Solar Power Suddenly Cheaper and Economically Justified

Don't look now, but solar photovoltaic power installations have become much cheaper since 2010 and, even though the sun only shines about 4.5 hours per day on average in the US, these installations are now reasonably justified in the economic sense, especially taking into account tax subsidies from the government.

From Ambrose Evans-Pritchard at Telegragh,

The US National Renewable Energy Laboratory says scientists can now capture 31.1pc of the sun's energy with a 111-V Solar Cell, a world record but soon to be beaten again no doubt. This will find its way briskly into routine use. Wind cannot keep pace. It is static by comparison, a regional niche at best.

A McKinsey study said the average cost of installed solar power in the US across all sectors has dropped to $2.59 from more than $6 a watt in 2010. It expects this fall to $2.30 by next year and $1.60 by 2020. This will put solar within "striking distance" of coal and gas, it said.

Solar cell prices have already collapsed so far that other "soft costs" now make up 64pc of residential solar installation in the US. Germany has shown that this too can be slashed, partly by sheer scale.

For example, consider a 3 kW solar panel installation at a residence.  At $2.59 per watt, that installation would cost $7,770 (using the above figure).   At 4.5 hours of sun per day, this installation would give the owner some 4,928 kW-hours of electrical power per year.   At an average cost of power of $0.11 per kW-hr, the owner would save $542 per year or make about 6.9% rate of return on his investment.

I went to the Solar City company's website and they indicate a cost of $30,000 for a 4 kW system or $7.50 per installed watt or about 3 times the US National Renewable Energy Laboratory's figure.  Therefore, the rate of return would be 3 times less or a 2.3% rate of return.  This is about the same as a government bond.   But in the US and Europe, there are tax incentives for solar installations bringing the installed costs down by about 30% or more, so the return is somewhere between 2.3% and 6.9% per annum -- probably close to 3% rate of return (based on Solar City info).  Homeowners using local firms and doing some of the installation work themselves will probably get returns closer to the 6% return figure.

Also, the cost of electricity is gradually rising which means that solar power will be increasingly attractive as years go by.  Home owners are well advised to factor-in the inflation hedge into their financial considerations.