Germany only gets as much sunlight as Alaska, yet it is the largest solar market in the world. The cost of installing solar is much cheaper in Germany – up to 48% less at $3.08 per watt versus $5.90 per watt in the United States, according to recent data from Lawrence Berkeley National Laboratory (LBNL). With so much more sunshine and land mass, why are photovoltaic solar projects nearly twice as expensive to install in the United States? And what needs to change for us to get the same cost structure?
One obvious answer is economies of scale. Germany’s PV market matured rapidly over the past couple of years as a result of the country’s feed-in-tariff policy, which guarantees payments for solar energy produced over a fixed term. Solar customers have predictable payback on their investments because the feed-in-tariff established clear pricing for solar energy production. Americans that want to go solar have to contend with upfront rebates and tax credits vary from state to state, and the PV market has been subject to swings in legislative cycles. As a result, the German PV market rapidly matured over a short period of time, while the U.S. has yet to reach critical scale. Over the past two years, Germany installed 3.6 times more solar capacity than the United States. On a per capita basis, that’s 14x more solar capacity!
In an expanding market, competition drives down system design and labor costs. While great for solar customers, installers can still make up for margin compression through increased sales volume. These “soft costs”, which also encompass permitting fees, sales tax and customer acquisition costs, represented 18.3% of total installed cost in Germany versus 58.2% in the United States, according to 2011 data from a LBNL survey of German and U.S. residential installers.
As evident in the cost breakdown above, the barriers to reducing installation costs in the United States are not so much technological as they are institutional. In a report published earlier this year, the Institute for Self Reliance outlined key policy reforms that are critical to lowering soft costs: standardizing and simplifying the permitting process, lifting restrictions on net metering capacity and limits to small-scale interconnection with the grid. In other words, cut the red tape! The longer a project takes to get approved, the more an installer must spend on system design, sales and marketing. With standard permitting processes and the allowance of more solar into the grid, there are tremendous opportunities for significant cost-reduction.
Germany may seem way ahead in the solar game, but we’re not so far behind. Simple reforms such as streamlining permitting can potentially cut the cost of installing residential PV by as much as 24%. While a variety of other factors may explain Germany’s cost advantage (differences in business overhead costs, cost of capital for installers, the length of supply chains for hardware, pricing solar systems based on the value of production rather than cost of installation), our current institutional barriers are preventing the creation of an efficient and dynamic PV market. We have the sunshine and the rooftops – now we just need the political will to harness it all.