Governments normally use incentive programs to create market demand for promising technologies, and many countries have applied them with energy efficiency and renewable generation. The Small-Scale Technology Certificates (STC) available in Australia for Solar power systems and heat pumps are one example.

Another common approach is establishing a Renewable Energy target for a country or region, which normally applies for electricity companies and large power consumers. While incentive programs reward early adopters of clean technologies, Renewable Energy Targets make them mandatory for key players in the industry, with hefty fines for non-compliance.

Although the two approaches differ, there is a common effect: the demand for solar power and other renewable sources increases in the country or region where the program is applied.

How High Demand for a Product Reduces its Cost

Incentive programs and renewable energy targets from governments guarantee a market demand for clean energy products and services, and this gives confidence to investors. As a result, the availability of capital increases throughout the entire solar supply chain.

There are two main ways in which the cost of a technology can be reduced, and both are strongly dependent on capital availability:

• Research and development lead to breakthroughs that can drastically reduce the cost of a technology. For example, innovation in materials science and manufacturing processes has made solar cells affordable.
• Economies of scale are achieved when a product is manufactured in large assembly lines, often with the help of automation. Producing solar panels in a large automated factories results in a lower cost per watt, compared with producing them in a smaller facility that is more reliant on manual labor.

However, R&D and large-scale manufacturing can only occur if investors are willing to commit capital, and this is more likely when there is high demand for the product in question. This is exactly what happened in the solar industry: photovoltaic technology was still expensive when countries started introducing incentive programs and renewable energy targets. Increased demand led to investment, and cost reductions in photovoltaic technology were achieved.

Solar power was once dependent on government aid to be viable, but at current prices the technology is cost-effective by itself. A similar approach is now being attempted with battery storage; for example, New York has an energy storage target, and California has an incentive program for energy storage with 1.2 billion USD in funds.

Additional Factors that Affect the Cost of Solar Power

Even though the price of photovoltaic technology has decreased sharply since the year 2000, it would be unrealistic to expect the same costs throughout the world. For example, solar systems in Australia are 2 to 3 times cheaper than in the USA, and there are two main causes:

• Australia is closer to China, the main manufacturing hub for solar power.
• USA has major solar manufacturing operations, and protection tariffs are applied on imported equipment. Australia is not a major solar manufacturer, and no such tariffs are applied.

There are also factors that don’t affect the installed cost of solar systems, but influence the savings achieved. If you install identical photovoltaic arrays in two places with different sunshine conditions, the one getting more solar radiation will produce more kilowatt-hours. On the other hand, if the output of two installations is identical but local electricity rates differ, savings are higher in the location where electricity is more expensive.

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