Economics and the environment

6.1 Paying for PV

6.1.1 Costs and markets

One of the most encouraging aspects of the current PV scene is the steady reduction in costs. Continuing improvements in cell and module efficien­cies are making a substantial contribution; but above all it is the sheer volume of production in state-of-the-art factories using highly automated facilities that is driving down costs. Right back in Section 1.4 we introduced the ‘1 earning curve’ concept to illustrate how, for a wide range of manu­factured products, costs tend to fall consistently as cumulative production rises. Figure 1.11 confirmed that PV costs have fallen for more than two decades by around 20% for every doubling of cumulative production – and the trend continues. The long-held, almost cherished, ambition of the PV community to produce modules at ‘ one US dollar per watf was finally achieved in 2009 in the case of high-volume thin-film CdTe manufacturing, with rival cell technologies not far behind.

Of course the cost of a PV system also depends heavily on balanceiofi system (BOS) components and there are design, installation, and mainte­nance charges to consider. Fortunately, most of these are also falling broadly in line with cumulative PV production and today typically represent – as they have in the past – about half of total system costs.

Electricity from Sunlight By Paul A. Lynn © 2010 John Wiley & Sons, Ltd

The speed of market penetration by a new technology normally depends greatly on economics. Potential purchasers of grid-connected PV systems, which have come to dominate the global market, wish to know how much solar electricity costs to generate. For example, if you are considering installing a rooftop PV system, how does the cost of a unit of electricity (1kWh) compare with the price charged by the local utility, and does it look like an attractive investment? In the case of stand-alone PV systems there are different criteria since grid electricity is not generally available as an alternative; comparisons are more likely to be made with diesel gen­erators, and decisions affected by environmental concerns, including noise and pollution.

It is important to bear in mind that, in many cases, the installation of a PV system is not only about money. Companies may be concerned to demon­strate their green credentials, schools to educate and inspire their pupils, and individuals to ‘do their bit’ to reduce carbon emissions. You may know someone who, instead of buying an expensive new vehicle, settled for a cheaper model that burns less fuel and spent the rest of the money on a rooftop PV system. For citizens in developed economies it can be as much a lifestyle choice as a purely economic one.

2000 2010 2020 2030 Figure 6.1 Towards grid parity in Europe.

As far as the economic case is concerned, Figure 6.1, although necessarily speculative, illustrates some important trends. Predicted costs of PV elec-

tricity in euros/kWh are plotted up to year 2030 for electricity supplied by utilities to domestic customers in Europe (red curve); and for electricity generated by rooftop grid-connected PV systems in various countries (orange, green and blue curves). Most experts expect that the increasing global demand for energy, together with falling fossil fuel reserves, will result in real price rises for conventional electricity in the coming years. This is shown by the red curve, assuming an annual increase of 2.5% com­pound. By contrast, the price of solar electricity is expected to fall as cumulative PV production soars. In sun-drenched European locations such as southern Spain and Italy (orange curve), the current cost is roughly competitive with conventional electricity because PV arrays are highly productive. In less sunny northern Germany and England (green curve), PV is expected to achieve ‘grid parity’ by about 2020; in Norway and Sweden (blue curve), perhaps 5 years later. But whatever the detailed timescales, the trends seem clear and inevitable – even if the citizens of northern Europe will need a bit more patience!

In many ways this picture is oversimplified. First, the costs of PV systems and the prices paid by consumers for grid electricity are not uniform between different countries. Second, price increases for grid electricity over the coming years cannot be predicted with any certainty. And additional factors will surely influence the cost of PV electricity – a cost that is by no means dictated solely by the choice of modules and the amount of sunlight. To understand this, we need to consider the capital and income components of a PV project.

Let us again imagine investing in a rooftop PV system. It is helpful to start by estimating expected cash flows over the life of the system, say 20 years, as in Figure 6.2 . This is the key ingredient of what is known as life-cycle analysis.1"2 Negative cash flows (expenditure) are shown red; positive ones (income) are shown blue. A major feature of PV systems is that the initial capital cost (A) produces by far the largest negative cash flow. This is fol­lowed by many years of positive cash flows representing the value of electricity generated (or savings due to electricity not purchased), and small negative ones to pay for routine system maintenance. Generally, it is also prudent to allow for additional capital expenditure to replace worn out or damaged BOS components such as charge regulators or inverters, or bat­teries in a stand-alone system (B, C, and D). And finally we may hope to obtain an end-of-life scrap value for the system (E).

We are now in a position to assess (perhaps with expert help!) the financial viability of the project. Of various measures, the easiest to understand are the simple payback period, the number of years it takes for the total costs

to be paid for by the income derived from the system; and the rate of return, the percentage annual return on the initial investment. But it is hard to know how long the system will last, or to allow for additional capital injections that may be needed as time goes by (items B, C and D above).

An even more important limitation is that the simple payback period and rate of return take no account of the ‘time value’ of money – a major con­sideration for a long-term project. In a nutshell, a cash flow expected in the future should not be given the same monetary value today. For example, would you rather have € 100 today, or the expectation of € 150 in 10 years’ time? Your answer will probably depend on predicting future interest rates (you could put the money in the bank); or the confidence you have about future payments; or you may prefer to purchase something for € 100 today. A proper life-cycle analysis takes this into account by referring all future cash flows to their equivalent value in today’s money using a discount rate. This is the rate above general inflation at which money could be invested elsewhere, say between 1 and 5%. In this way the present worth of a com­plete long-term project can be estimated, and compared with alternatives, allowing a more realistic investment decision to be made. As you may imagine, a positive value of present worth is generally taken as a good indication of financial viability.

So far so good, providing we recognise that the decision, even when based on careful life-cycle analysis, contains uncertainties about technical per­formance, system and component lifetimes, interest rates, and the future

Figure 6.3 Investing in the future: PV for a school in South Africa (EPIA/IT Power).

price of electricity. And, as we have previously noted, it may also be based on environmental and social factors.

We have tried to summarise the ideas behind conventional life-cycle analy­sis, with its positive and negative cash flows. But what if the picture is clouded by a government decision to offer capital grants to offset the initial purchase price, or suddenly to change or terminate grants that are presently available? And what if the price paid for renewable electricity is bolstered by special tariffs that may be altered or removed by a change of govern­ment? Over the years there have been many such stop-go incidents in countries as wide apart as Australia, Spain and the USA. One of the biggest threats to rational decision-making and steady growth in the PV market is uncertainty about government policy; and one of the biggest benefits is consistent long-term support. We shall discuss support schemes in the next section.

You may be wondering why governments offer financial support to PV in the first place. There are two principal reasons. First, the products of a new

high-tech industry tend to be very expensive at the start, before cumulative production gathers pace. If governments wish to pursue urgent policy objectives such as the reduction of carbon emissions, they may decide to stimulate market development with financial incentives. Second, Figure 6.2 makes clear that PV, like other renewable energy technologies including wind and wave, has its major costs ‘up front’, with no fuel charges. This is quite different from conventional electricity generation based on fossil fuels. Projects with high initial costs that must be set against future income are commonplace for large corporations, but tend to be far more problem­atic for small businesses, organisations, and individuals who find it hard to raise the initial capital.

Government support, although generally welcome and necessary for PV tends to distort the market and prevents it from behaving according to the assumptions of classical economics. Realistic life-cycle analysis becomes more problematic. In effect the global PV market becomes split into a number of sub-markets with different characteristics. As an extreme example, the decision of an organisation to install a large grid-connected system on its office building is likely to be influenced by very different financial criteria and incentives from that of a family in a developing country struggling to find initial funds for a solar home system. This is not to say that economic analysis is worthless, just that it should be approached and interpreted with caution. If you refer back to some of the photographs in earlier chapters, you will see plenty of examples of PV systems based on a wide range of investment criteria – political, economic, environmental, and social.

SHAPE * MERGEFORMAT

(b) Figure 6.4 Diverse markets for rooftop PV systems: an elegant home in the developed world, and a ‘ mobile’ home in Mongolia (EPIA/Shell Solar, EPIA/IT Power).

(a)