Solar power “soft” costs remain the United States’ greatest opportunity for cost reductions in solar energy deployment. These costs — which include permitting, inspection, interconnection, financing, customer acquisition, and others — represent approximately half of the total installed cost of residential solar systems, according to the National Renewable Energy Laboratory (NREL).
In order for the US to remain a serious global competitor in a future that, according to the IEA, will have renewables outpacing natural gas generation by 2016, we must encourage investment now. Contrary to claims by the Breakthrough Institute, soft cost reductions are not limited to Germany, and are possible in US markets without federal production and installation incentives.
Due to relatively high up-front capital costs, distributed generation (DG) requires sustainable, low-cost financing to compete with conventional fuels. However, there are plenty of opportunities to reduce the costs of capital without the use of German-style long-term federal incentives.
For example, banks assess cost of capital from the anticipated project risk, which is based on a number of factors, especially knowledge and experience. As banks increase their knowledge and experience financing solar projects, the cost of the capital they provide will decrease.
The experience risk factor will naturally decrease over time. Tony Clifford of Standard Solar says, “As conventional banks become more familiar with solar projects, larger institutions will finance solar projects on more favorable terms than we realize today. Bankers will see less technology risk and less construction risk.”
The other factor, knowledge, can be enhanced through private innovation. One group, kWh Analytics, is pursuing this by developing a rating mechanism for photovoltaic (PV) systems. A comprehensive and accurate rating system that applies a clear, accessible score to a project, and will allow financiers to more easily assess and finance solar systems. KWh estimates this simple rating system can reduce the cost of capital by $0.40 per watt.
Financing costs could also be reduced by extending Master Limited Partnerships (MLP) to renewables. Opening MLPs to renewables would increase access to cheaper capital equity and lead to more investment. Unfortunately, the most recent attempt to achieve MLP parity is stalled in Congress. An important step in reducing the soft costs of private investment is passing the Master Limited Partnerships Parity Act.
Finally, developing innovative financing mechanisms is key to spurring demand and investment in solar systems. Third-party leasing schemes, like solar power purchase agreements (SPPA), can eliminate up-front capital costs and provide predictable energy prices. Another idea, community solar farms, would allow consumers to reap the benefits of solar energy while simultaneously achieving the benefits of scale. State and local governments should encourage policies to promote SPPAs and community wind and solar farms. Developing these types of projects will be instrumental in moving US solar adoption beyond its infancy.
Although PV cell prices have declined significantly over the last 36 years, the true benefits of PV system innovation are on the horizon in “Plug and Play” solar systems. This concept is designed to standardize and simplify PV systems so that panel installation is as simple as installing a washing machine. A PV manufacturer would supply a “solar kit” that includes panels, wiring, inverters, controllers and mounts with directions for manual installation. This immediately eliminates the need to hire a professional electrician/line worker, which can lead to reductions of approximately $0.59 per watt. Plug and play solar systems could also eliminate the need for permitting and commissioning, which NREL estimates could potentially reduce costs by an additional $0.23 per watt.
The Department of Energy (DOE) is already evaluating these technologies for the PV market. The DOE should continue encouraging private companies to develop plug and play systems and should work to standardize permitting, inspection, and installation policies to make solar installation as simple — and safe — as possible.
Finally, customer acquisition and system design, which represent approximately 45 percent of soft costs, present an enormous opportunity for innovative cost reductions to residential PV installations. Companies like Clean Power Research are developing software tools to help companies provide customers with clear and simple information on incorporating PV into their homes. These tools would help customers search online for the best PV system and financing mechanism to meet their budget and other needs.
However, additional tools are still needed. We should develop a comprehensive solar database that will act as a reliable and unbiased source of information on PV vendors and financing opportunities. This database would help consumers evaluate the costs and benefits of competing solar systems in competitive markets based on location, home model, and budget. This would reduce the cost of generating leads and would encourage companies to continue improving their products in a competitive market.
Although the US solar industry still depends on federal support, there are plenty of effective, market-based solutions to reduce solar soft costs that do not require tapping into the federal purse. As long as the US encourages both smart public policies and private innovation, soft-cost reductions are clearly achievable in the PV market.