Why's solar so much cheaper in Germany than in New York?

In 2011, Germany installed more solar electric capacity every two days than was installed in the entire State of New York during all of year.

Why is that? The price of raw materials is roughly the same in both places, as is hourly rate of labor. A new study shows that big difference is the appalling red tape and high soft costs that solar faces in the US and manages to avoid in Germany.* 

Just like we buy potatoes or chicken by the pound, is solar business, we talk in terms of the price per watt of installed solar capacity to estimate and assess the components that comprise a solar electric system.

For example, the average price per watt of photovoltaic modules in 2011 was $1.83 in the US and $1.82 in Germany–virtually identical. This makes sense, since installers in both countries had equal access to the most popular Chinese-made modules with roughly comparable pricing.

The other major hardware components (e.g. inverters, racking) cost about $1.02 in the US and about half that, $0.56, in Germany, probably due to economies of scale in Europe. After all, annual residential installations in German were 9.5 times greater per capita than in the US in 2011. The non-module components have more suppliers than the modules do. So competition and volume help drive prices down.

That puts us at $2.85 per watt in the US and at $2.38 in Germany, a difference but not huge. But wait, we still have to pay for all the non-hardware costs!

These include, labor for installation, customer acquisition, system design, labor for permitting, permit fees, overhead, profit and other residual scope of work costs, such as post-installation monitoring, etc.

For the average German residential system, these balance of system (BOS) and soft costs add another $0.62 per watt, or about 40% of the hardware costs, yielding a final $3.00 per watt cost.   

However, in the US these BOS/soft costs added a whopping $3.34 per watt, or about 117% of the hardware costs, yieldiing a final $6.19 per watt. 

In short, in the US the soft costs more than double the price of solar.  The study estimates the average price per watt in 2011 for a less than 10 kilowatt system in the US was 206% higher in the US over Germany ($6.19 versus $3.00).

Why is solar so much more in the US? The researchers had some interesting findings.

Of the BOS/soft costs in both countries, installation labor was the largest, e.g. $0.59 per watt in US compared with $0.23 in Germany.

The results show a sizable gap of 36 hours between the U.S. and Germany in average installation times for PV systems of 10 kilowatts or smaller in size. The average time for installation in the US was 75 hours versus 39 in Germany.

This longer time in US may be partly explained by the higher frequency with which US installers penetrate the existing roof. That is less common in Germany due to different roofing material there (tile there versus shingle here) and higher wind speeds in many US locations (California). 

Installers in Germany rely even more on (cheaper) non-electrician installation labor than in the US (77% vs. 65%). But even if the US labor cost matched that in Germany, the price per watt would still be $3 higher here than there.

More telling questions are: What is my cost of acquiring a customer here v. there? And: How long does it takes to complete a job once I have sold it here v. there? 

Let’s look at customer acquisition first. We can break this into three phases (or costs) to the installer. How much more does the US installer has to spend on each of these stages versus her German colleagues? 

   Marketing + advertising: US installer spends 17X more ($0.34 v. $0.02/W)

   System design: US installer spends 10X more ($0.11 v $0.01/W)

   Other (sales process, follow up): US installer spends 6X more ($0.24 v $0.04/W).

Before a job is even sold, the US installer has spent $0.69 on acquiring the job, seven times more than the German installer’s marketing/sales investment of $0.10.

Some underlying facts drive up the US customer acquisition cost per watt. These include the much lower sales closure rate in the US (designing systems that don’t get sold) and the larger average system size in Germany.**

Let’s look at project cycle time. Residential projects take 126 days to develop in the U.S. vs. 35 days in Germany.  That is four times longer! According the study, shorter project development times in Germany contribute to an apparent price gap of about $0.20 per watt. 

Interestingly, residential PV systems are larger in Germany (“partly due to differences in policy design” as the researchers diplomatically put it), allowing German installers to benefit from economies of scale and work flow. The researchers find this saves an additional $0.15 per watt. 

The project cycle gap is principally driven by the red tape associated with the predominant way in which US photovoltaic systems must be permitted and accepted by the utilities. 

The project size gap is principally driven by Germany’s national Feed-in Tariff, which is far more effective to our net metering approach in making solar power a salable and bankable commodity for owners, installers, and utilities.

Policies matter. The net metering policies dominant in the US are strangling our solar potential.  Germany thrives because they have long moved to a much simpler, bankable, pre-negotiated approach (For more, see Feed-in Tariffs post.)

Of course, the customer acquisition gap discussed earlier is largely driven by the policy gap as well. It just takes longer to explain the needlessly complex US net metering and interconnection process to potential customers, which leads to closing fewer sales, which leads to higher per sale costs.

It's safe to conclude that, within a year,  the US solar cost per watt would drop by $1–or more!–if we had suddenly no “difference in policy design” with our fellow solar installers in Europe.

*Find some informed chatter about the Lawrence Berkeley Lab study,  here at MIT Tech Review and here at LinkedIn AEE Group.

**Residential (<10kW) solar systems are larger in Germany, not because they have bigger roofs (they don’t) or more sun (they don’t). They are larger on average (US median size in 2011 was 4.95kW versus 6.8kW in Germany, because German home and business owners maximize the solar output from their roof to take advantage of the ability feeding in excess electricity to the grid under the Feed-in Tariff revenue they get for doing so. Ironically, Germany gets less sunlight than New York, as the country is about at the latitude of James Bay and northern Ontario.