Here Comes the Sun: Solar Energy Price Trends

Published by H. Blair Kincer on Thursday, May 1, 2014
Journal thumb May 2014

The solar power market has come into its own in a big way. Analysis of four years’ of data from more than 200 properties audited by Novogradac & Company reveals that, with the help of the renewable energy investment tax credit (ITC), the cost of solar power has fallen dramatically. The ITC is not the sole reason for solar’s cost declines; the increasing supply of solar panels and the reduction in the cost of raw materials, such as polysilicon, for example, was also crucial. However, overall the ITC seems to be contributing to the decreasing cost of generating solar electricity.

Average Cost per kW, Year by Year
The cost per kilowatt (kW) measures the amount of money it takes a solar producer to generate one kW of electricity. This is an important metric because it measures the cost of the end product: electricity. Solar has experienced tremendous progress on this front. Novogradac data shows that in 2010, the average cost per kW was $7,485. Costs fell by almost 20 percent in 2011, reaching to $6,042 per kW. The decline in cost was less precipitous in 2012. The cost per kW fell by 12.3 percent to $5,298. In 2013, the market seemed to shake off the mild slowdown from 2012. Novogradac data shows that solar costs decreased by almost 26 percent, down to $3,942 per kW. From 2010 to 2013, solar cost per kW declined by a total of 47 percent, or $3,542. The average decline per year was 19 percent, or $1,180.

Cost per kW for Different Types of Systems
Another way to measure solar cost efficiency is to delineate between the three different types of systems: commercial, residential and utility.

Examining Novogradac & Company’s data about commercial solar systems reveals a dramatic price decline. In 2010, the cost per kW for commercial solar was $7,566. In 2011, this cost declined by 21 percent, or $1,595, down to $5,971. This trend held steady in 2012 and the cost per kW declined by 21.9 percent, or $1,308, to $4,663. The trend accelerated in 2013 and commercial solar cost per kW decreased by 30.4 percent. The 2013 decrease in cost per kW was $1,417, leaving the cost per kW for commercial solar at $3,247. Between 2010 and 2013, Novogradac’s data shows the cost per kW for commercial solar declined by $4,320, or 57.1 percent. The average year by year decline in cost was $1,440 per kW and 24.5 percent.

The cost to generate electricity using residential systems declined as well, albeit not as quickly as it did for commercial systems. According to Novogradac data, in 2010 the cost per kW for residential systems was $7,308. This cost declined by 7.32 percent in 2011, falling by $535 to $6,773. Residential systems’ cost declined a bit more quickly in 2012 when the cost per kW decreased by 10.6 percent, falling by $715 to $6,058. The 2013 cost for residential solar declined by 8.7 percent, or $526, to $5,531. While our data shows the 2010 cost per kW was higher for commercial systems than residential systems in 2010, by 2013 the roles were reversed. In 2013, the cost per kW for a residential solar system was $2,285, or 41.3 percent, higher than the cost per kW for a commercial solar system. Despite the difference in cost level, the costs per kW declined between 2010 and 2013 for both types of systems.

Less data is available for utility scale solar systems, which precludes Novogradac from creating a statistically reliable year by year cost comparison for utility solar systems, but we are able to make aggregate observations. The average cost per kW for utility solar systems between 2010 and 2013 was $3,416 according to Novogradac’s research. In 2013, a year for which we have the largest sample size, the average cost per kW was $3,137 for utility solar. This level just $110 below the cost per kW for commercial solar systems in 2013 and significantly below, $2,934, the cost per kW for residential systems.

Cost by Size of Systems
A key consideration in examining these costs is the size of the solar installation, which is measured in kW capacity. Generally, a large solar energy property is one that is above 1,000 kW, and a small system is generally one with less capacity than that. Examining the cost trends for large and small properties can reveal whether there are significant differences between their cost decline rates.

The cost per kW for large solar properties declined between 2010 and 2013, but the decline rate was inconsistent. Novogradac’s data shows that in 2010, the cost per kW for a large solar property was $5,882. This cost decreased by 9 percent in 2011, falling $528 to $5,354. In 2012, costs fell more quickly, declining by $1,495 to $3,859. That represents a 27.9 percent decline in cost per kW. The decline slowed a little in 2013, with costs declining by 18.1 percent, which is still a significant decrease of $700 per kW, to $3,159. Between 2010 and 2013, the cost per kW for large properties fell by 46.3 percent, or almost half. In dollar terms, Novogradac’s data shows the cost per kW for large solar installations fell by $2,722 between 2010 and 2013.

Small systems began with higher costs than their large counterparts. According to Novogradac’s data, the cost per kW for a small solar installation in 2010 was $7,885. In 2011, this cost fell by 18.2 percent, or roughly double the rate that the price fell for large systems. In dollar terms, costs per kW decreased by $1,439, to $6,447 in 2011. The cost decline rate for small properties slowed in 2012 while the equivalent rate for large energy properties accelerated; In 2012, cost per kW for small solar installations fell by 11 percent, or $706. The cost per kW for small solar properties in 2012 stood at $5,740. In 2013, cost per kW fell by $773, or 13.5 percent, to $4,967. Between 2010 and 2013, Novogradac’s research indicates the cost per kW for small solar properties fell by $2,919, or 37 percent. While both large and small properties experienced declines in their cost per kW between 2010 and 2013, the decrease in cost per kW for large solar installations was consistently faster. This suggests that not only do large solar installations benefit from economies of scale, which explains why it costs less to produce a kW for a larger property, but also that these advantages are expanding.

Industry Context
On March 5, the Solar Energy Industries Association (SEIA) released data on quarterly pricing for solar energy costs per kW between 2010 and 2013. While the data is not exactly comparable, it still provides an interesting guidepost. SEIA found that between 2010 and 2013, costs per kW for residential energy properties fell by 28 percent. This is roughly in line with Novogradac’s estimated 24.3 percent decline in costs per kW for residential energy properties. For commercial properties, SEIA found that costs per kW fell by 34.9 percent. While this figure is significantly lower than the 57.1 percent decline estimated by Novogradac, it remains in line with the general trends of strong cost decline across all sectors and stronger cost decline for commercial properties than residential properties.

SEIA’s data also allows for the trending of Novogradac & Company’s data. For example, if the average price per kW in 2005 was $10,000 and in 2014 the average price per kW was $5,000, then the trend is that prices in 2014 are 50 percent of the prices in 2005. This method, called “trending averages,” can be applied to Novogradac’s data to establish what the prices of past systems would be in the first quarter of 2014. The result of applying trending averages to Novogradac data, broken down by system size, can be seen on page 66.

Conclusions
The cost of producing solar energy has plummeted in the last few years, across all types and sizes of projects. Commercial and residential solar energy systems generated electricity at a lower and lower cost. Production costs for electricity from both small and large solar systems declined between 2010 and 2013, albeit not at the same rate. While the link is not entirely causal, there is strong evidence to suggest that the ITC is at least partially responsible for this cost decline.