able to satisfy the total annual global energy demand within just one hour each day.
How are the costs of solar measured?
A commonly referred metric to compare costs across energy sources are levelized costs of energy (LCOE). Naturally, they are used for photovoltaics too. We have already blogged about the method and formula used in the LCOE calculation for solar PV; make sure to check it out!
As a short recap, the formula we use to calculate the levelized costs of solar PV is as follow:
LCOE = [Sni=0 (Ii + OMi + Fi – TCi – Di – Ti + Peni + Ri) / (1+r)i] / [Sni=1 Ei / (1+r)i]
where (i) Ii is the invested capital in period i, (ii) Mi is the costs of maintenance in period i, (iii) Fi is the cost of fuel in period i, (iv) Ei is the energy output in period i, (v) TCi is the tax credit in year i, (vi) Peni is the sum of the production loss and the penalty (paid for non-compliance) in year i, (vii) Di is the depreciation in year i, (viii) Ti is the tax levy, and (iv) Ri) is the royalties of the corresponding year. Tax credit and Penalty are subject to each specific PPA.
A simplified formula
If we were to simplify the above formula, we would rewrite it as follows:
LCOE = NPV (CAPEX + OPEX) / NPV (GENR)
where NPV is the Net Present Value, CAPEX the capital expenses, OPEX the operational expenses, and GENR the amount of electricity generated.
What are CAPEX exactly?
Capital Expenses or Capital Expenditures (CAPEX) are any expenses that occur when a company or business venture has expenses designed to benefit the entity in the long run. These expenditures are usually for fixed – and physical – assets like land, property, equipment, or plants.
In the case of solar PV, capital expenses refer to any costs that are related to the development, the financing, the construction, the installation and commissioning of the asset.
The Institute for Energy and Transport has identified five components that are included in the CAPEX of a commercial solar PV installation in the size range of 100kW to 2MW. The components are sorted by their share of overall costs.
They are (i) mechanical equipment supply and installation costs, (ii) project indirect costs, (iii) civil and structural costs, (iv) ‘owner’s costs, and (v) electrical and I&C supply and installation costs.
How much are CAPEX for solar PV?
The global average CAPEX for commercial ground-mount installations between 100 kWp and 2 MWp are estimated to be 900 Euros per kilowatt of installed capacity in 2020, down from 1100 €/kW in 2014. Cost projections show a continuous decline until CAPEX are expected to reach 720 €/kW in 2050.
This further reduction of CAPEX can be achieved via cost degression caused through bigger, more efficient and better designed plants. Current developments show that average PV plant sizes are increasing in scale, which enables leveraging economies of scale. On top, module efficiencies are increasing, yet prices are relatively lower.
Naturally, these values are only reference values and are therefore not applicable to all types of installations.
When looking at residential solar PV with installed capacities smaller than 100kWp, the Institute for Energy and Transport has estimated CAPEX to be 1310 €/kWp, 1100 €/kWp, and 880 €/kWp for the years of 2014, 2020, and 2050, respectively.
What about the costs of solar PV with a tracker?
Ground-mount utility-scale solar PV systems above 2MWp can be split in two groups, namely fixed tilt or with tracker. A tracking system adjusts the ‘modules’ angle based on the position of the sun so that the modules are always generating electricity at an optimal rate.
Logically, capital expenses are lower for systems without a tracker, and their reference values stand at 980 €/kW, 800 €/kW, and 520 €/kW for the years of 2014, 2020, and 2050, respectively.
PV installations with a tracker, on the other hand, have reference CAPEX at 1450 €/kW, 1100 €/kW, and 710 €/kW for the years of 2014, 2020, and 2050, respectively.
What about the OPEX?
The second type of expenses used in the LCOE formula are operational expenses or OPEX.
These expenses are related to daily operations but include rent, salaries and wages, any kind of variable fees, and taxes.
However, these costs are industry and country-specific and may vary significantly.
In the solar PV industry, OPEX are comprised of operation and maintenance costs, insurance costs, land rental costs (if applicable), property taxes (if applicable), security costs (if required), and asset management costs (if applicable).
As already mentioned, operational expenses can vary by a large extent. For once, not all solar PV plants require security (i.e., guards or a surveillance system). Nor do all investors include an asset manager.
Generalised, there is a positive correlation between the asset’s installed capacity and the presence of an asset manager.
Furthermore, the need for on-site security and surveillance depends on the geographic location of the plant. In the UK, for example, physical guards are rarely found on solar plants. Whereas in Spain, guards are frequently present and sometimes even armed.
Property taxes only account for a small share of expenses, yet even these costs can start to add up quickly. The most significant share of costs are usually O&M expenses, which vary depending on the O&M service provider, the scope, the market price level, and the quality of the O&M provider.
What do the experts say?
According to Bloomberg NEF, the annual costs for a full-scope O&M service in 2019 in Europe are € 6700 per MWp. This corresponds to an average decline of 13 percent since 2018.
Prices are set to decline another five to 10 percent in the upcoming year. The annual operating expenses for a solar PV plant are estimated to be € 17100 per MWp and include full-scope O&M, asset management, land lease and insurance costs.
Table 1 below shows the composition of OPEX, where O&M services account for the biggest share, followed by asset management fees and land lease costs.
Similarly, to CAPEX, OPEX have seen drastic cost reductions over the past decades, caused by a maturing market, greater expertise, and overall price pressure in the market.
In fact, average lifetime operational expenses in the US have decreased by 45% between the years 2007 and 2019. Comparable results were obtained for markets in Europe.
Why is all of that of importance?
Without the cost reductions in OPEX, solar PV would not have seen the decline in levelized costs that it did. Hence, it would nowadays not be the cheapest source of electricity.
The average operational expenses for utility-scale projects installed in 2019 in the US were approximately $17/kW per year, down from $35/kW per year in 2007. This is in line with the estimates obtained by Bloomberg NEF, who have estimated prices for the European market.
Figure 2 below illustrates the price and scope of O&M contracts signed in 2019 across countries. The further right on the graph, the more services are included in the scope. Bubble sizes represent project capacity ranging from below 5MW to above 50MW.
Costs of solar PV – Outlook
Price reductions for the upcoming two years are projected to be a lot less than previously. Nevertheless, reductions in excess of 10 percent may be seen in less mature markets. In already consolidated markets, price reductions in O&M will most likely not exceed 5 percent.
These reductions are mainly driven by asset owners opting to choose the cheapest O&M provider. However, at expense of the recommended quality standards that other service providers offer. Certain market players even expect an increase in O&M costs in the next couple of years.
In Table 3 below, the price developments of a full scope O&M contract for PV installations in Europe are shown. A full scope O&M service contract includes monitoring, periodic maintenance, panel cleaning (once a year), vegetation control (once a year), and corrective maintenance.
Overall, we have seen a great decline in operational and capital expenses for solar PV. This has contributed massively to make photovoltaics the cheapest energy source to date.
Price developments in the upcoming years will most likely not reflect those of years passed. This is because the market is already more consolidated. Nevertheless, less mature markets will still benefit from existing learning curves. Consequently, this will reduce the global weighted average costs of solar PV even further.
Participate in the quiz below and see if you remember the key learning points of this blog post!
#1. What is the cheapest energy source today?
#2. What is the professional term for the cost of energy?
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