WHAT ARE THE INDICATORS?
The IRENAs Cost and Competitiveness Indicators for rooftop solar (IC&CI or “indicators” hereafter) are a series of indicators of solar photovoltaic (PV) costs compared to electricity rates.
The solar PV market is one of the fastest moving renewable energy markets, with high learning rates of 18% to 22% (for PV modules) combined with rapid deployment resulting in rapidly falling costs (IRENA, 2016). As a consequence, there is a clear need for up-to-date analysis of the evolving competitiveness of solar PV in different markets.
The IC&CIs are designed to inform government, policy makers, regulators and others about recent trends in the competitiveness of solar PV. The goal of the indicators is to aid decision makers in designing, adopting or sustaining renewable energy policies to support solar PV deployment. The results are based on a simple and transparent analysis of reliable cost and performance data, which are updated on a quarterly basis. The indicators consist of three key components:
1. PV installed cost trends,
2. Effective electricity rate when the solar PV system is generating, and
3. The location-specific levelised cost of electricity (LCOE) of the PV system. Notably, the IRENA indicators for rooftop solar PV are not an attempt to identify the direct economic or financial benefits of solar PV in the market segments examined, either for the owner of the solar PV system or for the utility. The detailed data required to accurately assess these values are beyond the scope of this analysis.¹⁷ The indicators are designed instead to show the evolution of the costs of solar PV systems in different markets and to compare these to a proxy of the value of solar PV (on the basis of electricity tariffs) to identify competitiveness.
First and foremost, the analysis is designed to help inform policy makers about the trends in solar PV competitiveness. As a result, although support policies are discussed for each market, their impact on a system owner’s financial situation is not analysed. The IC&CI are, however, also designed to be a vehicle for examining special topics around solar PV costs and deployment, so these issues may be discussed in future editions of the indicators.
WHY DEVELOP THESE INDICATORS?
Commercially available solar PV systems have benefited from almost half a century of development and are today a mature and proven technology. Yet PV costs continue to fall rapidly in some markets.
PV is one of the fastest growing renewable power generation technologies and has experienced strong progress in cost reduction. PV modules have fallen in price by around 80% since 2010, with somewhat lower percentage reductions in total installed costs at the rooftop and utility-scale levels (IRENA, 2016). A range of studies has confirmed the competitiveness of solar PV in different markets, such as Germany. Yet, there is also a lack of regularly updated analysis in the public domain for important markets.
An accurate understanding of the evolution of solar PV competitiveness in different markets is critical to ensuring both efficient and effective support policies. The IC&CI are therefore designed to help fill the significant gap in available analysis, by analysing current cost and performance data.
To make the analysis as useful as possible to policy makers, the IC&CI use a series of simple indicators. These still require very detailed modelling, however, combined with transparent methodological assumptions and data. This ensures that policy makers have the best possible analysis to allow them to make informed decisions on the role that distributed solar PV can play in their energy system.
The IC&CI are part of IRENA’s cost analysis programme’s core products and are designed to leverage the data available in the IRENA Renewable Cost Database and other sources. By focusing on analysis that has direct relevance to policy makers (rather than just reporting installed cost trends) and doing so in a timely manner, the indicators are designed to provide IRENA’s Member States and others with timely and useful supporting analysis.
This analysis is particularly topical. Once the LCOE of residential solar PV falls below tariff levels, even in the absence of support measures, installing residential PV systems in order to self-consume PV electricity becomes increasingly attractive. Understanding when this occurs is critical for policy makers and utilities, as small-scale distributed solar PV is a potentially disruptive technology.
At low levels of penetration, solar PV owners and utilities can benefit from solar PV deployment. Customers can reduce their bills and utilities can enjoy lower distribution losses, deferring investments in distribution capacity and in some cases transmission capacity. As solar PV’s penetration grows, however, the strong economic incentive for individuals or organisations to install solar PV can affect the balance between costs and income in the system and undermine the existing utility model. As such, utilities start to look more closely at the impacts of solar PV on their profitability, and questions about the appropriate market design can become very important. (IRENA, 2017b)
Understanding these issues well in advance of a market shift will allow policy makers, utilities, regulators and potential solar PV owners to have a balanced debate and analysis of all the direct and indirect costs and benefits of solar PV deployment. They also can understand how the regulatory and support structure needs to adapt to the rise of solar PV, over time. This challenge will only become more pressing as electricity storage costs continue to decline, increasing the potential for self consumption of solar PV generation.
HOW ARE THE INDICATORS CALCULATED?
To ensure that the analysis is as accessible as possible to policy makers, it is based on a simple set of three indicators:
1. Solar PV installed costs: data for individual systems by country – and in some cases by city – and by market segment (e. g., residential). The analysis is focused on examining trends in installed costs at a relatively granular geographic level (i. e., at the city or state level, where data are available).
2. An indicator of the value of solar PV as measured by mapping the hourly output of the PV system to time-of-use (TOU) tariff rates (if in effect) over the 8 760 hours in a year, assuming an average meteorological year. This is done using freely available modelling software that is specifically adapted to the task.
3. An analysis of the LCOE of the solar PV systems for comparison with the indicator of electricity value, assuming a 5% cost of capital. This is based on a methodological approach that has been used by IRENA over a number of years.
In all cases, the analysis does not include the impact of policy support. This is because the goal is to inform policy makers about any gaps in the level of competitiveness. Where policy support is in place, the relative economics will be better than that implied by the indicators – sometimes significantly so.
Despite focusing on a set of simple metrics, the analysis and modelling itself can be very complex. This is because of the very granular analysis of costs, performance and competitiveness undertaken at a city/state level. In addition, the sophisticated modelling required to analyse hourly output over the 8 760 hours in a year, while identifying the associated electricity tariff in force in each of those hours, is also a complex procedure. This identification depends on tariff schedules, location, user demand profile for electricity and other factors.
The details of the methodology and definitions used in the IC&CI series can be found in Annex 1 and will be available online in subsequent IC&CI updates.
WHICH MARKETS WILL BE COVERED?
The IC&CI series is being launched with an analysis of residential PV in the markets of California and Germany.
These markets have been chosen because they provide interesting contrasts in terms of costs and electricity tariff structures for residential consumers. Good time-series data are also available for all the relevant parameters. Future editions of the IC&CI will include other markets but may not have the same granularity, given more challenging data collection issues.
This first edition provides indicators for the four largest metropolitan areas in California (Los Angeles, San Francisco, San Diego and San Bernardino) as well as five cities in Germany (Cologne, Berlin, Frankfurt, Hamburg and Munich). The locations in California cover the full range of utilities in the state, which has become one of the most important renewable energy markets worldwide. This first edition also provides indicators for Germany, which remains one of the most competitive residential solar PV markets globally. Additional markets will be added in forthcoming editions of the IC&CI.
Eventually, the analysis could be extended to other market segments, such as commercial rooftop systems, but this is not envisaged in the near future, given the resources required to undertake this extension of the IRENA indicators.
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