Economics of Solar Power
Authors: Crago Christine L. 
Published: May 2021

Energy from the sun has vast potential for powering modern society. The first decades of the 21st century saw a rapid increase in the deployment of solar power, with global solar photovoltaic (PV) capacity growing over 25-fold, from 23 GW to 627 GW, between 2009 and 2019. Growth in the solar PV market is supported by financial and regulatory incentives offered by many governments worldwide. These incentives include feed-in tariffs, rebates, and tax incentives, as well as market-support policies governing permitting and grid interconnection. Despite the rapid growth in solar PV capacity, solar electricity accounts for under 3% of global electricity generation, suggesting that there is huge potential for the solar PV market to expand and meet global energy demand.

Foremost among the benefits of solar power is its potential to drastically cut greenhouse gas (GHG) emissions from the electricity sector. Solar electricity can also reduce local air pollution, and growth of the PV market can enhance energy security and contribute to the green economy. However, there are challenges to future expansion of the solar PV market. One of the key barriers is the cost of solar projects. Although as of 2020 the cost of utility-scale solar projects was beginning to be competitive with the cost of conventional energy sources, further reductions in costs are needed to achieve deeper penetration of solar electricity. Other challenges associated with solar electricity have to do with the predictable and unpredictable aspects of solar resource. On the one hand, solar resource varies predictably based on season and time of day. When solar electricity output coincides with peak electricity demand, solar electricity provides added value to the electrical grid. On the other hand, weather variation, air quality, and other factors can drastically alter predicted output from solar PV systems. The unpredictable aspect of solar electricity poses a major challenge for integrating solar electricity into the electrical grid, especially for high levels of penetration. Grid operators must either store electricity or rely on standby generators to maintain grid reliability, both of which are costly. Advances in storage technology and grid management will be needed if solar electricity is to be a major source of electricity supply.

Residential adoption of rooftop solar PV systems has led to the growth of “prosumers” (households that consume and produce electricity) and has provided a novel setting to examine several aspects of consumer behavior related to adoption of new technology and energy-use behavior. Studies show that financial incentives, pro-environmental preferences, and social interactions affect adoption of solar PV technology. Prosumers are also likely to consume more electricity after they install solar PV systems.

Decarbonization goals related to society’s response to climate change are expected to drive future growth in the solar PV market. In addition to technological advances, market mechanisms and policies are needed to ensure that the transition to an energy system dominated by solar and other renewables is accomplished in a way that is economically efficient and socially equitable.