Renewable energy sources of all types have seen immense energy generation efficiency gains over the past decade. This is most apparent in the solar industry where the costs of generating electricity through solar photovoltaic systems have decreased by 79% since 2009. Photovoltaic systems – commonly referred to as PV systems or Solar PV power systems, are the dominant and most easily recognizable form of solar energy. To offer a simple explanation, PV systems consist of solar panels that convert sunlight into energy and inverters that change this electric current from DC to AC.
The levelised cost of electricity (LCOE) is calculated by dividing the cumulative lifetime cost of installing and maintaining an electricity-generating asset by the total amount of electricity that asset will be able to generate over its lifetime. While photovoltaic systems are gradually becoming cheaper, projections (shown above) predict them having a LCOE 31% higher than coal and 71% higher than natural gas combined-cycles by 2020.
Thus in spite of increased energy generation efficiency, solar photovoltaic systems still have a long way to go in order to be competitive with the low cost of generating electricity through natural gas and solar power’s rival renewable resources. While solar energy still remains costly compared to its competitors, newer solar power projects continually outperform their earlier iterations in energy generating efficiency – projects completed in 2014 performed at an average capacity factor 2.9% greater than those built in 2012.
One of the primary reasons for the increased energy generation efficiency of photovoltaic systems may be the 30 percent federal income tax credit (ITC) made available for purchases of either residential or commercial photovoltaic system installations under the Bush administration’s Energy Policy Act of 2005. This ITC was initially only applied to projects completed between January 1, 2006 and December 31, 2007, and included a tax credit cap of $2,000 on residential purchases. It was extended first in 2006 under the Tax Relief and Health Care Act for an additional year, and again for 8 years through the Emergency Economic Stabilization Act of 2008 which went a step further by eliminating the tax credit cap on residential purchases.
In 2015 the solar ITC was extended again, this time through 2019 as part of the Omnibus Appropriations Act, with the tax credit dropping to 26% in 2020, to 22% in 2021, and permanently to 10% for commercial installations and 0% for residential installations in 2022.
The figure above illustrates the growth of the total installed solar generating capacity in the United States in relation to the solar ITC’s extensions and expansions.
As one might expect, the solar industry has benefited greatly from this ITC. By offering a portion of the purchase back to residential and commercial adopters of solar power systems the government has in effect subsidized the growth of this industry. Individuals who might have initially been wary of the gross cost of installing a solar system may view the ITC as a direct 30% price reduction – a compelling reason to go ahead and make the purchase.
In turn, the ITC provides solar power system suppliers a greater number of consumers and thus the opportunity to produce on a larger scale. As most browsers of this blog would know, greater economies of scale allow capital-intensive industries to be profitable as the production of large quantities of a product allows for lower average unit costs and investments into technological developments such as increasingly efficient solar cells and improved production processes.
One of the most important modifications to the solar ITC may have been the elimination of the cap on tax credit available for residential photovoltaic system purchases. Before eliminating this cap, the installation of a $15k photovoltaic system really only offered a 13% ITC on the purchase. In effect, the cap halved the incentive that the ITC was intended to provide for photovoltaic system adopters, and that’s for an extremely cheap system. When considering the fact PV systems could be as much as $30k, some early-adopters prior to 2008 may have only seen an ITC of 6% their installation cost.
The solar ITC itself may also be the reason why the US had the third highest solar power generating capacity growth in 2015, making its cumulative installed generating capacity grow from the world’s fifth to fourth largest in 2016.
Altogether, Solar PV systems seem to be gradually approaching a more affordable level. No matter what one might believe about the true extent of climate change (or its relation to human activity), increased clean energy generation efficiency should come as good news to all. For it to come partly as a result of a tax break, rather than an additional government subsidy, should make this good news even better.