Technology Push
Niche Markets
Demand Pull
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Scale Up
Chapter 8: Local Learning
Because module prices have fallen so much, soft costs—that is non-hardware costs—are now most of the cost of solar power today. They have fallen too through a process of learning by doing—improvements that have occurred as installers have gained experience and learned from their suppliers, customers, and competitors.
While much analysis, including this book, emphasize the cost reductions in PV hardware, the other portion of the costs of installing a solar system have also fallen. Using industry jargon, these “balance of system” or “soft costs,” involve labor in installation, insurance, marketing, and obtaining permits. Because hardware has become so inexpensive, soft costs represent approximately two-thirds of the costs of an installed PV system in the US. These costs are distinct from hardware costs in that they are almost completely locally driven, whereas PV modules are globally traded. A comprehensive analysis of these costs of solar must acknowledge that PV also got cheap because of innovation happening at the local level—both in adoption and reductions in soft costs.
First, PV adoption decisions have been almost entirely locally driven. In contrast to almost all other energy supply technologies, households have by far been the most important adopters of PV systems. The small scale and modular design of a PV system—a typical panel is 200 W and about 20 are needed for a household—put decision making in the hands of customer. This makes PV more like a typical consumer product. It has many of the characteristics, and similar costs, of a consumer durable product like hot water heaters, furnaces, and to some extent automobiles. As a result, PV shares some of the adoption drivers with those others. The cost of over $10,000 makes financing important. The one-time nature of the purchase makes information and search costs crucial to adoption.
Unlike furnaces and hot water heaters, and like cars, installed PV systems can be a form of conspicuous consumption, an expression of identity. Neighbors who have installed solar are important drivers of adoption. Finally, households have often been willing to pay more for PV than the value of the electricity they would avoid having to purchase. These consumers have provided an important niche market for PV.
Second, this local adoption activity also led installers to scale up and develop experience in marketing, installing, and financing PV systems. With its own learning curve, local activity has thus generated substantial reductions in the prices paid for installed systems. While PV modules are globalized with an international supply chain and easily transported end products, the rest of the cost of a PV system is almost entirely locally produced. Moreover, as the price of modules have fallen, the non-module, or “soft” costs has made up an increasingly large proportion of the total costs. In U.S. residential installations today, those soft costs are close to 80% of the total costs. But those costs are falling as well. Improvements are being made at the local level in which marketers, finances, installers, and others are identifying ways to improve performance and reduce costs. Those actors are learning from each other.
Subsidies raise prices in the near term but reduce them in the longer term by increasing demand and creating opportunities for learning by doing and economies of scale. See for example Solar Tribune. As PV became widely adopted concerns have risen about: grid stability, value deflation, electric utility business models, related political economy issues, and financing. The latter is increasingly an issue as PV has large potential in developing countries where credit is often scarce.
For both adopters and installers peer effects are occurring at the local level. Potential adopters are learning about PV from their neighbors. Installers are learning from the experience of other installers. The local aspects are important because they have sustained interest and political support from a wide variety of places over a substantial period of time. The local activity, especially these interactions among peers, has also been expressed in political advocacy that has effectively sustained support for PV despite the centrifugal forces of globalization and the boom and bust nature of the industry. In some places, local stakes in the outcomes of PV related policy provided political support that made support for PV robust to the forces of globalization which tended to move the locus of production and technology hardware development.
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