The Top 5: Factors Affecting The Price Of Solar Power

Solar energy has grown exponentially in recent years thanks to the global trend of developing low or zero-emission energy. Clocking exponential growth, solar is on the verge of entering a new era of Terawatt solar. SolarPower Europe’s latest Global Market Outlook reveals that worldwide, global solar capacity doubled in 3 years from 2018, bringing the world’s solar fleet to one Terawatt capacity in April 2022, even as it seems to double once again in the next three years to over 2.3 TW.

As the technology is strengthening its feet in the energy sector, the cost of solar power remains one of the most crucial points determining its success. This price of solar power depends on various factors. While there can be several things which impact the cost of shifting to solar power, we look at the top 5 factors affecting the price of solar power, especially in the context of it’s spreaf to newer regions and in a larger way in existing markets like China, India, the US , Europe and Australia.

#1 Price of Polysilicon

Polysilicon, a high-purity form of silicon, is a key raw material – forming solar cells and solar modules – in the solar photovoltaic (PV) supply chain. Hence, any change in the prices of polysilicon would affect the price of solar modules which will lead to an increase in the overall cost of solar power. As per IEA, a 100 per cent increase in polysilicon cost results in around a 2.2 per cent increase in the investment cost of a PV system.

To gauge how much effect the price of polysilicon has on the price of solar power, consider the recent jump in the price of solar modules. The price of polysilicon was about 80,000 yuan per ton at the beginning of 2021. By August 2022, the price hovered over 305,000 yuan per ton. In India, solar cell and module prices have increased by more than 40% over the last 18 months, driven mostly by rising polysilicon prices.

#2 Custom Duties

The production of solar modules and related products is consolidated into a few regions. Most of the countries seeking transition to green solar modules are highly dependent on imports of solar modules from a few manufacturers, especially China – which claims n 80 per cent share in all the key manufacturing stages of solar panels. Hence, individual custom duties play a very critical role in the price of exploiting solar power in the target company. This has become even more critical now as countries across the world, be it India, the US, or Even Europe and the Middle East region now seem to foster domestic production by providing tariff protection from imports, besides non-tariff barriers.

For instance, a 40 per cent import duty on photovoltaic modules and a 25 per cent duty on photovoltaic cells in India came into force on April 1, 2022  in line with the government’s announcement in mid-2021. This is intended to outcompete imported solar modules by raising their cost for end consumers and making domestically produced options more attractive.

#3 Metal Prices

Metals as raw materials are one of the most important factors affecting the price of solar power. Prices for industrial materials have been on an increasing trajectory since Q1 2021, pushing up solar PV costs. A 100 per cent increase in steel prices (from an average 2019 price) will result in a 6 per cent increase in the total investment cost of PV manufacturing. Similarly, for Aluminium and Copper, the cost of investment will increase by 4.9 and 1.4 per cent, respectively.

As per IEA reports, since the beginning of 2020, the price of steel has increased by 50 per cent. This, coupled with increased freight costs by six fold and aluminium by around 80 per cent, has resulted in an increase in solar PV modules anywhere between 10-25 per cent (depending on country and region). Also, inverter and electrical installation costs depend on the price of copper, which has also increased by 60 per cent in the same period.

The change in prices of raw materials affects the prices of solar both in solar manufacturing countries and countries importing solar modules. For instance, China produces around 80% of the world’s modules. Yet, the higher commodity prices have also driven solar PV system costs higher in its domestic market as well.

#4 Energy Prices

Energy is needed to manufacture solar equipment. The rise in fuel and electricity costs also affects the overall cost of manufacturing solar equipment. Recently, this prompted the Asian and European manufacturers of materials critical for renewable energy equipment to curtail production to avoid higher fuel and electricity costs. This, in turn, exacerbates an already strained material supply chain, leading to additional increases and volatility in prices for commodities such as aluminium, copper, and steel, which eventually raises the overall cost of solar.

#5 Inflation Levels

Inflation leads to an increase in the cost of everything. The world is witnessing inflation due to turbulence in supply chains. The solar industry is not unscathed as well. As the inflation levels increase, the manpower cost, the cost of equipment, freight costs, the energy costs increase as well. Thus, it becomes more costly to manufacture solar panels and hence the overall cost of getting solar power increases. Thus the pace of adoption of solar power slows down.

As we can see, while some of the factors are obvious, higher energy prices were initially thought to support solar growth by encouraging renewable capacity. Similarly, the freight costs have increased to such a great extent to start making a serious impact on end prices currently.