PrintThe Changing Economics of Solar Energy
The generation of solar energy – primarily through Solar PV – is a story of exponential growth. Since 2000, the global Solar PV industry has grown by around 25% per year on average, so installed capacity has been doubling every 2.7 years (see below). Even so, solar represents a very small sliver of total global power generation — for now.
The nice thing about exponential growth is that it is easy to project it into the future. Over the time period shown in the graph above, solar energy generation has grown by 25% per year; if we continue that into the future, we find that before long, we would have enough solar energy to make up a substantial portion of the global energy needs by 2030 (see figure below). By the year 2040, this growth would rise to 1360 EJ, more than twice the global energy consumption of the present. Of course, that makes no sense — we would not produce more energy than we need, and this reminds us of an important fact, which is that exponential growth cannot continue forever.
The image is a line graph titled "Global Solar Energy Generation Projection," depicting projected solar energy generation from 1985 to 2030. The x-axis represents the year, ranging from 1985 to 2030, and the y-axis represents the energy generated per year in exajoules (EJ), ranging from 0 to 120. The graph starts with a nearly flat blue line from 1985 to around 2015, indicating little to no growth in solar energy production. After 2015, the line turns orange and begins to curve sharply upward, showing a significant increase, projecting exponential growth in solar energy generation up to 2030. A text box within the graph notes "Projection into the future assuming 25% per year growth."
One reason to trust this projected future growth is that the price of solar energy has fallen dramatically over time as can be seen in the graph below. In fact, if the generation of solar PV energy has been growing exponentially, the price has been dropping exponentially.
This bar chart illustrates the decline in the cost of silicon photovoltaic (PV) cells from 1977 to 2015, measured in US dollars per watt ($/Watt).
Key Observations:
1977:
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- The price of silicon PV cells was $76.00 per watt, the highest recorded in the dataset.
- Marked by a tall blue bar at the far left.
1980s:
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- Significant price reduction as PV technology improved.
- By 1985, the price dropped to around $10 per watt.
- The bars become progressively shorter, showing a steep decline.
1990s:
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- The price stabilized around $5–10 per watt.
- The bars maintain similar heights, indicating slower reductions.
2000s:
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- Continued gradual decline, reaching around $2 per watt by mid-2000s.
- More efficient manufacturing and increased adoption contributed to lower costs.
2015:
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- The price reached $0.30 per watt, as indicated by a highlighted blue label at the bottom right.
- This marks a 99.6% reduction from 1977 prices.
Additional Details:
- A text box in the center of the graph reads:
"Price history of silicon PV cells in US$ per watt" - Data Source: Bloomberg New Energy Finance & pv.energytrend.com
- The trend follows Swanson’s Law, which states that solar PV prices drop by 20% for every doubling of cumulative shipped volume.
The price decrease is following a pattern that has been given a name: Swanson’s Law, which states that the price drops by about 20% for each doubling in the number of PV cells produced. This law suggests that the prices of solar PV energy will continue to decline in the future.
This brings us to an important question — how does the cost of solar energy compare to other sources of energy? Energy economists have come up with a good way of comparing these costs by adding up all of the costs related to producing energy at some utility-scale power plant (a big wind farm, a big solar PV array, a CSP plant, a nuclear plant, a gas or coal-burning power plant). This is called the levelized cost of energy and you get it by taking the sum of construction costs, operation and maintenance costs, and fuel costs over the lifetime of a plant and then dividing that by the sum of all the energy produced by the plant over its lifetime. This cost provides us with a way of comparing the energy from different sources. Since the boom in natural gas production due to fracking, natural gas has been the lowest cost form of energy (which is why coal is being used less and less), but energy from solar and wind have been decreasing rapidly, as can be seen in the following graph. When a renewable electrical energy resource such as solar or wind becomes equal in cost to the cheapest fossil fuel source of electricity, we say that the renewable resource has reached "grid parity". Once grid parity is achieved, the renewable resource makes sense from a purely economic standpoint, and as it drops below the grid parity point, it is the smartest electrical energy resource.
This line graph displays the levelized cost of energy (LCOE) for solar, wind, and natural gas from 2008 to 2018 in 2018 dollars per megawatt-hour (MWh). The LCOE represents the total cost of generating electricity from each source, considering installation, maintenance, and fuel costs.
Key Observations:
Solar Energy (Red Line)
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- In 2008, the LCOE for solar was about $180 per MWh, the highest of the three energy sources.
- The cost declined rapidly over the years, reaching approximately $40 per MWh by 2016.
- By 2018, solar became the cheapest energy source at under $30 per MWh.
- The decline reflects advances in solar panel technology, manufacturing efficiency, and increased adoption.
Wind Energy (Green Line)
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- The cost of wind energy fluctuated between $60–80 per MWh from 2008 to 2010.
- After 2010, wind costs began to decline, reaching a low of about $20 per MWh in 2018.
- The drop can be attributed to larger and more efficient wind turbines, better grid integration, and falling installation costs.
Natural Gas (Blue Line)
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- The LCOE for natural gas remained relatively stable, fluctuating between $40-60 per MWh over the period.
- Natural gas was cheaper than solar for most of the timeline but was surpassed by both solar and wind by 2018.
- The stability of natural gas prices is due to fuel costs, infrastructure maintenance, and policy factors.
Overall Trends:
- Solar energy saw the most dramatic cost reduction, making it one of the cheapest electricity sources by 2018.
- Wind energy also experienced a significant drop, becoming the least expensive energy source by 2018.
- Natural gas remained relatively stable, but was no longer the most cost-effective option by the end of the period.
Part of the reason that solar and wind have expanded in recent years has to do with government policies — a number of countries have instituted subsidy and incentive programs that offset a large portion of the construction/installation costs of solar and wind technologies or devise rules that otherwise give advantages to electricity generation from renewables. Subsidies enacted in various countries have included feed-in tariffs (which guarantee an above-market sales price for solar power); rebates (which directly offset capital and installation costs); and favorable tax treatment (which is like an indirect feed-in tariff). Germany has one of the world’s largest Solar PV markets not because it has the best solar resource on earth but because it has been willing to support a generous feed-in tariff on solar power. (For many years the tariff was over 30 cents per kilowatt-hour, or more than five times the average power price in the United States; in recent years the tariff has been reduced.) These government policies have effectively stimulated the growth of these renewable energy resources, which has, in turn, resulted in lower prices.