It's becoming a more common sight in California: solar photovoltaic panels on top of homes, commercial buildings and schools. Whether driven by a desire to generate electricity without emitting pollutants and greenhouse gases, to save on one's energy bills, or to have one's own source of power during grid outages, California has become the biggest market for PV power in the United States.

Public policies to encourage the growth of solar power have helped make the state's solar market hot. Both the California Energy Commission (CEC) and the California Public Utilities Commission (CPUC) have had rebate programs for solar PV installations in place for years. The CEC's program targets systems less than 30 kilowatts (30 kW) in size, many of which end up as retrofits for homes, in schools and small businesses, and in new housing developments, while the CPUC's program targets commercial systems of 30 kW and larger. With a recent announcement by the CPUC to launch an 11-year, roughly $3 billion incentive program for solar power, California's solar future is bright, with the state expected to make up ground on the world's two largest PV markets: Germany and Japan.

The state's policy goals for these programs include increasing the percentage of electricity generated from solar power, driving the costs of solar power down, and creating jobs in the solar industry. But are the state's existing programs working as intended? A better understanding of the effect of the rebate programs on the total cost of installing PV systems can help policy makers adjust these programs for maximum effectiveness.

To this end, scientists at Berkeley Lab's Environmental Energy Technologies Division, the National Renewable Energy Laboratory, and Neenan Associates reviewed data from 18,942 grid-connected PV systems in California, totaling 254 megawatts (254 MW) of projects either installed, approved for installation, or wait-listed (approved but awaiting program funding). Their new report, Letting the Sun Shine on Solar Costs: An Empirical Investigation of Photovoltaic Cost Trends in California, provides an in-depth analysis of the costs of installing PV systems in the state.

"Local, state, and federal government incentives are the principal drivers for the recent growth in grid-connected photovoltaic capacity," notes Berkeley Lab's Ryan Wiser, principal author of the report. "Their goal is to drive down the cost of PV over time to a level that does not require government stimulation. We were interested in uncovering historical cost trends from California's PV market. Because California is the third largest market for PV worldwide, and because the market is projected to expand dramatically, we expect that our results will have broad international interest."

California's Market Size: Small, But Growing Rapidly

According to the International Energy Agency, the U.S. added 76 MW of PV in 2004 (including 52 MW of grid-connected capacity), for a cumulative total of 307 MW. Of the grid-connected capacity added in 2004, 36 MW came from California, and the state's installed capacity has grown dramatically since 2000. The CEC and CPUC rebate programs have been the dominant drivers of new PV additions in California, and over the past eight years, these programs have combined to pay roughly $400 million in rebates to completed PV systems.

Photovoltaic installations have grown rapidly in California during the last five years.

Substantial Cost Declines Found; More Are Possible

The results of the Berkeley Lab analysis are encouraging for solar power in the state — researchers found that PV system costs have declined substantially over time. Among the CEC-funded systems, annual cost reductions averaged approximately 70 cents per watt, representing a 7.3 percent annual decline. (Cost per watt in this report is indicated in dollars per AC watt, or $/WAC. Other reports use WDC-STC, which stands for DC watts at standard test conditions.) 

Costs of systems funded under the CEC's program have declined from more than $12 per watt (in 2004 dollars) in 1998 to less then $9 per watt for 2004-2005. Under the CPUC program costs have declined more moderately, with annual reductions averaging 36 cents per watt, a 4.1 percent decline.

Analysis shows that the cost of PV installations in California has been declining, especially those systems receiving rebates under the California Energy Commission program.

Greater cost reductions are possible, if experience in Japan is any guide. There, costs for standard 3-kW residential systems averaged roughly $7.4 per watt in 2004, which is $1.4 per watt lower than similar costs in California. The Berkeley Lab report finds that the cost of the solar modules — the solar panels alone, without the inverter or other system costs — have largely passed directly to PV system purchasers in California on a one-for-one basis, and that module costs have been declining worldwide (with a recent uptick because of shortages of silicon).

However the study suggests that these costs — determined by the worldwide market — are not as subject to influence by state policies as are the nonmodule costs of installing the system on buildings. It's encouraging that nonmodule costs, especially under the CEC program, have declined substantially, suggesting that California's solar programs are beginning to have their desired effect. Much more significant reductions will be necessary, however, if solar power is to be a significant contributor to the state's electricity supply.

Policy Design Matters!

The research also found that the size of rebates have influenced the prerebate cost of installing PV systems in the state: the study's analysis shows that each dollar-per-watt change in the CEC's rebate level has, on average, yielded a 55- to 80-cent-per-watt change in prerebate installed costs.

As a result, when the CEC raised its rebate by $1.50 per watt in 2001, the buyers received only a portion of the rebate benefit, while the rest was absorbed by the system retailer. Conversely, as the commission gradually lowered its rebate beginning in 2003, the retailers absorbed some of the reduction by lowering their prices. The CPUC's historically richer incentives, meanwhile, were found to have caused some price inflation. These and other findings may provide important insights on how to better tune incentive programs in the future.

Other interesting results:

• Large installations show economies of scale, with large PV systems coming in at significantly lower installed costs than smaller systems.

• Systems installed in large new residential developments and in affordable housing applications have lower costs on average than those in the general retrofit market.

• As a result, further targeting of incentives to account for the relative economics of different kinds and sizes of systems may be appropriate.

"The most important finding," says Wiser "is the substantial reduction in PV system costs over time, especially among systems funded by the CEC's program. Without a control group, we can't conclude that the CEC program caused this decrease, but it's perhaps the most logical hypothesis. And because of the comparison to the Japanese experience, we believe these costs can come down even more, especially if the state's incentive policies are designed effectively."

Additional information

• Letting the Sun Shine on Solar Costs: An Empirical Investigation of Photovoltaic Cost Trends in California, by Ryan Wiser and Mark Bolinger of Berkeley Lab, Peter Cappers of Neenan Associates, and Robert Margolis of the National Renewable Energy Laboratory, is based on research funded by the Assistant Secretary of Energy for Efficiency and Renewable Energy, Office of Planning, Budget, and Analysis, and by the Office of Electricity Delivery and Energy Reliability, Electric Markets Technical Assistance Program, of the U.S. Department of Energy (pdf).
• More about Berkeley Lab's Electricity Markets and Policy Group
• More about the California Energy Commission
• More about the California Public Utilities Commission