Ever asked yourself why solar power is a thriving business in some locations, but is barely used in others? In principle, solar power is simple: photovoltaic panels are installed and wired, their DC output is converted to AC, and now they can synchronize with the power grid to provide energy. However, external factors may prevent a technology that works perfectly from being financially attractive. With solar power, four key ingredients must be in place.
1) An Abundant Solar Resource – If a project location does not get enough sunlight, you can install the most efficient solar panels in the market but will not make much energy from them. Any obstacle that blocks off sunlight diminishes the output of a solar array, and some examples are:
- Hills or mountains
- Unipole billboards
The list goes on, but the basic rule is that anything capable of casting a shadow on top of a solar array is counterproductive. Geographic location can also have a negative impact on solar power. Days become shorter during the winter as you move far to the north or south, diminishing the energy output of a solar array. Solar energy production may become very low during the shortest days of the winter, precisely when the most energy is required for heating.
2) Affordable Technology – Residential PV systems are now priced at around three dollars per watt, while utility-scale projects are approaching one dollar per watt. For comparison, a solar PV system used to cost more than $10/watt in the year 2000. The gradual reduction in technology costs has been a key factor driving the solar industry. However, there may also be artificial factors influencing the installed cost of solar power:
- An installed solar array will be more expensive in countries with higher wages.
- Taxes can make or break a solar power project; high taxes may make the project unfeasible, while tax exemptions and credits may drastically reduce its payback period and make it more attractive.
- Utilities trying to meet renewable energy targets may offer rebates, further reducing the cost of an installed and functioning solar photovoltaic system.
Sometimes, the Levelized Cost of Energy (LCOE) is a more useful metric than the upfront cost of solar power, since it provides a direct way to compare it against local utility rates. Assume a solar PV system offers an energy cost of $0.12/kWh: it saves money if local electric rates exceed that value, but offers no economic benefit if the rates are lower.
3) Low-Cost Capital – A residential PV system is a sizable investment, not to mention a utility-scale solar farm. For example, even if the $1/watt mark is reached, a 100MW solar farm will cost 100 million dollars, and few project developers will be willing to pay that kind of cash up front. Therefore, it is common for solar PV systems to be installed with loans, but the interest on a loan can determine whether the project is lucrative or not. Assume a solar PV system has a rate of return of 10 percent: any loan with an interest rate below that value is attractive for financing the project, but any loan above that rate actually means the developer loses money. Corporations have access to very favorable loan terms, and individuals with a great credit record may also apply. However, a solar PV system is not something you can buy with your credit card! The cost of capital does not affect the installed cost of a solar PV system, but it influences the LCOE: higher interest rates translate into a higher LCOE and less likelihood that the solar PV system in question will be able to compete with electric utility rates.
4) Favorable Regulations – For the solar industry, governments can be the best ally or the worst enemy.
- Solar power can thrive in a country with a strong renewable energy portfolio, an electric sector that is open to private investment, and with tax incentives for renewable energy.
- On the other hand, the industry is doomed to fail in a country where the electric sector is operated exclusively by the government and homes are not allowed to have net metering for solar power.
Argentina and Mexico are two clear examples of this, both countries recently opened up their electric sector to private investments, and renewable energy sources like solar and wind power have grown considerably in just a few months.
You can visualize the solar industry as a four-legged table. If any of the legs are cut, solar power ceases to be a solid investment. However, solar power is a lucrative business when there is an abundant solar resource, affordable technology, low-interest loans and favorable regulations.