The Economics of Solar Power

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.

Understanding the Economics of Solar Power

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.

The True Cost of Fossil Fuels

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.

Among all energy sources, fossil fuels trump both renewable energy and nuclear power. In 2019, fossil fuels accounted for approximately 85% of all energy consumed—up from 80% in 2014. 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.

Accumulating Economic Costs

While the U.S. spends over $1 trillion annually on fossil fuels, the harmful effects of burning them continue to accumulate economic costs. In fact, the U.S. spent $649 billion on fossil fuel subsidies alone in 2015. Research suggests air pollution in Europe generates economic costs of $1.6 trillion a year in diseases and death. 

Combining expenditures on fossil fuels, healthcare costs, and environmental degradation, it is estimated the true cost of fossil fuels is $5.2 trillion a year globally. 

Price of Solar Power

Though renewable energy represents a fraction of total energy consumed, the U.S. is the leading consumer of renewable energy. Yet, despite the increase of available solar energy over the past 10 years, solar still only accounts for 2.3% of the total energy used in the U.S. Solar power also trails hydropower and wind in terms of preferred sources of renewable energy, making up 11.5% of total U.S. renewable consumption in 2019.

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.

Adoption of Solar Power

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 the early 2000s, the average U.S. solar system cost $10 per watt.

In 2017, The International Renewable Energy Agency (IRENA) published a report, called, “Renewable power generation costs in 2017,” which revealed that the cost of solar photovoltaic (PV) had fallen to $0.10 per kWh.

The U.S. Office of Energy Efficiency & Renewable Energy had a goal of enabling solar electricity costs to be competitive with conventionally generated electricity by 2020, without subsidies. As of 2017, costs for utility-scale photovoltaic (PV) solar power had dropped to $0.06 per kilowatt-hour (kWh). Cost targets for residential- and commercial-scale solar had dropped to $0.16 and $0.11 per kWh, respectively. (In comparison, in 2017, electricity produced by fossil fuels typically ran from $0.05 to $0.17 per kWh).

As a result, the number of photovoltaic systems installed in the U.S. has drastically increased among residential and commercial spaces. From 2008 to 2021, solar capacity has grown from 0.34 gigawatts to 97.2 gigawatts.

A Global Increase

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 175 gigawatts of renewable energy by 2022. Meanwhile, the capacity for solar photovoltaic installations in the United States is expected to more than double over the next five years.

Big Businesses

Big businesses are also investing in reusable solar systems. Walmart (WMT), Verizon (VZ), and Apple (AAPL) have already switched some stores, offices, and facilities to solar energy. In the largest ever solar procurement deal, Google purchased 1,600 megawatts from 18 different providers in the fall of 2019.

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.

Solar Photovoltaics

Assuming forecasts are correct, solar photovoltaics will be among the cheapest sources of energy. With declining prices, the IEA conservatively estimates solar systems to supply 5% of global electricity consumption in 2030, rising to 16% by 2050. Achieving this vision would require increasing the global capacity of solar energy from 150 gigawatts in 2014 to 4,600 gigawatts by 2050. As a result, this would avoid the emission of 6 billion tons of carbon dioxide annually.

More recent estimates, for example from the Lappeenranta University of Technology in Finland, believe 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 cities and countries around the world have committed to cutting greenhouse gas emissions by 85% by 2050, including New York City. California’s target is 40% by 2030.

Solar Power Tax Credits

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 Bottom Line

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, adverse environmental effects from burning fossil fuels can hopefully be moderated.