The price of solar equipment has dropped by 89% since 2010. Will it continue to get cheaper?
If you’re interested in solar and renewable energy, you’re probably aware that the price of both wind and solar technologies have dropped an incredible amount in recent years.
There are a couple questions that homeowners who are thinking of going solar often have. The first is: Is solar power getting cheaper? And other is: If solar is getting cheaper, should I wait before installing solar panels on my house?
I think the answers to both questions are clear. Solar power has gotten dramatically cheaper in the past 10 years, and is absolutely expected to continue to get cheaper. In fact, it’s expected to steadily drop in price through the year 2050. And because the price will always be dropping, there’s really no point in waiting, because there’s no bottom price in sight. Install your solar panels now, especially because tax credits do expire.
Because renewable energy is such an incredibly important part of the economy now and in the future, a lot of high quality research has been done in this area. I’m going to draw information from three different sources, all of which you can regard as being highly credible.
How much have solar energy prices fallen?
The price of solar has dropped by an incredible amount. Back in 1977, the price of solar photovoltaic cells was $77 for just one watt of power. Today, it’s around $0.13 per watt, or about 600 times less. The cost has generally been following Swanson’s Law, which states that the price of solar drops by 20% for every doubling of shipped product.
This relationship between manufacturing volume and price is an important effect, because as you’ll see, the entire global economy is shifting rapidly toward renewable energy.
As you see in the graph below, the past 19 years have been a time of incredible growth for distributed solar. Distributed solar refers to small systems that are not part of a utility power plant – in other words, rooftop and backyard systems on homes and businesses throughout the country.
This graph shows how many systems were installed per year. As you can see, there was a relatively small market in 2010, and it has exploded in the years since. While there was a drop in 2017, the growth curve in 2018 and early 2019 has continued upward.
Swanson’s Law describes how this massive growth has also led to a massive drop in price: solar module costs have dropped by 89% since 2010.
Hardware costs versus soft costs
When you think about a solar system, you might think that it’s the hardware that makes up most of the expense: the racking, wiring, inverters, and of course the solar panels themselves.
In fact, hardware accounts for only 36% of the cost of a home solar system. The rest is taken up by soft costs, which are other expenses that the solar installer must bear. These include everything from installation labor and permitting, to customer acquistion (ie. sales and marketing), to general overhead (ie. keeping the lights on).
Soft costs have been dropping, but not as dramatically as hardware costs, as shown in the graphs below:
You’ll also notice that soft costs become a smaller percentage of system costs as the system size increases. This is especially true as you go from residential to utility scale projects, but large residential systems generally also have a lower price-per-watt than small systems. This is because many costs, such as permitting and customer acquistion, are fixed and don’t vary much (or at all) with the system size.
How much will solar continue to grow in the United States?
The growth of renewable energy has been driven by two things: better technology and an increasing manufacturing volumes. Together, these forces have driven down the price of solar electricity so much that it is on par with gas and coal, or even cheaper in many cases.
Second, the majority of people live in states that have a renewable portfolio standard (RPS). An RPS is a mandate from the state government that a certain percentage of the state’s electricity must come from renewable sources.
You can see map of all the states with an RPS at ncsl.org.
These mandates are important for the price of solar because it means there will be a guaranteed market for photovoltaics in the future. By increasing the demand, we’ll see the price of solar panels to continue to drop.
How much should we expect the price of solar to drop?
Bloomberg New Energy Finance (BNEF) makes some predictions about the price of solar in the future. If these seem far out, keep in mind that historically we have tended to underestimate how quickly green technologies would grow, including solar, wind, batteries, and electric cars. All of these have grown much faster than many people have predicted, so these numbers from BNEF might actually end up underestimating the actual market trends.
Here are some highlights from the BNEF New Energy Outlook 2019:
- Solar photovoltaic module prices have dropped by 89% since 2010
- Solar PV prices should drop by another 34% by 2030
- By 2050, those prices should drop by a total of 63%. This means utility-scale PV will cost only 2.5 cents per kWh.
- The price of batteries have dropped by 84% since 2010
- Residential solar will grow to be 11% of the total electricity by 2050
Finally, in the near term, Wood Mackenzie forecasts that solar in the US will grow 25% in 2019 compared to 2018. They also predict that in just five years, the total amount of installed solar will have doubled.
How much will solar grow globally?
The United States is actually not the largest market in the world for solar. China is outpacing the US by far, installing solar at about double the rate of the US. China, like most US states, have a renewable energy target. They’re aiming for 20% renewable energy by 2030. That’s a big shift for a country that used coal to power much of its industrial growth.
Here some more highlights from the reports:
- By 2050, half the world’s electricity will be renewable, split roughly 50-50 between wind and solar.
- In 2019, solar power supplies only 2% of the world’s energy, but it will grow to 22% by 2050.
- Massive, grid-scale batteries will be a key catalyst for this growth. Batteries will be 64% cheaper by 2040, and the world will have installed 359 GW of battery power by 2050.
- The cumulative amount of solar investment will hit $4.2 trillion by 2050.
- In that same period, coal usage will drop by half globally, down to 12% of the total energy supply.
- In the United States, we will have nearly stopped building new coal and nuclear power plants. Both technologies will basically disappear from the electric grid by 2050.
- India is projected to continue to build some coal power to meet its growing electricity demand, in part driven by air conditioning which will double globally. India is projected to add 170 GW of coal capacity by 2050, but this will be dwarfed by renewables which will be 1,500 GW in the same time period.
- 67% of India’s electricity will be zero carbon by 2050, and 70% of that will come from solar.
The effect of soft costs on the price of home solar
So far, we’re shown how the hardware costs of solar have dropped by an incredible amount in the past few decades. However, one component of the cost of a solar array that has remained relatively high isn’t affected by the dropping cost of solar technology, which is soft costs.
What are soft costs?
Soft costs are the part of a solar installation project that include everything except the hardware. This means labor, marketing and sales, company overhead, profits, and the work involved in applying for permits with City Hall and interconnection applications with the utility company.
On average, soft costs are 64% of the total cost of a home solar installation. For a residential solar installation, soft costs take up a much larger portion of the project cost than with a utility-scale project, and are a larger part of the overall project cost for a small solar installation than a large one.
This is because if you’re doing a small home solar project – say, a 3 kW installation – the amount of work required to apply for permits, get interconnected with the utility company, and get inspections done is the same as if you were doing a much larger 20 kW project. This is why commercial and utility-scale solar is cheaper on a per-watt basis than home solar.
According to an analysis by the Department of Energy, soft costs break down like this:
- Permit fees: 2%
- Permitting and interconnection work: 2%
- Sales tax: 5%
- Transaction costs: 6%
- Installer profit: 9%
- Indirect corporate costs: 9%
- Customer acquisition: 9%
- Installation labor: 11%
- Supply chain costs: 12%
Because of the nature of these costs, they are harder to reduce than the cost of solar hardware. For example, “indirect corporate costs” may include things like paying rent for your building, the cost of insurance, the cost of support staff, and other things that are required to keep the lights on for a business. These are costs that are hard to reduce.
Increased competition in places like California that have high competition has squeezed the profit margins of installers, so there isn’t much more wiggle room to reduce these costs.
Should you wait for solar to become cheaper?
In large part because of the stubborn nature of soft costs, if you’re wondering if you should wait for costs to drop further, we would recommend not to wait. Only 36% of the cost of a home solar installation is related to hardware costs, so waiting a few years won’t result in the kind of dramatic price drops we’ve seen in the past. Solar hardware is already very cheap.
However, waiting until you’re financially able to purchase the system rather than take a PPA or lease is a good idea.
By going solar now, you’re effectively locking in your electricity costs for the next couple decades. By starting the payback period sooner, your investment will start returning dividends to you sooner.
The other important issue is that federal and local incentives for solar will eventually expire. The federal tax credit will be dropping in value in 2020 and disappear for residential customers by 2022.