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Why only comparing energy prices is the wrong approach: a case study of residential photovoltaic costs in Germany and the United States

Introduction to 3-part discussion:

This 3-part series discusses the cost of residential photovoltaic (PV) panels in the U.S. compared to Germany, and shows that while most aspects are different, there are some important similarities. This creates a nuanced perspective on answering the question: “Is residential PV more or less expensive in the U.S. compared to Germany?”

  1. The paid cost of installing residential PV is much cheaper in Germany versus the U.S.  This relates to the facts that the U.S. and Germany have different:
    1. regulations, experience and learning from installing PV, and profit margins for installers (see Part 1),
    2. financial incentives to promote PV installations: the Feed-in-Tariff (FiT) in Germany versus the Personal Tax Credit (PTC) in the U.S. (see Part 2), and
    3. culture and roles for government that created differences in electricity prices, tax policies (for energy and other goods), and social services.
  2. Despite the differences, the U.S. and Germany both spend the same fraction of their GDP on both residential electricity and total energy (see Part 3). An amazing coincidence? That is a question for further study, but it provides evidence that
    1. overall energy costs are similar in each country, and
    2. you cannot separate the cost of energy in a country from the broader context of that country’s energy and social policies

Part 1: Comparing Cost of Residential PV in Germany versus the United States

Part 1: short intro

Past surveys show that the cost of installing residential PV in Germany are much lower than in the U.S. even though the technology is the same.  In 2011, it cost twice as much to install a PV panel on your roof in the U.S. versus Germany. The major differences in installed costs relate to each country’s different incentive programs, regulations, profits, and labor costs.   Here I use older data on prices and costs (from 1980-2011), but the concepts here are applicable no matter what the updated costs of any particular energy technology. To learn more, click here for more details.

Part 1: more details

Customer financial incentives have been heavily influential in promoting the installation of residential photovoltaics (PV).  As the cost of PV panels themselves has dropped over the past several years (from 4-5.5 $/W in 2006 to 1-4 $/W in 2011, [1]), so has the installed cost of the panels also dropped.  NOTE: All discussion of installation costs assumes the unit of “constant, or real, 2011 U.S. dollars”, or “$2011”, even, but I refrain from specifying the year 2011, and simply use “$”.

What you pay as a PV owner is usually termed the “installed cost.” The cost of the PV panel is one of the major components of the installed cost of PV, but there are other significant costs such as inverters (convert direct current to alternating current), mounting design and materials, regulatory costs, profits, and labor costs.   In other words, you can buy a PV panel and set it on your lawn, but it costs more money to pay someone to put it on your roof and wire it to your house.

Let us focus on the question of PV installation costs for residential applications (as opposed to large scale solar farms).  Lawrence Berkeley National Laboratory (LBNL) investigated this question in comparing the installed costs of PV in the United States and Germany in 2011 [2].  This comparison is interesting because the cost of the PV panels themselves was exactly the same but installed costs of residential PV systems in Germany were much lower than in the U.S. In 2011 the cost in the U.S. was 6.2 $/W versus 3.0 $/W in Germany (see Table 1).

If I define “soft costs” as those other than for materials and hardware, there is a 2.7 $/W difference in “soft costs” between the U.S. and Germany.  This difference accounts for the vast majority of the installed PV cost disparity. Half of this difference is 1.6 $/W in U.S. installer profit versus 0.3 $/W profit in Germany.  However, the labor costs in the U.S. were 0.59 $/W versus 0.23 $/W in Germany. Further, U.S. installers spent an average of 75 person-hours per installation versus 39 person-hours in Germany.  Both electricians and non-electricians involved in installing PV in the U.S. also get paid more per hour than their counterparts in Germany. Thus, U.S. installers spend more time at higher wages when installing PV panels while making higher profit.  According to LBNL, some of the reason for more installation person-hours in the U.S. is due to a higher proportion of PV systems installed on roofs that require penetrating the roof (due to different roofing materials and some higher wind speeds in U.S.) and additional regulatory requirements that govern installation criteria.

Table 1.  Average installed cost of residential PV panels in 2011, in Germany and the U.S., as estimated by the Lawrence Berkeley National Lab [2] (BoS = balance of system).

Cost item U.S. ($/W) Germany ($/W) U.S. 2010 (labor hrs) Germany 2011(labor hrs)
Module 1.83 1.82
Inverter 0.55 0.33
Other hardware 0.47 0.23
Profit + labor + other 3.34 0.62
Installation labor only 0.59 0.23 75 39
Profit only 1.61 0.29
Total 6.19 3.00

The results of the LBNL study are enlightening (all referencing costs in 2011 U.S. dollars):

  • PV module costs are the same in U.S. and Germany: PV modules are sold in a global market and prices are similar around the world,
  • Other “balance of system” hardware was slightly more expensive in U.S. versus Germany,
  • Installation costs are over twice as high in the U.S. than Germany, and perhaps half this cost difference (~ 1.3 $/W) was due to German installers having more experience from installing more capacity than in the U.S. (the more you install, the faster and cheaper you can install), and

There are many reasons for these results, the reasons are difficult to separate, and hence, all people do not agree on the reasons.   Perhaps two of the most influential factors are (i) the differences in financial incentives and (ii) the price of residential electricity in the U.S. and Germany  To read about the financial incentives, click here: Part 2: PV Incentives, and to read about residential electricity prices, click here: Part 3: The Price is Wrong – U.S. versus Germany.

Part 1: References

[1] IEA (2012) TRENDS IN PHOTOVOLTAIC APPLICATIONS: Survey report of selected IEA countries between 1992 and 2011, Report IEA-PVPS T1- 21 : 2012, available January 7, 2014 at: http://www.iea-pvps.org/index.php?id=3&eID=dam_frontend_push&docID=1239.

[2] Joachim Seel, Galen Barbose, and Ryan Wiser (2013), Why Are Residential PV Prices in Germany So Much Lower Than in the United States? A Scoping Analysis, Lawrence Berkeley National Laboratory, February 2013 Revision, (with Updated Data on Installation Labor Requirements), available January 7, 2014 at: http://emp.lbl.gov/publications/why-are-residential-pv-prices-germany-so-much-lower-united-states-scoping-analysis.

[3] ALSO SEE: Galen Barbose, Naïm Darghouth, Samantha Weaver, and Ryan Wiser, (2013). Tracking the Sun VI: An Historical Summary of the Installed Price of Photovoltaics in the United States from 1998 to 2012 (report LBNL-6350E), July 2013, available January 7, 2014 at: http://emp.lbl.gov/publications/tracking-sun-vi-historical-summary-installed-price-photovoltaics-united-states-1998-201.

[4] DSIRE website, Federal Incentives/Policies for Renewables & Efficiency: (http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US37F).

 

Part 2: Residential PV financial incentives

Part 2: short intro

For financial incentives, Germany has used a Feed-in Tariff (FiT) and the U.S. has used a Personal Tax Credit (PTC) for residential installations (the corollary is the Investment Tax Credit (ITC) for commercial systems) [1].   The FiT incentivizes production and sales of electricity whereas the PTC incentivizes capital investment to enable the PV owner to offset the purchase of electricity.  It is important to understand the differences in impacts from these different incentive policies. Some believe the PTC in the U.S. has incentivized U.S. installers to increase the installed cost to obtain the government rebate.

Part 2: More details

For financial incentives of installing residential PV systems, Germany has used a Feed-in Tariff (FiT) and the U.S. has used a Personal Tax Credit (PTC) (the counterpart is the Investment Tax Credit (ITC) for commercial systems) [1].   It is important to understand the differences in impacts from these different incentive policies.

In Germany, the FiT pays the PV owner a fixed price for each kWh fed into the electric grid (i.e., for each kWh not used by the home owner).  In 2004, the value of the FiT was equivalent to 0.90 $/kWh decreasing to approximately 0.40 $/kWh by 2011[1] [2]. This was a planned decrease in the value of the FiT as part of the original incentive law in Germany.  As a comparison, the German residential electricity price, including taxes, was 0.23 $/kWh and 0.35 $/kWh in 2004 and 2011, respectively (see Figure 2.1). For most of its history, until 2012, the FiT was higher than the price of electricity, and is the main reason that Germany has more PV solar capacity than the U.S.

Part2_Figure1

 

 

 

 

 

 

Figure 2.1. Residential electricity prices, including taxes, in the U.S. and Germany based upon nominal U.S. dollars [original data source: IEA Energy Prices and Taxes].

 

In the U.S., the PTC subsidizes the installation of the PV system by reducing the cost of the installation by 30% of installed costs. This incentive is independent of the quantity of electricity actually generated by the PV panels.  An important difference between the FiT and PTC is that the PTC is a “tax credit.” A tax credit reduces the federal taxes for the PV owner.  Thus, if I install a PV system at cost of $10,000, I get a $3,000 PTC (at 30% of $10,000) to help pay my taxes.  If the owner owes fewer taxes than all money received via the PTC during the year of installation, then the owner cannot fully take advantage of the PTC in that year.  The PV owner can carry over the tax credit to the next tax year (at least until 2016 per the Energy Improvement and Extension Act of 2008) [1].

Remember this important distinction: the FiT incentivizes renewable electricity generation, and the PTC acts to reduce the fixed percentage part of the cost of installation.

In Germany, both the FiT (selling PV electricity to grid) and relatively high retail electricity price (compared to the U.S.) incentivize the homeowner to generate PV electricity.  Residential electricity prices in Germany are approximately three times those in the U.S (see Figure 1).  The FiT and electricity price pushes German installers to compete for customers on installed costs since the installer does not benefit from PV electricity sales or a federal rebate.  Some believe the PTC in the U.S. has incentivized (to some degree) U.S. installers to increase the installed cost to obtain the highest government rebate, but not so high as to be uncompetitive.  Here I explain how this can be interpreted.

While the 2011 average total installed system PV costs in the U.S. were over 100% higher than Germany (see Table 1 of Part 1), another common way to compare costs is to look at the cumulative amount of installation costs, rather than during a single year.  The reason for this second method is based on the idea that as more of a technology is installed, the more efficient and cheaper it becomes to install the technology due to installers “learning” how to do better each time.  Thus, it can be considered more ‘equivalent’ to compare installed costs at the same cumulative quantity of installation rather than the same calendar year.

To assess “learning” effects of PV installation, I focus only on costs of installation, or the “non-module” costs (i.e., all costs other than the price of the PV panel). The Lawrence Berkeley Lab study notes that the non-module costs of PV were only about 36% higher (4.9 vs. 3.6 $/W) in the U.S. versus Germany at the same cumulative installed capacity of approximately 4-5 GW [2].  That is to say, after both countries installed 4 GW of residential PV (in 2007 for Germany and 2011 for the U.S.), the U.S. installation cost was 36% higher than in Germany – very close to the PTC level in which the U.S. government subsidizes 30% of the full installation cost.

Is this a coincidence? Perhaps, but there is logic behind the rationale that federal incentives based on installed costs act to increase the installed cost.  In other words, when the federal government provides the PTC to the consumer, the consumer afford a 30% higher price for a PV installation, and the consumer effectively passes that incentive to the installer.

Is the FiT of Germany or the PTC of the U.S. better? I say there is no answer to this question, but you must read Part 3: The Price is Wrong that discusses electricity prices and expenditures to understand why.

Part 2: References

[1] DSIRE website, Federal Incentives/Policies for Renewables & Efficiency: (http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US37F).

[2] Joachim Seel, Galen Barbose, and Ryan Wiser (2013), Why Are Residential PV Prices in Germany So Much Lower Than in the United States? A Scoping Analysis, Lawrence Berkeley National Laboratory, February 2013 Revision, (with Updated Data on Installation Labor Requirements), available January 7, 2014 at: http://emp.lbl.gov/publications/why-are-residential-pv-prices-germany-so-much-lower-united-states-scoping-analysis.

 

Part 3: The price is wrong: how to determine if solar photovoltaic electricity is cheap

Part 3: short intro

It is not the price of residential electricity (or price of energy in general) that is the best determination of whether or not electricity is expensive.  Instead, a better metric is the total expenditures on energy relative to total household incomes, country GDP, or other metrics using some measure of wealth or disposable income.  When compared to GDP, both the United States and Germany spend 1−1.5% of GDP on residential electricity, even though the price of residential electricity in Germany is three times that in the U.S.  Further, the U.S. and Germany spend the same fraction of GDP on total energy. To learn more, click here for more details.

Part 3: more details

In Part 1 I discussed that in 2011 the installed cost of residential photovoltaics (PV) in the U.S. (6.2 $/W) was twice as high as in Germany (3.0 $/W).  In Part 2, I explained that the higher costs are completely due to “non-module” costs, or all costs other than the PV module that houses the PV cells that generate electricity from sunlight.  In this discussion I contextualize the price and expenditures for residential electricity in the U.S. and Germany.

The costs of installed PV are often discussed in units of “dollars per watt of installed capacity,” or “$/W.”  This is different than the cost of the generated electricity over time, stated as “dollars per kilowatt-hour” ($/kWh), or perhaps “cents per kilowatt-hour.”  For most of us, our electricity bill is based upon an electricity price rate in units of $/kWh. Thus, if I consumed 1,000 kWh per month, and my monthly electricity rate is 0.10 $/kWh, I owe $100 for that electricity.

Ultimately as consumers we care more about $/kWh than the installed cost as $/W, but the installed cost is the dominant cost factor that determines the $/kWh cost of PV electricity.  The other major factor is how much the sun shines where you install the panel.  The amount of sunlight in a given location is called “insolation.”  In Germany, the annual solar insolation is 1,000-1,500 kWh/m2/yr whereas the U.S. varies more widely from 1,400 kWh/m2/yr in western Washington to 2,500 kWh/m2/yr in the desert Southwest (see the very informative National Renewable Energy Laboratory map comparing insolation rates in the U.S. to Germany [1]).  The higher the insolation, the more electricity is generated, and the lower the cost (in $/kWh) of PV electricity.  Thus, for the same cost of installation, in $/W or total dollars, the “levelized” cost of electricity in $/kWh can be over twice as high in Germany as in the U.S.

Figure 3.1 shows U.S. and German residential electricity prices (including taxes).  In 2010 the German residential electricity price was approximately three times that of the U.S.  Both prices include taxes.  German taxes are 40-45% of the total price, and U.S. taxes are usually 0%-10% depending upon the state (often based on the state sales tax) [3].  This large difference in taxation reflects one of the main reasons why it is hard to compare price across countries.

The tax rates, not only on electricity, reflect many differences in the culture, politics, energy resource availability, and social structure between each country.  Both the U.S. and Germany are world leaders in technological innovation, so taxes do not describe differences in incentivizing technology, though it is relevant to note that the industrial electricity price in Germany is approximately 1/3 of the residential price.  But because Germany provides more social services than the U.S., taxes on citizen consumption are higher to pay for these services. I won’t pontificate whether either strategy is better or worse, but for now note that they are different.

Part3_Figure1

Figure 3.1.  Residential electricity prices, including taxes, in the United States and Germany.  Units are in nominal U.S. dollars per megawatt-hour.  Data are from International Energy Agency [3].

 

Since residential electricity prices are difficult to compare in the U.S. and Germany due to varying social service and taxation policies, how can we determine if residential electricity, much less PV panels, are cheaper in one place or another?  One way is to look at total expenditures on energy.  Expenditures equal price times consumption. Figure 3.2 shows total expenditures on residential electricity in both countries as a fraction of GDP in each country (another valid metric would be expenditures as a fraction of household income).  The interesting finding is that both the U.S. and Germany spend about the same amount on residential electricity: typically 1.0% – 1.4% of GDP!  This means that while the average American has a lower residential electricity price (1/3 those of Germany) they consume a much higher quantity of electricity than the average German (almost 3 times more).  In 2011, residential electricity consumption in the U.S. was approximately 35% of total electricity at 1,440 TWh & 4,600 kWh/person; in Germany it was approximately 26% of the total at 140 TWh & 1,700 kWh/person [5, 6]. Taking this concept one step further, we can ask: Does one country spend more on electricity but less on natural gas (for example), or vice versa?

Figure 3.3 shows the fraction of country GDP spent on all energy, including commodities such as oil that typically dominate overall energy expenditures.  Amazingly, again since the 1980s, the U.S. and Germany have spent the same fraction of GDP on energy!  This similarity occurs despite very different histories, cultures, social structures, policies, and energy prices.

Because of this similar trend of Figure 3.3, we cannot say that energy is more or less expensive in either one of these countries, since countries allocate the same fraction of their economic output to pay for energy. It therefore might be most accurate to say that energy costs are very close to equal in the U.S. and Germany. Other important details about energy imports versus exports, and their effect on trade balance provide further insight (e.g., Germany net imports a higher share of its energy than the U.S. but has a trade surplus, whereas the U.S. runs an account deficit) but I will save a detailed discussion of this complicated issue for another day.

Part3_Figure2

Figure 3.2. The fraction of country GDP spent on residential electricity, using prices that include taxes, in the United States and Germany.  Data are from International Energy Agency.  Estimated expenditures are from calculations of the author [7].

Part3_Figure3

Figure 3.3  The fraction of GDP estimated as spent on energy in the United States compared to Germany. Energy expenditures are equal to annual price multiplied by annual consumption quantity.  “Energy” is composed of: oil (including crude oil, natural gas liquids, and other unrefined feedstocks), natural gas (residential, industrial, and for electricity generation), coal gas (residential, industrial, and for electricity generation), and both industrial and electricity consumption coming from the fraction of electricity generation from non-fossil generation (e.g., nuclear, hydropower).  Except for oil (first import price), the prices for consuming each energy commodity include taxes. Estimated expenditures are from calculations of the author [7].

Part 3: References

[1] NREL map of solar insolation in the United States and Germany: http://en.openei.org/w/index.php?title=File:NREL-pvmap-usgermanyspain-poster-01.jpg.

[2] How Different Energy Sources Create Electricity Price Differences Between Countries, Available February 6, 2014 at: http://www.theoildrum.com/node/7215.

[3] IEA Energy Prices and Taxes: http://www.iea.org/statistics/topics/pricesandtaxes/.

[4] Finnish Energy Industries (2010), Energy Taxation in Europe, Japan and The United States, available February 6, 2014 at: http://energia.fi/sites/default/files/et_energiav_naytto_eng_040211.pdf.

[5] EIA International Energy Statistics, accessed September 5, 2014 at: http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=2&pid=2&aid=2.

[6] World Bank population data for 2011, accessed September 5, 2014 at: http://data.worldbank.org/indicator/SP.POP.TOTL.

[7] King, Carey W. and Maxwell, John P. (Master’s Thesis), in preparation for journal article.

About Carey King

Dr. Carey W King performs interdisciplinary research related to how energy systems interact within the economy and environment as well as how our policy and social systems can make decisions and tradeoffs among these often competing factors. The past performance of our energy systems is no guarantee of future returns, yet we must understand the development of past energy systems. Carey’s research goals center on rigorous interpretations of the past to determine the most probable future energy pathways. Carey is a Research Scientist and Assistant Director at the Energy Institute at The University of Texas at Austin, and appointed also at the the Center for International Energy and Environmental Policy within the Jackson School of Geosciences and Business, Government, and Society Department of the McCombs School of Business. Visit his website at: http://careyking.com and follow on Twitter @CareyWKing
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