Greenhouse gas mitigation policies and activities help support renewable energy development, including solar energy. Various incentives and mandates designed to trigger GHG mitigation have helped promote solar energy in industrialized countries. In the case of developing countries, the Clean Development Mechanism (CDM) under the Kyoto Protocol has been the main vehicle to promote solar energy under the climate change regime. The CDM allows industrialized countries to purchase GHG reductions achieved from projects in developing countries, where reducing GHG emissions is normally cheaper than in industrialized countries.
As of July 2011, there are 6,416 projects already registered or in the process of registration under the CDM. Of these, 109 projects are solar energy projects with annual emission reduction of 3,570,000 tons of CO2. Out of these 109 projects, 89 are located in China, South Korea and India.
However, the solar energy projects account for a very small fraction (< 1%) of total emission reductions from the total CDM projects already registered or placed in registration process (UNEP Risoe, 2011).
One reason for the small share of solar energy projects in the global CDM market is cost. As noted, solar energy technologies remain costly, and at present they are not economically competitive with other CDM candidates such as wind power, small hydro, landfill gas, and biomass cogeneration. The high upfront capital investment cannot be recovered even if the revenue generated from sales of emission mitigation at standard (non-subsidized) rates is included along with revenue from electricity sales. In addition, solar energy projects to date come in smaller sizes than other CDM options; transaction costs incurred in various steps during the CDM process (e. g., validation and registration of projects and monitoring, verification and certification of emission reductions) do not vary that much with project size and are often prohibitive for solar energy projects that are already less attractive compared to their competitors.
To increase the share of solar energy projects in the CDM, one approach is to give solar energy technologies some additional premium for other economic and social benefits. However, other technologies can provide these benefits with lower impacts on electricity costs, so the strength of this argument is open to question. The transaction costs of diffused, small-scale solar CDM projects could be reduced by bundling them into single larger projects, as with “programmatic CDM” schemes. Further simplification of CDM registration process for solar energy projects could be accomplished by avoiding additionality screening, as they meet the additionality criterion by default given their costs. With or without CDM, further capacity building in developing countries to enhance technical and managerial skills for market participants is necessary (BMU, 2007).
Physically, solar energy constitutes the most abundant renewable energy resource available and, in most regions of the world, its theoretical potential is far in excess of the current total primary energy supply in those regions. Solar energy technologies could help address energy access to rural and remote communities, help improve long-term energy security and help greenhouse gas mitigation.
The market for technologies to harness solar energy has seen dramatic expansion over the past decade—in particular the expansion of the market for grid-connected distributed PV systems and solar hot water systems have been remarkable. Notably, centralized utility scale PV applications have grown strongly in the recent years; off-grid applications are now dominant only in developing markets. Moreover, the market for larger solar thermal technologies that first emerged in the early 1980s is now gathering momentum with a number of new installations as well as projects in the planning stages.
While the costs of solar energy technologies have exhibited rapid declines in the recent past and the potential for significant declines in the near future, the minimum values of levelized cost of any solar technologies, including tower type CSP, which is currently the least costly solar technology, would be higher than the maximum values of levelized costs of conventional technologies for power generation (e. g., nuclear, coal IGCC, coal supercritical, hydro, gas CC) even if capital costs of solar energy technologies were reduced by 25%. Currently, this is the primary barrier to the large-scale deployment of solar energy technologies. Moreover, the scaling-up of solar energy technologies is also constrained by financial, technical and institutional barriers.
Various fiscal and regulatory instruments have been used to increase output of solar energy. These instruments include tax incentives, preferential interest rates, direct incentives, loan programs, construction mandates, renewable portfolio standards, voluntary green power programs, net metering, interconnection standards and demonstration projects. However, the level of incentives provided through these instruments has not been enough to substantially increase the penetration of solar energy in the global energy supply mix. Moreover, these policy instruments can create market inefficiencies in addition to the direct costs of requiring more-costly electricity supplies to be used. While not discussed in this paper, these indirect impacts need to be considered in assessing the full opportunity cost of policies to expand solar power production.
Carbon finance mechanisms, in particular the CDM, could potentially support expansion of the solar energy market. While some changes in the operation of the CDM could increase solar investment, the price of carbon credits required to make solar energy technologies economically competitive with other technologies to reduce GHG emissions would be high.
The fundamental barrier to increasing market-driven utilization of solar technologies continues to be their cost. The current growth of solar energy is mainly driven by policy supports. Continuation and expansion of costly existing supports would be necessary for several decades to enhance the further deployment of solar energy in both developed and developing countries, given current technologies and projections of their further improvements over the near to medium term. Overcoming current technical and economic barriers will require substantial further outlays to finance applied research and development, and to cover anticipated costs of initial investments in commercial-scale improved-technology production capacity.