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Lessons from Germany on solar costs

Solar has never been more affordable for more Americans – with residential prices dropping an impressive 14% over the last year alone. But global solar leader Germany is still beating the U.S. in the race to low-cost PV.

The Lawrence Berkeley Lab released a fascinating study that shows that the total the price of a residential installation in Germany is $2.8/W – or a whopping 45% – lower than here in the U.S. Um, that’s huge.  (Note that cost varies dramatically in the U.S. from state to state, and even within a state.  So in some places U.S. solar installers are actually on par with German pricing, but on average we are lagging far behind.)

So what’s going on? We’re all buying the same panels at prices generally set by the global market? Turns out there are a multitude of reasons for the price differential – many of which carry clear lessons for effective policy design.

1. Size matters. Turns out that the sheer number of megawatts a country has installed dramatically affects the price of solar – and Germany has installed massively more solar than we have. In 2011, Germany installed about five times more solar than the U.S (7,485 MW compared to 1,900 MW).  At the residential scale, Germany installed more than 2.5 times more solar in 2011 than the U.S. So why is more solar lower cost solar? LBNL attributes this to business process “learning” – with experience, businesses become more efficient at every step from customer acquisition to installation.  Our learning rate is slower because simply haven’t had as much practice developing solar projects. LBNL estimates that about half of the price difference could be attributed to this factor alone.

The policy lesson is simple; more solar. Market-building policies that drive economies of scale and sustained industry experience deliver real returns in the form of cost-effective solar.

2. Little soft costs add up to big price tags. To put it simply, while German installers pay the same price for solar panels -where price is determined on a global scale- they are paying much less for all the ‘soft costs’ associated with a solar installation.  In Germany their customer acquisition costs are lower; their permitting costs are lower; they pay lower sales tax on solar systems, and their solar companies may be making smaller margins on each installation. The lesson here is that both the U.S. solar industry and solar advocates have a role to play in reducing these soft costs. While the industry must reduce customer acquisition and overhead costs, groups like Vote Solar can help work to reduce permitting costs and sales tax costs. Check out our Project Permit campaign website to see what we are doing to streamline solar permitting requirements in the U.S.

3. A national approach to energy policy helps. While all U.S. solar installers have access to the 30% federal investment tax credit, additional state or even local incentives vary widely and create a very uneven landscape for solar installers to navigate. Germany on the other hand has offered one federal incentive – the feed in tariff (FIT).  In addition to offering the cost advantages of a straightforward incentive process, the FIT has been reduced iteratively since 2004 – putting pressure on German installers to lower system prices to maintain attractive investments for their customers. (Note that California’s CSI rebate program has had a similarly effective step-down design that has reduced the incentive from $2.50/watt in 2007 to near zero today) We aren’t expecting federal solar energy policy to overtake the work of the states anytime soon, but this is a good reminder that a patchwork 50 state approach is an inefficient process.