The Economics of Solar Power

Oct 30, 2024

The cost of solar power has plummeted as of 2023 and the years preceding it, and in many places, it is even cheaper than coal or other fossil fuels. Thanks to generous tax credits and subsidies, solar installations are now increasing worldwide. Below, we cover some of the economic considerations surrounding solar energy.

Even with the massive strides made in technological innovation, sustainable energy has not yet replaced traditional fossil fuels. In order to incentivize renewable energy adoption, governments have levied tax credits for solar and wind energy, which until recently, were far more expensive than the status quo.

However, due to increased production, government subsidies, and mounting environmental concerns, the direct costs of solar and wind energy for consumers have decreased. In fact, some markets generate renewable energy more cheaply for consumers than fossil fuels. While wind energy, such as wind farms, is predominantly used for commercial means, solar energy has both commercial and residential uses.

Although an exact date is difficult to determine, many estimates suggest that fossil fuels will be depleted in less than 100 years; oil by 2052, gas by 2060, and coal by 2090. While sources of coal, natural gas, and crude oil have continued to deteriorate, the consumption of fossil fuels has not.

For power generation in the United States, fossil fuels are still used far more than both renewable energy and nuclear power. As of 2023, all fossil fuels made up 60% of U.S. electricity generation. Nuclear power accounted for 18.6% and renewables for 21.4%. Solar, a part of the renewable category, produced 3.9% of U.S. electricity in 2023. Not only are fossil fuels nonrenewable, but they are also a cause of various adverse environmental effects. Burning fossil fuels is the leading producer of anthropogenic CO2, which has contributed significantly to climate change. Notable effects include global warming, melting ice in the Arctic, rising sea levels, and poor crop yields.

Despite the harmful effects of fossil fuels on both human health and the environment, governments continue to subsidize them, including the United States government. According to the International Monetary Fund, global fossil fuel subsidies amounted to $7 trillion in 2022. A study from the World Bank estimates that the harm done by air pollution causes $8.1 trillion in damage each year and causes 6.4 million deaths annually.

The year Bell Labs announced the invention of the first solar cell.

Though renewable energy represents a fraction of total energy consumed, the U.S. is the number two leading consumer of renewable energy. Yet, despite the increase of available solar energy over the past 10 years, solar still only accounts for 3.9% of the total power generated in the United States in 2023. Solar was the third most used renewable source, trailing wind at 10.2% and hydropower at 5.7%.

Currently, only two types of solar technology exist that are capable of converting the sun’s energy into a source of power: solar thermal and photovoltaic. Solar thermal collectors absorb the sun’s radiation in order to heat a home or water. Photovoltaic devices use sunlight to replace or supplement the electricity provided on the utility grid.

Until recently, solar energy systems were only accessible to the wealthy or fanatical. However, due to sharply declining costs, universal access to solar paneling systems is becoming a reality. In 2003, the average residential U.S. solar system cost $10 per watt.

As of 2024, the cost of solar power had fallen to about $0.06 per kWh. It had been the governments target to get costs down to this level by 2020 and it was already achieved by 2020. In light of this, the U.S. Department of Energy's SunShot initiative has set a new target of lowering the cost by 50% to $0.03 per kWh by 2030. For comparison, the cost of combined cycle natural gas power is $39 to $101 per MWh which equals $0.039 to $0.101 per kWh. Coal is even more costly at $68 to $166 per MWh which would be $0.068 to $0.166 per kWh.

As a result, the number of photovoltaic systems installed in the U.S. has drastically increased among residential and commercial spaces. Between 2014 and 2023, solar power generation increased by more than eight times to 238,121 gigawatt-hours.

Solar energy has seen a global increase in consumption as more countries recognize the harmful effects of burning fossil fuels. Increased competition within the solar power industry has resulted in sharp declines in installation costs.

Many of the largest economies, including the U.S., China, India, and several European nations, have begun to implement solar energy. In an effort to combat pollution, China has made the biggest push into renewable energy and installed a large quantity of photovoltaics.

India, which is also plagued by pollution, has made a target to reach 500 gigawatts of renewable energy by 2030. As of May 2023, India stood at more than 125 gigawatts of renewable power. In the United States, the government expects solar power generation to grow 75% between 2023 and 2025.

Big businesses are also investing in reusable solar systems. Walmart (WMT), Amazon (AMZN), and Apple (AAPL) have already switched some stores, offices, and facilities to solar energy. Google has been a massive adopter of solar power and clean energy. From 2010 to 2023, the company signed 115 clean power agreements totaling over 14 gigawatts of energy. This is is the equivalent of 36 million solar panels. Although it should be said, these agreements include wind and other power forms in addition to solar. The company pledges to run completely on clean energy by 2030.

Although solar power continues to account for a small share of the overall energy supply, the residential and commercial sectors are slowly embracing renewable energy. As prices continue to decline, it is expected that solar energy systems become more prevalent. In Europe, the price per kilowatt-hour is expected to decline to between 4 and 6 cents in 2025 and further decrease to as low as 2 cents in 2050.

Assuming forecasts are correct, solar photovoltaics will be among the cheapest sources of energy. With declining prices, the U.S. Department of Energy projects solar power to account for 40% of U.S. electricity by 2035 and 45% by 2050. This would require producing 1600 gigawatts with solar technology.

Another estimate from the Lappeenranta University of Technology in Finland believes that solar could account for 76% of global electricity consumption by 2050.

In conjunction with the increased production of renewable energy, there is an increasing commitment to declining greenhouse gas emissions from burning fossil fuels. Many governments have committed to cutting greenhouse gas emissions. In the United States, New York has committed to an 85% reduction from 1990 levels by 2050. California has a statutory mandate to reduce emissions 40% below 1990 levels by 2030. The state has since released an even more aggressive plan with the goal of 48% by 2030 and 85% by 2045.

U.S. homeowners who install solar panels are eligible for a 30% tax credit for systems installed between 2022 and 2032. It will decrease to 26% in 2033 and to 22% in 2034, before expiring in 2035, unless renewed by Congress.

Even though solar energy systems are more cost-effective today, residential and commercial usage still receive government subsidies. In the U.S., the Renewable Energy Tax Credit decreases the tax liability of solar energy users. A taxpayer can claim a credit of either 30%, 26%, or 22% of qualified expenditures for systems that serve an occupied space, depending on when the property was placed in service. The U.S. government applies the same credit to wind and geothermal systems.

Many European countries impose a feed-in-tariff scheme to increase the appeal of renewable energy systems. Under a feed-in-tariff scheme, renewable energy system owners can collect money from the government. Costs are calculated per kilowatt-hour (kWh), with prices varying between countries.

The cost of solar power falls every year, and it can be cheaper than fossil fuels, depending on the sun and weather conditions in the place of installation. By some estimates, solar is now the cheapest form of energy in the United States, with prices as low as $0.70 per watt according to Popular Science.

Solar panels are manufactured from various minerals that must be extracted from the earth. This mining process can degrade local ecosystems, just like mining coal and copper. In addition, panels have a limited useful lifetime, and they turn into e-waste when they are obsolete. In addition, solar power is not ideal for every location—some places have more reliable exposure than others.

It has been difficult to power a home exclusively with solar power unless you were willing to go without electricity at night. Now, battery systems are becoming more advanced and prevalent, making it increasingly possible. By some estimates, it costs between $16,000 and $35,000, plus the cost of installation. The profitability of doing so is determined by the local energy market.

For the most part, the commitment to renewable resources has come from individuals, big businesses, and countries. Besides solar energy, companies such as Google (GOOG) and Amazon (AMZN) have committed to using wind to power company facilities. With big businesses, individuals, and countries continuing to transition to renewable energy sources, the use of fossil fuels and their adverse affects can continued to be reduced.

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