We are all used to getting quotes for large ticket items or works. For solar installations, especially in the US, this can prove to be a minefield –if one is able to obtain accurate, comparative total costs at all in today’s broad and scattered market.
A new white paper from leading research firm IHS Markit, titled ‘US Solar Capex and O&M Costs Remain Highly Variable,’ reveals new findings on the state of the US solar market. Using data from Mercatus’ Investment Lifecycle Management (ILM) platform, analysts found that despite the record massive growth in solar installations, especially in the last year, there is tremendous variance in both the capital expenditure and operations and maintenance (O&M) costs of planned systems.
This comparative study, based on real, aggregate market data, uncovered that while the variability in project size is to be expected, the variability in solar capex and O&M costs is not.
Solar capex costs
The Mercatus data, which encompasses over 75GW of solar under development in North America, allows segregation into three project size ranges, 0-1MW, 1-10MW and over 10MW, and also between rooftop and ground mounted systems.
The report observes high capex variability across all three segments, ranging in 2015 from US$1.19-5.12/W for ground-mount systems and US$1.73-5.79/W for the generally more costly rooftop systems.The data shows the lowest capex is to be found in the segment over 10MW.
The capex development costs are comprised of multiple factors, including developer expenses, permitting, land costs and grid connection. It is variations in these – especially the latter two factors – that drive most of the variation between regions according to the white paper. The big exception is California, where environmental permitting is a significant cost factor.
Solar O&M costs
O&M costs also show wide disparity on a per project basis. According to the report, these differences mainly relate to the wide variety of services that can be included in an O&M contract, ranging from low-end reactive maintenance plans to higher end preventative and condition-based solutions. In general, projects with high purchase power agreement rates and high plant availability requirements will be contracting the premium services. Projects with lower revenues will have minimal service contracts.
On average, the O&M costs show little annual variation, however. Part of the reason is that companies compete by offering different service levels instead of lower prices. It also is due to such contracts normally extending over several years.
Lessons for solar developers
Commenting on the findings, Mercatus analyst Dean Granoff says that the high variability in the capex and O&M costs illustrates that different companies and markets are ultimately getting better pricing on solar products.
“This emphasizes the importance of having market intelligence such as this, as it enables you to drive for a best price for a project,” he says. “If one is operating in competitive markets, especially in multiple markets, one needs to understand the cost structures. With a high degree of variability, such understanding is critical to achieving projects that are financeable.”
Clearly from the analysis, projects at the upper end of the capex cost range are less likely to installed because their cost structures are less viable.
From an investor perspective, certain costs, such as the land and permitting costs, must be swallowed for installation of solar in a particular location, while other costs that have some flexibility.
“In general the locations that have greater levels of activity have lower prices, but there is flexibility in the developer costs,” explains IHS Markit analyst Josefin Berg, who authored the report. “There are the workforce costs and the costs of overheads such as procurement and shipping which will depend on the level of development of the supply chain, and these vary between individual developers and the nature of the projects they are undertaking. For example, for a developer undertaking several large projects, negotiating them collectively with suppliers would be a key factor to driving down overall costs.”
Such economies of scale also account for the larger projects having the lowest average capex.
Lessons from Europe
Commenting on takeaways from the study for other geographies, Berg says the European market is more advanced than the US with a greater degree of competition. This, coupled with the declining costs of solar panels, results in lower and often less variable capex costs than in the US.
“In the US we are starting to see projects approaching European benchmark costs. But the emergence of tenders for solar in countries, such as France and Germany, point to the need for developers – if they are to win these - to continue to get capex as low as possible.” says Berg.
Looking ahead in the US, the extension of the federal investment tax credit at the end of 2015 has given the market a means for significant growth over the next five years, the report states. IHS Markit projects that this should result in the US adding 74GW of PV by 2020, of which almost two-thirds will be utility-scale.
As a result, further declines in the capex costs are expected, Berg says, projecting “utility-scale solar to reach US$1/W by 2020.”