Energy Reports

Search • RSS Feed

Bringing Solar to Scale: California’s Opportunity to Create a Thriving, Self-Sustaining Residential Solar Market 2005-04-25 Bringing_Solar_to_Scale.pdf

Executive Summary

Developing a thriving, self-sufficient solar power market in California can have huge benefits for the state—reducing air pollution, protecting consumers from volatile electricity prices, and reducing the need for expensive upgrades to electricity transmission and distribution systems.

The best way for California to ensure that the state sees a future expansion in solar power capacity is by committing to long-term market development programs that include financial incentives and new construction design policies. Experience in California and in other countries, especially Japan, has shown that such government programs can lead to increased demand, lowered prices, and ultimately a robust, self-sufficient solar market in which government incentives are no longer necessary. It is unlikely that the goal of Governor Schwarzenegger’s Million Solar Roofs Initiative—3,000 MWp (peak megawatts) of total new solar photovoltaic (PV) capacity and half of all new homes built with PV in the next 10 years—can be achieved without a sustained, guaranteed program that combines incentives for both residential and commercial systems, as well as policies that encourage the inclusion of solar power systems into the construction of new buildings.

The most important factor in reducing costs is the experience gained from increased production.

With the growth in solar PV installations in California and worldwide, the solar industry has learned how to improve production methods, improve the efficiency and life of various components, and operate more efficiently. Some of this is due to economies of scale as the companies themselves get bigger, but much of it is due to the fact that they have done each part of the process many times, and have learned how to do it better. This learning curve—what economists call the “experience curve” and quantify in terms of a “progress ratio”—is true for many products across many industries.

Government incentives can spur increased demand for solar power systems, bringing the industry to cost-competitiveness more quickly.
The incentives given under the California Energy Commission’s (CEC) Emerging Renewables Program and the Public Utilities Commission’s Self-Generation Incentive Program have spurred increased installed PV capacity and decreased price. In fact, the increased production resulting from the CEC’s residential incentives has caused the price of retrofitted residential PV systems in California to drop by 36 percent from 1998 to 2004—from $14.01 per Watt to $8.98 per Watt.1 (Note: All price figures are in 2004 dollars, and all PV system sizes indicate Watts of alternating current, unless otherwise noted.) Much of this expense can be recouped by the homeowner over the life of the system, but prices will need to drop further—to within the range of $4.00-$4.50 per Watt—for homeowners to break even on their solar investment without financial incentives.

Using a conservative estimate of the rate at which production increases spur price decreases:

-With no residential incentive program after 2005: California would install approximately 53 MW of residential PV systems on new and existing homes by 2015, with the system price in 2015 of $5.69/W—not yet within the range of being economically self-sufficient for the consumer.

-With a 10-year incentive program that scales down $0.20/W each year from its current level of $2.80/W: California would install about 1,278 MW of systems on new and existing homes by 2015, when the system price reaches $4.40/W – a price that would put solar within the range of cost-effectiveness for California homeowners without financial incentives. Getting to this point would require an average annual budget of $180 million for incentives to create the demand for residential installations.

Under a more optimistic estimate of how rapidly price decreases, the residential incentive can be scaled down even more quickly, with residential installation prices reaching the break-even point in 2012 or sooner.

Also, because installation costs are significantly lower when the PV system is incorporated into a new home during construction, system prices in the new home market could hit the break-even point sooner than in the residential retrofit market. This will be an important and growing market in the future, as seen in Japan.

Japanese solar policies over the last decade prove the effectiveness of this approach.
Since the start of Japan’s residential incentive program in 1994, the average system cost has fallen by about 75 percent in real (2004) dollars, and the country is approaching the point at which government rebates will no longer be needed. However, much of the cost reduction has occurred in parts of the system price that are specific to Japan (such as balance-of-system components and installation), and therefore has not resulted in equally large price reductions in California and in other
markets. By following the example of Japan’s incentive program, California could achieve similar results by allowing designers, installers, and service companies in California’s market to develop similar knowledge.

Japan’s average annual investment of $115 million over the last 10 years has led to a 35-fold increase in photovoltaic capacity.4 In fact, Japan has installed almost as much capacity over the last decade as the rest of the world combined. Despite reductions in the size of the incentive from 50 percent of system costs to 10 percent, demand for solar PV has continued to skyrocket. The country achieved its goal of equipping 70,000 homes with solar PV systems by 2000, and it is on track to meeting its goal of installing building-integrated photovoltaic systems on half of all new homes by 2010.6 In addition, Japan’s solar manufacturing industry has surged ahead to become the largest in the world.

A strong commitment to solar PV now can create long-lasting results.
California already has the third-largest PV market in the world, after Japan and Germany, and has great potential for solar generation given its high sunlight exposure. Pursuing the right policies can develop this market and the industries that serve it. The state should:

-Commit to a sustained incentive program for residential and other small systems. A new, dedicated solar fund, paid through a surcharge on electric bills, can ensure that residential incentives will continue until the California solar market is self-sustaining. To accomplish the goal, this program must include a guaranteed fund so that companies and investors can plan to meet a growing market that will not suddenly disappear. Equally important, the rebate should be designed to scale down over time, much like the California Energy Commission’s current Emerging Renewables Program. Based on projections using conservative assumptions, driving the cost of residential systems down to the point where homeowners can break even over the course of the PV system’s lifetime will require at least $180 million per year for 10 years. This amount will allow the program to meet the demand that arises from the reduced cost of PV systems to homeowners.

-Commit to a sustained incentive program for commercial systems. Creating a parallel incentive program for commercial installations is critical as well. In conjunction with a residential incentive program, this will further drive down the cost of solar power. The programs should be coordinated, and the size of the incentives should also ramp down over time.

-Incorporate solar into new home design and construction. California builds approximately 135,000 new single-family homes each year. Incorporating solar systems into the home during construction is one of the most cost-effective and efficient ways to build California’s solar market. Policies targeted specifically at new homes—such as requirements to install solar on an increasing percentage of new homes or offer systems to homebuyers—can develop the most cost-effective, but largely untapped, part of the residential PV market.

-Raise the net metering cap. Raising the net metering cap to at least 5 percent of a utility’s peak demand will allow more homeowners and businesses to get credit for the electricity they generate—a key component to making solar power cost-effective for homeowners.

-Continue tax incentives for solar installations. California should continue the various tax incentives it currently gives for solar PV systems and other renewable energy technologies.

Such residential and commercial programs will create the demand needed to drive down prices in the long term. Funding for these incentives should come through an electricity surcharge because electricity customers benefit directly from increased solar power capacity. By reducing peak demand, solar power reduces the need for expensive new power plants and upgrades to the transmission and distribution system, decreases reliance on imported fuels, and reduces electricity rates – as well as creates cleaner air and more in-state jobs, which benefit everyone.