title: Can Solar Costs Keep Shrinking?
author: Tomas Pueyo
content_type: article
publication: Uncharted Territories
published: 2024-08-29T00:00:00
source_url: https://unchartedterritories.tomaspueyo.com/p/can-solar-costs-keep-shrinking
word_count: 2877
Can Solar Costs Keep Shrinking?
Thank you John Arnold, Casey Handmer, and Austin Vernon for having a look at this article. You can check out Austin’s two articles that inspired mine here and here.
I’ve shared this graph before:
The price of solar photovoltaic (PV) panels has been shrinking around 12% per year for decades. That decline is because of this:
We’ve been installing more and more solar panels. They’re now the lion’s share of new electricity capacity in countries like the US:
The more solar panels we1 produce, the cheaper they get. If the trend continues for a few years, the promise is that electricity will be too cheap to meter. Indeed, solar is already the cheapest source of electricity.2
But hold on: According to that graph, the cost of solar electricity *increased* between 2021 and 2023—by about 30-100%—like all sources of energy. Here’s a zoom in on solar and wind:
Part of it was due to supply chains breaking during COVID and the subsequent inflation, but is that all? Or were there other reasons? Can we count on solar electricity shrinking further, or are we facing a future where the promise of cheap energy remains unfulfilled?
That would be catastrophic, because our energy consumption has stagnated now for decades.
And there is no such thing as a rich country that consumes little energy:
Think about it. If we had stayed on the Adams curve, we would be consuming 2-5x more energy than we do today. For the US, that means that GDP per capita today would not be the current amount of $65k, but $100k-$200k. It is a *catastrophe* that we don’t have more energy: We should be much richer.
Energy stagnation makes us poor. If we want to be richer, we must produce more energy, and the best way to achieve that is if energy costs nothing.
So what might prevent the cost of solar energy from shrinking further?
Solar panels matter less now.
The following graph looks at the costs of installing solar panels in a residence, comparing the cost of the hardware (“unit costs”) in teal, and in red the “soft costs”, which traditionally include permitting, inspections, interconnection fees, transmission lines, sales tax, operations, and the profits of the installer.
Today, if you want solar electricity in your home, the cost of the actual solar panels is minimal. Over 60% of the costs are soft! It’s harder to shrink those and all the other costs outside of the panels. For example, as reader John Arnold highlights, land and labor are inflationary. Labor and engineering costs grew by 23% and 22% in 2024. Interest rates have also raised costs significantly, as well as connecting to the grid and the fact that so many other solar plants are producing electricity at the same time, congesting the electric network. Other sources of cost increases include interconnection delays, permitting hurdles, lack of transmission, best sites already developed, tariffs on solar panels…
If we want to know whether solar electricity costs will continue shrinking in the future, we need to break down its costs and figure out to what extent each one can shrink.
Breaking Down the Cost of Solar Energy
First, we need to narrow our focus. There are three main types of solar installations: residential (your home), commercial (businesses), and utility-level (companies whose main purpose is producing and selling electricity).
As you can see, the vast majority of installed capacity is utility-level, and that will probably be even more true in the future, now that solar electricity is so cheap and there’s big money to be made with it. So we need to pay attention to utility-level solar costs.
OK, so what’s the cost of a utility-level solar farm, broken down by types of costs?
Conveniently, today every watt of solar capacity in a farm costs about $1, so we can simplify and use percentages of costs (like 39% for PV modules) interchangeably with straight up cents (like $0.39).
Solar Panels
The PV (photovoltaic) module is still 39% of the cost (about $0.39 per watt). That will go down fast—probably faster than the historic 12% annual drop because the investments are so much higher now. The world average is already around $0.25/watt. In some places in the US, solar panels already cost $0.20/watt. Overseas, it can go as low as $0.10-$0.12/watt.
Is there a floor for these costs?
Solar manufacturers are investing hundreds of billions in expanded capacity in an all out war for market share against a background of panel price drops of 15-25% per year. There is an extreme economic forcing function towards rapid improvement and ultimately convergence with the Platonically ideal solar panel - some 20 um thick layer of silicon supported by a 100 um thick layer of plastic rolled off a spool - or some other tech that's thinner and cheaper than paper.—[Casey Handmer]
Thinner and cheaper than paper. Think about that!
Solar panels are basically sand atoms reconfigured with intelligence. Sand is everywhere. It’s cheap. We can bring the cost of PV panels down radically. What will the world be like when panels cost $0.05/watt? $0.01/watt?
And here’s the key insight of this article: For the longest time, PV panels were so expensive that no other cost mattered. All the focus was on improving the efficiency of the panels, other costs be damned. We could waste everything that was not the PV panels and the economics barely changed.
Cheap solar panels are a new paradigm
That is not the world we live in today. For the first time, solar farm designers must change their mindset completely. They must stop thinking about optimizing for panels, and instead start focusing on trimming the other costs. How will that change them?3
Building the Farm
To build a solar farm, you need all the stuff I put in brown on the graph above:
Design and engineering to figure out how you’ll lay out your farm (~3% of costs)
Civil works to adapt the site to the trucks, machinery, and solar panels (~8% of costs)
Balance of System (BOS) for all the other material we need to build the solar farm (~17% of costs)
Logistics to bring all the material to the farm (3% of costs)
Direct Labor to install the PVs and the BOS costs (~12% of total costs).
Together, these items make up about 43% of solar installation costs today—more than the panels!
To begin a solar farm, you need design and engineering, to adapt the panels to the land.
Then you lay the ground for the site. For example, add gravel so that the trucks that bring the material don’t get stuck in mud or trenches (dug to hide the cables). That’s the civil work.
Once your site is ready, you start installing the panels. Structural Balance of System (SBOS) refers to the cost of the infrastructure that will hold the panels.
First you need to pound the pilings into the ground.
Then, if you want your solar panels to track the Sun to maximize power, you’ll need trackers that pivot the panels through the day.4
These pilings and trackers will then hold the racks where panels sit.
Once you have the racks with the panels, you need to wire it all up. That’s what Electric Balance of System (EBOS) means: the cabling, switches, electronic control systems, battery management system etc.
Will these costs go down?
On one side, these are hard costs that have been around for a long time and are difficult to shift. Labor cost usually increases, while steel, aluminium, wires, and the like are unlikely to go down.
But remember: They’ve never been optimized! Our paradigm was: “*Do whatever you need to get the most out of every solar panel!”* If we change that paradigm and now the panels are dirt cheap, how would we completely rethink the installation?
Here’s one example: Historically, solar panel makers have reduced the cost of solar energy by making their panels collect sunlight more efficiently. Now that installation is such a big share of costs, they have started redesigning their panels to reduce these BOS costs. One example of recent redesign is bigger panels: The bigger each panel is, the less rack and wiring it needs.
Or think about the entire structure: trackers to pivot the panels to follow the Sun, racks high up to allow room for that movement and to protect the panels from ground-level hazards, strong pilings deep in the ground to hold all this weight…
But if your panels are cheap, you can basically dump them on the ground! No pilings, no racks, no trackers. Barely any SBOS! And since you don’t have heavy materials to transport, your logistics costs drop and you barely need any civil engineering: No need for big trucks to enter the farm, no need for infinite trenches to hide cables underground.
And this is not a pie in the sky. Some companies are doing it already, like Erthos:
According to the company making these panels, it can reduce costs of CAPEX (capital expenditure; fixed upfront costs) by 20% thanks to:
Tighter spacing that reduces land usage by about 50%.
The simple layout that reduces site preparation, planning, and design expenses.
70% less trenching and wiring.
No racks or trackers.
50% reduction in construction time (reduces civil engineering costs).
Farms using modules with glass on both sides without the expense of beefier racking. Double-glass panels are more reliable and have longer lifetimes.
It also means lower operation costs: little mowing because plants barely grow underneath, easier to clean, less maintenance because of fewer moving parts like trackers.
Just to show that this is not a one-off empty promise, here is Jurchen Technology’s PEG system:
The panels are about 1 meter above ground, but crucially they have no moving parts and are laid on the basic steel rebar you can see. Here’s how it’s installed:
No need for trenches, gravel paths, concrete, heavy machines. Since the panels are one meter high, workers don’t need to go up and down ladders.
Since it’s so easy to install, you don’t need skilled labor. Unskilled workers can easily be trained to do the job.
Maintenance is also quite low:
Since all the panels are packed, it’s easy for a robot to clean them with little human interaction.
This uses 75% less steel, 90% in machine cost, 50% less in logistics, for an overall reduction in CAPEX of 40% and OPEX (the operation of the farm) of 20%.
Of course, with such a straightforward installation, you don’t need much civil work or design and engineering.
This is just one example of the types of changes we can make to reduce costs of design, logistics, BOS, direct labor, and even civil engineering. We’re already at a point where we can halve these costs of the solar farm (as a reminder, ~43% of the total). We will probably be able to reduce these costs further in the coming years.
PV Inverter
Once all these solar panels are installed, they generate a constant stream of electricity, which is called direct current or DC. But the electric grid uses electricity going back and forth quickly, called alternating current or AC.5 The inverter transforms electricity from DC to AC.
This cost has been shrinking and will continue to shrink: