Why has the cost of renewable energy fallen so much?

Why has the cost of renewable energy fallen so much?

How solar energy got cheap is a story of luck, science, policy, tenacity and climate change

Between 2010 and 2019, the average price of a solar panel fell by 86% and the average price of a wind turbine from Vestas, the global leader in wind turbine manufacturing, decreased by 40%. These falls in technology costs have led to falls in the cost of generating electricity that are transforming electricity markets around the world. In many countries such as India, China, Spain, Finland, Sweden and the United States, the price of electricity from solar panels and onshore wind is now cheaper than from new coal power plants.

These reductions in technology cost have been an important factor in increasing the global share of renewable energy to 10.5% in 2017. How did these cost reductions come about? Innovation. The simplest way to describe how innovation reduces technology costs is via a so-called "learning curve" or "experience curve". A typical learning curve describes the relationship between unit cost and total volume of a technology. Over many decades the learning curve for solar panels has varied, but it has been about 20% on average. This means that as the total cumulative volume of solar panel capacity has doubled, the unit cost has fallen by 20%. For wind energy, the average learning curve is about 11%.

This simple mathematical relationship has been dubbed Wright's Law. As a standard metric for rate of cost reduction, it enables comparisons between technologies and over time and facilitates future modelling. However, it is based on correlation not causation and its neat elegance leaves out much of the messiness that is an inescapable part of innovation. How solar energy got cheap is a story of luck (good and bad), scientific breakthroughs, helter-skelter policy making, entrepreneurial tenacity and a steadily strengthening environmental movement.

Solar energy technology started in 1839 with the first recorded observation of the photoelectric effect. The development of the first photo-voltaic module came in 1884 (just 1% efficient) and Einstein’s theoretical description of the photoelectric effect arrived in 1905. The resultant scientific knowledge was sufficient for Siemens to propose powering Europe by building a solar farm in Northern Africa in the 1930s. However, the Second World War intervened, and solar technology innovation moved to the US where Bell Labs developed the first practical solar cell (6-9% efficiency) in the 1950s. Through learning-by-research, a standard technology design began to emerge.

During the 1960s, solar panel technology developed in a number of niche markets where performance rather than price was key. Russia’s launch of Sputnik galvanised the US space industry, which pioneered solar panels on early satellites. International oil companies - including climate change bad boy Exxon - were early adopters of solar because it suited their remote operating environments (such as offshore oil rigs). The global reach of these oil companies helped the global flow of knowledge of solar.

The 1970s energy crisis put a focus on renewables like never before. US investment in solar research and development (R&D) increased efficiency (14-15%) and public procurement tied to decreasing technology costs nurtured the first commercial markets. The idea and initial data for a solar learning curve emerged during this period. But in the changing political winds of the 1980's Reagan administration, R&D budgets were slashed, solar support regimes dismantled, and the White House solar panels removed and put into storage.

Elsewhere, Japan was also shaken by the 1970s energy crisis and looked to energy efficiency, nuclear and renewables such as solar. Thanks to its political stability, Japan’s solar R&D investments and policy supports sustained for decades, which helped prevent solar knowledge depreciation. A vibrant consumer market also led to mini-solar being developed for calculators, wrist watches and radios. All these innovations (large and small, technology and policy) ensured the continued growth and cost reduction of solar. By 2003, Sharp had a 30% of global manufacturing capacity in solar PV.

In Germany, a coalition government, that included the Greens, passed the Renewable Energy Sources Act  (Erneuerbare-Energien-Gesetz) in 2000 with a very generous subsidy for rooftop solar, which rapidly created the biggest market in the world for solar panels. Driven by action-backed ambitious policy, solar was scaling up. Crucially the manufacturing production capacity to meet this level of demand also rapidly developed. Germany helped standardise the production process for solar.

At the same time, Chinese entrepreneurs built on this manufacturing knowledge to upscale solar production by a factor of 500. By reducing costs without compromising quality, China made solar cheap globally. This capacity of China’s enormous manufacturing sector to reduce costs is a reason for hope given China’s recent announcement of net-zero emissions by 2060.

Wind energy innovation has been similarly multifaceted. Recently published MaREI research on the 31% reduction in Vestas wind turbine prices found the biggest reductions came learning-by-deployment rather than learning-by-research. This included reduced delivery costs, lower financial and legal costs, and improved employee productivity, all things consistent with a mature technology. Supply chain and market dynamics were also important, though for two years (2007-2008) they caused wind turbines to temporarily increase in price.

Unfortunately, reductions in renewable energy technology cost don’t always reduce the consumer price of electricity. To facilitate increased shares of renewable electricity, grid infrastructure investments are vital. As Ireland aims to have a 70% share of renewable electricity by 2030, such future investments will be essential.

What technology innovation lessons can we learn from the past? For early stage technologies, significant levels of R&D investment are likely necessary for technological breakthroughs; otherwise a minimum level of R&D investment to avoid knowledge loss or depreciation is important. Niche markets, which value performance rather than price, are also critical for early learning. Lastly, stable but responsive policy tailored to the stage of development of a technology is crucial.


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