The Economics and Policy of Solar Photovoltaic Generation Pere Mir Artigues

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The Economics and Policy of Solar Photovoltaic Generation Pere Mir Artigues
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Preface and Acknowledgements

The unprecedented accumulation of greenhouse gases (GHG) in the atmosphere in
the last two centuries is undeniably changing the climate, as consistently informed
by the Intergovernmental Panel on Climate Change (IPCC) (see IPCC 2014a;
Houghton 2015). This represents quite a serious threat for the survival of many
vegetal and animal species and has the potential to generate considerable distortions
in the lifestyles of human beings. Despite the fact that most citizens and governments
are clearly aware of the problem, GHG concentrations are likely to exceed
the 500 parts per million of CO2 equivalent (ppm CO2e) level. This represents a
50-50 chance that the average temperature would have been 2 °C above the average
temperature in the mid-nineteenth century, i.e. in the preindustrial period, when the
GHG concentrations were estimated at 280 ppm CO2e. In volume terms, this means
that the 50 billion tonnes of CO2e emitted in 2013 should go down to 35 billion
tonnes in 2030 and 20 billion tonnes in 2050. If emissions remain at this level in
2030, concentrations could be above 650 ppm CO2e, consistent with temperature
increases of around 3.5 °C with a 50-50 chance (Sachs et al. 2014: 8–10; Stern
2015: 14–15, 37). It should be taken into account that the current concentration of
around 450 ppm is unprecedented in our planet, and it could have only happened
between 800 thousand and 3 million years ago. If this concentration exceeded 750
ppm by the end of this century, the average temperature would likely be above 4 °C
with respect to the preindustrial era. Both ecosystems and humans would suddenly
be within an environment which has been the common one in our planet in the last
35 million years (Stern 2015: 9–10).1
The anthropogenic origin of climate change can no longer be doubted
since average temperature changes in the Holocene have remained within a narrow
±1.5 °C range. This means that a wait-and-see attitude is not an option, even given
the unavoidable uncertainty of the specific impacts of human-induced climate
change. Delaying mitigation actions has two serious implications: on the one hand,
1Since those increases are average values, the different regions can experience different rates of
change according to the season of the year.
it would mean that those actions should become more drastic in later years, which
would increase the costs of reaching a given concentration target (Edenhofer et al.
2009). On the other hand, there would be an increasing risk of a positive feedback
of emissions (uncontrolled release of the methane contained in the permafrost),
which would involve severe and irreversible changes in the biosphere (Houghton
2015). It should not be forgotten that GHG remain in the atmosphere for centuries,
depending on their oxidation rate.
In spite of the arguments of the climate skeptics, the connection between human
activities and climate change has a solid empirical base. The rejection of convincing
evidence of the existence of climate changes due to GHG emissions leads the
skeptics to conclude that such effects are non-existent. Or, in other words, from the
absence of evidence they conclude an evidence of absence of such a
relationship. Furthermore, the “deniers” use the inaccuracies that are unavoidably
part of any long-term prediction of a complex system (such as climate) to their
advantage. They attribute them to a lack of scientific rigour, although the underlying
problem is one of inexactitude rather than the fact that it cannot be verified.
The real debate today is the degree of implementation of the climate mitigation
measures. The experts stress the role of the energy sector in this issue. Electricity
and heat generation represent 31 % of emissions, whereas the burning of fossil fuels
by industry, transport and others adds a further 36 %. Energy provision is, thus, the
main cause of human-induced climate change (Sachs et al. 2014: 13–14; Stern
2015: 41).
A package of mitigation measures has been implemented in many countries
around the world in order to limit GHG emissions, aiming to change the nature
of the energy sector. Several technologies are available to achieve this goal
(Socolow et al. 2004). The effort made so far is non-negligible, but should accelerate
and be stronger in the next decades.2 This structural change should not necessarily
involve a reduction of the welfare level in the developed countries, whereas
it could also encourage the development of emerging and less developed economies
(Stern 2009). The electricity sector and electricity generation from renewable
energy sources (RES-E) have a prominent role to play in this challenge. And, within
the different alternatives for RES-E, Solar Photovoltaic (PV) generation has raised
huge expectations. This technology already generated great expectations when it
was first developed around six decades ago.3 Then there was a period of skepticism
about its performance, which was followed by a rapid evolution in recent times and
2For example, in 2011, the public promotion of renewable energy sources reached $88 billion
(73 % for electricity generation and the rest for agro-fuels). This figure, however, pales in comparison
with the $523 billion (according to IEA) or $480 billion (according to IMF) of subsidies
for the consumption and exploration of fossil-fuel sources (Stern 2015: 116–117). In fact, RES-E
support reached only a 13 % of subsidies for oil, gas and coal (and the electricity generated with
these fuels) in 2011. Another report, using a different estimation method, concludes that this figure
reaches $200 billion for OECD and BRIICS countries and that these subsidies have been reduced
since 2012, although they still reached $160 billion two years later (OECD 2015: 42–47).
3Its roots, however, can be found in the nineteenth century.
a widespread diffusion. Photovoltaic generation has been a key element of the
structural and technological change in the electricity sector. This is due to two main
advantages: the huge solar irradiation of our planet (approximately 6800 times the
world annual energy consumption) and the fact that it is not an exhaustible resource
at a human scale. Notwithstanding, having a colossal energy source is one thing,
but quite another is to be able to exploit it in a convenient and efficient manner.
Since decades ago, humanity has been able to exploit the solar energy received
by the Earth but only in recent times it has been able to develop technologies to
convert such radiation into electricity. Those technologies, basically solar PV and
concentrating solar power, are characterized by attractive environmental properties
compared to conventional power technologies (Lechón et al. 2013). Even though
the lower emission levels of pollutants achieved by solar PV generation are not a
superfluous attribute with respect to its economic feasibility, this later variable has
raised serious doubts. Unfortunately, it is difficult to measure and compare both
aspects. In this book, the focus has been put on the economic and policy dimensions
of solar PV generation, with a very scarce reference to other renewable energy
technologies, each of them deserving a wide treatment in a handbook.
Therefore, a description of the goals achieved by solar PV generation as well as
an assessment of its expected costs and performance is carried out. Those goals are
intermingled with the vicissitudes of the promotion policies. The resulting economic
analysis has always the same underlying backdrop: the environmental
advantages of solar PV generation. It should also be taken into account that the final
diagnosis is necessarily provisional, since many technical alternatives compete
between each other and more drastic measures may be needed in order to mitigate
human-induced climate change.
No one knows what the future will bring. Although we cannot rule out that
radical innovations will appear, it is an undisputed fact today that the cost of solar
PV generation has come close to the cost of other conventional and renewable
energy technologies. This trend was unimaginable a few years ago. It all seems to
indicate that the different policy measures to support solar PV generation (being
gradually implemented since the end of the past century) and, thus, the other
renewable energy sources have played a crucial role in this context. Two categories
of measures have been adopted in this context: support for research, development
and demonstration of the technical feasibility of solar PV and policies aimed to
provide favourable economic conditions for the exploitation of solar PV (commercialization).
The result has been a considerable reduction in the costs of solar
PV equipments and thus, the electricity produced, employment creation (both direct
and indirect) and CO2 emissions reductions. However, reaching its full competitiveness
in the electricity market requires even cheaper components and a better
exploitation of the solar irradiation. Achieving a longer operational life is also quite
relevant in this context. All in all, the solar PV sector deems the pending task a
feasible one, even in the current policy context characterized by the modulation
and, in many cases, the slowdown in the implementation of support policies.
Preface and Acknowledgements xi
The trajectory of the solar PV sector will be definitively drawn in the next years.
This trajectory will be determined by two aspects: what design (of the cell and the
module) becomes hegemonic (a robust condition, which evolves over time) and
which is the comparative cost level of the electricity being generated. If its competitiveness
consolidates, particularly in the terms set by the electricity market,
there is a widespread consensus that solar PV generation will become a crucial
energy source already in the second quarter of this century and beyond. This
expectation will not be curbed by grid integration aspects, an issue currently being
discussed. In this case, human beings in the future may regard currently common
electricity generation systems such as coal, nuclear, combined cycle gas plants or
wind installations in a similar manner as we regard steam-based machines or the
linotype machines, i.e. as old technical gadgets of a distant past. This expectation
will be conditional upon the absence of a technique which scores better in terms of
cost, environmental impact, integration in the electric power system and regulatory
simplicity. However, if solar PV generation is not able to be clearly competitive in
the following years, future generations will consider it as a promising alternative
which, unfortunately, did not live to its expectations.
Most experts envisage a considerable weight of solar PV in future electricity
generation, although a few have doubts that this will be so (GEA 2012; IPCC 2012,
2014b; IEA 2014; IRENA 2014; MIT 2015). Nevertheless, there is a wide consensus
that solar PV generation as well as other renewable sources of electricity
generation is undergoing a decisive moment. This is due to the perception of what is
at stake, i.e. whether this and the future generations are able to reconcile growing
levels of economic welfare and environmental protection.
This book provides a contribution to the economic analysis of solar PV generation,
which involves the design of an appropriate analytical framework and the
development of a thematic repertoire. The scrutiny includes the following wide
sections:
1. An overview of the main technical features of solar PV generation, together with
the facts of its development in the last decades (Chaps. 2 and 3).
2. A description of the value chain of the solar PV sector, together with a debate
about the impacts of solar PV integration in the electricity system (Chap. 4).
3. An analysis of the public promotion policies which can and have been implemented,
both regarding the RD&D stages as well as the deployment stage,
considering also self-production (Chaps. 5–8).
4. Chapter 9 provides a set of concluding remarks and provides some relevant
insights on the future expectations of solar PV generation.
Given its handbook character, the aim of this book is to provide the basis for the
economic analysis of solar PV generation and, to some extent, of other renewable
energy sources. Therefore, the reader is encouraged to deepen its knowledge by
consulting other books, journals and specialized electronic sources. This will allow
xii Preface and Acknowledgements
him/her to capture the complexity involved in a simultaneous analysis of the
protection of the interests of the consumers, a sufficient profitability for investors in
new sources of electricity generation and the promotion of environmentally friendly
technologies.
The authors acknowledge the general or specific comments provided by Joan
Batalla (Foundation for Energy and Environmental Sustainability), Natàlia Caldés
(CIEMAT), Emilio Cerdá (Complutense University of Madrid), Félix Hernández
(CSIC), Margarita Ortega (University of Burgos), Cristina Peñasco (CSIC),
Desiderio Romero (University Rey Juan Carlos) and Elisa Trujillo (Energy
Sustainability Research Group, University of Barcelona). This book has also benefited
from the discussions with individuals related in one way or another, with
solar PV generation. Obviously, the authors are the only ones responsible for any
mistakes or omissions that the final text could contain.

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2 Photovoltaic Technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Cells: Types and Efficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.2 The Performance Under Real Operation Conditions . . . . . . . . . . . 17
2.3 Scarce Materials for Photovoltaic Generation. . . . . . . . . . . . . . . . 22
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3 Short History and Recent Facts of Photovoltaic Generation . . . . . . . 37
3.1 First Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.2 Recent Stages: Growth, Crisis and Recovery . . . . . . . . . . . . . . . . 42
3.2.1 Capacity and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
3.2.2 The Role of Different Countries in Module
Manufacturing and Capacity Additions. . . . . . . . . . . . . . . 62
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
4 Economics of Solar Photovoltaic Generation . . . . . . . . . . . . . . . . . . 71
4.1 The Value Chain of the Photovoltaic Sector . . . . . . . . . . . . . . . . 71
4.2 A Model on Costs and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . 87
4.2.1 Analysis of the Manufacturing Costs of Modules. . . . . . . . 87
4.2.2 The Trade-off Between Costs and Efficiency . . . . . . . . . . . 94
4.2.3 Installation Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
4.2.4 Parities and Comparisons . . . . . . . . . . . . . . . . . . . . . . . . 109
4.3 The Social Value of the Photovoltaic Electricity . . . . . . . . . . . . . 113
4.3.1 Values of Photovoltaic Electricity . . . . . . . . . . . . . . . . . . 113
4.3.2 Components of the Market Value . . . . . . . . . . . . . . . . . . 124
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
5 Principles for the Public Promotion of Photovoltaic Generation . . . . 161
5.1 Main Elements in Public Policy Assessments . . . . . . . . . . . . . . . 161
5.1.1 Relating Goals, Targets, Policies and Criteria . . . . . . . . . . 161
5.1.2 Assessment Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
5.1.3 Goals, Targets and Policies in the European Union
Context. The Role of Photovoltaics . . . . . . . . . . . . . . . . . 175
5.2 Justifying the Public Promotion of Photovoltaic Generation:
Market Failures, Systemic Failures and Other Barriers . . . . . . . . . 187
5.3 Combinations of Support Instruments: Demand Pull
and Supply Push . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
6 Support for Research, Development and Demonstration . . . . . . . . . 199
6.1 The Sources of Innovation: Some Insights from the Literature . . . . 199
6.1.1 Main Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
6.1.2 Relating Deployment and RD&D . . . . . . . . . . . . . . . . . . 208
6.1.3 Learning Effects and the Learning Curve Model . . . . . . . . 211
6.1.4 Other Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
6.2 The Sources of Innovation and the Sources of Cost
Reductions for Solar Photovoltaic Technology. . . . . . . . . . . . . . . 225
6.3 Possibilities for Innovation in Solar Photovoltaic
Technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
6.4 Public RD&D Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
6.5 Data on RD&D Support for Photovoltaic Technologies . . . . . . . . 233
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
7 Photovoltaic Demand-Side Generation . . . . . . . . . . . . . . . . . . . . . . 243
7.1 Types of PV-DSG and Their Main Economic Features . . . . . . . . . 244
7.1.1 Basic Economic Features of PV-DSG . . . . . . . . . . . . . . . 248
7.1.2 Forms of Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
7.1.3 Exchange Prices and Additional Economic Conditions . . . . 255
7.2 Developing the Economics of PV-DSG . . . . . . . . . . . . . . . . . . . 258
7.2.1 Regulation Before Retail Grid Parity . . . . . . . . . . . . . . . . 259
7.2.2 Reaching the Retail Grid Parity . . . . . . . . . . . . . . . . . . . . 262
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
8 Public Support Schemes for the Deployment
of Commercial Plants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
8.1 Deployment Instruments. An Economic Description
of the Alternatives: Instruments and Common Design
Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
8.2 Feed-in Tariffs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
8.2.1 Design Elements of FITs . . . . . . . . . . . . . . . . . . . . . . . . 278
8.2.2 The Double Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . 285
8.2.3 Financing FITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
8.2.4 Dynamic Problems with FITs . . . . . . . . . . . . . . . . . . . . . 292
8.3 Feed-in Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
8.4 Quotas with Tradable Green Certificates . . . . . . . . . . . . . . . . . . . 299
8.5 Auctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
8.6 Solar PV Instruments in the Real World: An Economic
Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
8.6.1 USA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
8.6.2 Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
8.6.3 Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310
8.6.4 Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316
8.6.5 Italy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320
8.6.6 France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322
8.6.7 UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323
8.6.8 China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326
8.7 Using Assessment Criteria and Indicators to Assess Solar PV
Support Schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
8.7.1 Effectiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
8.7.2 Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
8.7.3 Support Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332
8.7.4 Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337
9 Summing-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343