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Falling solar costs: Good for buyers, bad for makers

Solar panel prices have fallen 20 percent so far this year, which is brutal for producers but beneficial for people considering buying or leasing solar panels.

Martin LaMonica/CNET

There's a paradox in the global solar industry: When manufacturers are suffering, things are looking up for consumers.

Lux Research yesterday released its latest industry analysis which projects fast growth in the amount of solar power installed, at 15.5 percent per year, but flat revenue until 2016. Reflecting the same dynamic of falling product prices, a report from Navigant Consulting yesterday found that the price of solar modules, or solar electric panels, is down almost 20 percent so far this year.

The reports put numbers on the brutal price competition among makers of solar photovoltaic panels where global competitors continually shave down the price per watt. For panel producers, it means shrinking profit margins and worries over whether demand is strong enough to absorb the output of rising manufacturing capacity, according to analysts.

But for consumers, it means a rooftop solar array will deliver more bang for the buck. A less obvious effect is that lower hardware prices also improve the prospect that solar leasing, rather than buying panels outright, will become more widespread.

"For companies that would offer a solar lease (falling panel prices) help make the model work better so they can expand the offering to new states and geographies and to projects that otherwise might not have penciled out," said Shayle Kann, a solar industry analyst at GTM Research. "Eventually that will bleed into wider availability."

Buying a rooftop solar array costs in the neighborhood of $30,000 depending on the size, before a 30 percent federal tax rebate and state incentives. Solar panels themselves, though, are far less than half the cost of the entire system. Installation is about half the overall cost and other hardware, such as inverters, figures in as well.

As a result, even the rapid decline in panel prices seen in the first half of this year has only a muted impact on consumers. The impact is more dramatic for installers and companies that offer solar leases, Kann said.

Solar leases and other financial arrangements are designed to get around the upfront cost of solar PV. It's a model that's grown rapidly over the past few years and is being offered by more companies.

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Rather than buy the panels, consumers pay a monthly fee which lowers their overall electricity bill. It can either be a predetermined fee set for 20 years in the case of a lease. In a power purchase agreement, the consumer buys the power from the panels at a lower rate than the grid retail rate.

Third-party financing companies or installers which offer financing make money because they own the panels, so they receive federal and state renewable energy incentives. A handful of companies--including SolarCity, Sungevity, and SunRun--started in California and expanded to more states to the point where solar leases are available in about 20 states, said Kann.

"We embrace (falling panel prices). That makes our business more viable in that we can offer lease product or cash sale to customers in more places. It's a good trend for us," said Mac Irvin, the chief financial officer of Sungevity.

Road to grid parity?
Regardless of how solar is delivered to consumers, technical improvements and higher manufacturing rates are pushing down the cost per watt of solar. If solar hardware prices continue to drop, solar power is expected to get below the cost of grid power, also called "grid parity."

Many consider grid parity to be a turning point, which will lead to wide-scale adoption. But for residential solar, grid parity is not going to come in the next few years, according to Lux.

The research company projects that grid parity will come to commercial rooftop solar installations first, with 10 countries reaching that point by 2016. Hawaii, which has the highest electricity rates in the U.S., is the exception with residential grid parity expected this year.

Grid parity, which will happen at different locations at different times, will also help solar leasing because it will allow for more financing arrangements, said GTM Research's Kann. For example, a solar installer could offer a power purchase agreement where a consumer pays 90 percent of the retail rate, regardless of whether it goes up or down.

For now, the key levers in whether solar power can undercut grid power on price are state subsidies and the price of retail electricity. "An anticipated future increase in the cost of retail and wholesale power is all that's necessary to generate positive demand--even in countries without subsidies," Lux said in a release.

As prices fall and demand slows in Germany--the largest consumer of solar power globally--the pressure to lower the cost below grid prices is becoming stronger, according to Paula Mints, a solar PV analyst at Navigant Consulting. "The PV industry, and solar in general, will need to develop business strategies that do not rely on incentives," she wrote.