Economics and Finance

In recent years, PV technology has improved its electricity generating efficiency, reduced the installation cost per watt as well as its energy payback time (EPBT), and has reached grid parity in at least 19 different markets by 2014. Photovoltaics is increasingly becoming a viable source of mainstream power. However, prices for PV systems show strong regional variations, much more than solar cells and panels, which tend to be global commodities. In 2013, utility-scale system prices in highly penetrated markets such as China and Germany were significantly lower ($1.40/W) than in the United States ($3.30/W). The IEA explains these discrepancies due to differences in “soft costs”, which include customer acquisition, permitting, inspection and interconnection, installation labor and financing costs.[120]:14

Utility-scale PV system prices
Country Cost ($/W)
Australia 2.0
China 1.4
France 2.2
Germany 1.4
Italy 1.5
Japan 2.9
United Kingdom 1.9
United States 3.3
For utility-scale PV systems in 2013

Grid parity

Solar generating stations have become progressively cheaper in recent years, and this trend is expected to continue. Meanwhile, traditional electricity generation is becoming progressively more expensive. These trends are expected to lead to a crossover point when the levelised cost of energy from solar parks, historically more expensive, matches the cost of traditional electricity generation. This point is commonly referred to as grid parity.

For merchant solar power stations, where the electricity is being sold into the electricity transmission network, the levelised cost of solar energy will need to match the wholesale electricity price. This point is sometimes called ‘wholesale grid parity’ or ‘busbar parity’.

Some photovoltaic systems, such as rooftop installations, can supply power directly to an electricity user. In these cases, the installation can be competitive when the output cost matches the price at which the user pays for his electricity consumption. This situation is sometimes called ‘retail grid parity’, ‘socket parity’ or ‘dynamic grid parity’. Research carried out by UN-Energy in 2012 suggests areas of sunny countries with high electricity prices, such as Italy, Spain and Australia, and areas using diesel generators, have reached retail grid parity.

Incentive mechanisms

Because the point of grid parity has not yet been reached in many parts of the world, solar generating stations need some form of financial incentive to compete for the supply of electricity. Many legislatures around the world have introduced such incentives to support the deployment of solar power stations.

Feed-in tariffs

Feed-in tariffs are designated prices which must be paid by utility companies for each kilowatt hour of renewable electricity produced by qualifying generators and fed into the grid. These tariffs normally represent a premium on wholesale electricity prices and offer a guaranteed revenue stream to help the power producer finance the project.

Renewable portfolio standards and supplier obligations

These standards are obligations on utility companies to source a proportion of their electricity from renewable generators. In most cases, they do not prescribe which technology should be used and the utility is free to select the most appropriate renewable sources.

There are some exceptions where solar technologies are allocated a proportion of the RPS in what is sometimes referred to as a ‘solar set aside’.

Loan guarantees and other capital incentives

Some countries and states adopt less targeted financial incentives, available for a wide range of infrastructure investment, such as the US Department of Energy loan guarantee scheme, which stimulated a number of investments in the solar power plant in 2010 and 2011.

Tax credits and other fiscal incentives

Another form of indirect incentive which has been used to stimulate investment in solar power plant was tax credits available to investors. In some cases the credits were linked to the energy produced by the installations, such as the Production Tax Credits. In other cases the credits were related to the capital investment such as the Investment Tax Credits

International, national and regional programmes

In addition to free market commercial incentives, some countries and regions have specific programs to support the deployment of solar energy installations.

The European Union’s Renewables Directive sets targets for increasing levels of deployment of renewable energy in all member states. Each has been required to develop a National Renewable Energy Action Plan showing how these targets would be met, and many of these have specific support measures for solar energy deployment. The directive also allows states to develop projects outside their national boundaries, and this may lead to bilateral programs such as the Helios project.

The Clean Development Mechanism of the UNFCCC is an international programme under which solar generating stations in certain qualifying countries can be supported.

Additionally many other countries have specific solar energy development programmes. Some examples are India’s JNNSM, the Flagship Program in Australia, and similar projects in South Africaand Israel.

Financial performance

The financial performance of the solar power plant is a function of its income and its costs.

The electrical output of a solar park will be related to the solar radiation, the capacity of the plant and its performance ratio. The income derived from this electrical output will come primarily from the sale of the electricity, and any incentive payments such as those under Feed-in Tariffs or other support mechanisms.

Electricity prices may vary at different times of day, giving a higher price at times of high demand. This may influence the design of the plant to increase its output at such times.

The dominant costs of solar power plants are the capital cost, and therefore any associated financing and depreciation. Though operating costs are typically relatively low, especially as no fuel is required, most operators will want to ensure that adequate operation and maintenance cover is available to maximise the availability of the plant and thereby optimise the income to cost ratio.