How Cheap Can Solar Power Be?

21st Aug 18

Cameron Quin

Written by Cameron Quin

One of the main advantages of solar power systems is working with sunlight, a free resource. However, it would be incorrect to say that solar power is free: photovoltaic modules and other system components have a manufacturing and installation cost, and they require maintenance once they are operating. Thankfully, solar technology has become very affordable over the last few years, and photovoltaic arrays have simpler maintenance needs than most other generation systems.

In recent years, some large-scale solar projects have made headlines with surprisingly low electricity costs:

  • In 2016, the first solar farm with a price below 0.03 USD/kWh was announced – an 800-MW project near Dubai, UAE.
  • In 2017, solar projects with prices below 0.02 USD/kWh were announced in Saudi Arabia and Mexico.

Of course, the cost of solar power cannot decrease indefinitely, since projects require material inputs and skilled labor. Also consider that solar power is business, and companies seek profits.

GTM Research carried out a study of current industry trends, focusing on technology costs and the availability of low-interest financing. In their most optimistic scenario, solar power achieves a cost of 14.7 USD/MWh (1.47 cents/kWh) by the year 2022.

What Makes Low-Cost Solar Power Possible?

A solar power company can only offer low kWh prices if their expenses are even lower. In other words, the lifetime ownership cost of photovoltaic systems must be decreased. The following are some of the main ways to achieve it:

  • Having a favorable site with abundant sunshine, since each solar panel can deliver more kilowatt-hours during its service life.
  • Access to large sums of capital with low interest rates, or even free of interest payment if possible. Normally, only the largest developers have this benefit.
  • Reductions in the price of solar panels and associated components.
  • Lower transportation and installation costs.
  • Lower maintenance expenses.
  • Tax exemptions or reductions for photovoltaic technology.
  • Favorable contract conditions, such as a long-term Power Purchase Agreement (PPA).

When many of the conditions above are found together in the same solar project, its lifetime cost is decreased and its electricity output can be sold for a less. The levelised cost of electricity (LCOE) is a metric used in the energy industry to weigh project lifetime costs against kilowatt-hour production:

  • In simple terms, the LCOE is the net present value of all costs in a solar project, divided by the total kWh output over its lifetime.
  • For example, assume a 100-MW solar system has a service life of 25 years. The expected energy production is 5 billion kilowatt-hours, and the total costs for the developer add up 250 million USD (in net present value).
  • If you divide 250 million USD by 5 billion kWh, you get 5 cents/kWh. This is the LCOE of the project.

You cannot expect the electricity prices to be lower than the LCOE, or otherwise the project developers lose money. To sell cheap electricity from a solar system, first you must reduce the levelised cost of electricity.

 

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