Solar energy is the fastest growing energy source in the world. Thanks to its rapid technological advancements and efficiency gains, the costs of solar PV have dramatically declined over the past decades, making it the most economically viable energy technology besides onshore wind, even surpassing fossil fuels. Unlike wind, water or nuclear, solar is highly scalable. It can be placed almost anywhere with sizes ranging from a rooftop (kilowatt) to a solar park (gigawatt).
Solar PV installed capacity grew more than 70-fold between 2009 and 2022, to reach almost 1,200 GW, with both Utility-scale and distributed (residential and commercial) PV accounting for considerable shares. Solar electricity generation also ballooned to around 1,300 TWh in 2022, almost 40 times its value in 2010, placing it in third place among renewables, after hydropower and wind. BloombergNEF expects a massive rise in the number of solar installations and power generated by 2030.
Although the concept of solar energy dates back to the 7th century B.C., when humans used shiny objects to reflect sunlight and ignite fires, the first photovoltaic (PV) effect was discovered in 1839 by the French physicist, Edmond Becquerel. While experimenting with a cell made of metal electrodes in a conducting solution, he discovered that it could produce more electricity when exposed to light. Later in 1954, Daryl Chapin, Calvin Fuller and Gerald Pearson developed the first silicon PV cell, marking the first solar cell that could absorb and convert solar energy into electricity to power domestic electrical equipment. Today, PVs have advanced to a level where satellites and spacecraft orbiting Earth are powered by solar energy.
Owing to its rapid growth rate, solar energy is perhaps the most promising and economical renewable energy technology for accelerating the green energy transition and reaching net-zero by 2050. Solar PV is the only energy source evaluated by the International Energy Agency (IEA) to be “on track”, towards a net-zero transition path, being responsible for reducing emissions by over 1 Gt between 2009 and 2023.
According to a recent study by the World Bank, almost 93% of the World’s population live in countries with an average daily solar PV potential of 3-5 kWh per installed kilowatt of capacity (kWp), where solar projects can provide some viable sources of energy. Moreover, 70 countries are endowed with excellent environmental conditions for solar PV (average daily solar output of more than 4.5 kWh/kWp and low seasonality in PV output), including those in the Middle East and Africa, in addition to countries such as Afghanistan, Argentina, Australia, Chile, Iran, Mexico, Mongolia, Pakistan, Peru, and those in the Pacific and Atlantic Island (Figure 1). These conditions make these regions prime candidates for the expansion of solar energy projects, offering significant potential for sustainable energy generation and economic development.
Figure 1 – Solar PV Power Potential by Country
Source: The World Bank
Despite its potential, solar technology faces challenges such as intermittency, technical grid complications, weather dependency, and high solar energy waste. Government incentives are crucial for overcoming these obstacles and promoting further technological advancements and investment in solar energy.
The objective of this research is to delve into the solar energy sector as a major green energy source, examining its growth prospects and challenges. This research serves as the third installment in a series focusing on top “green” energy sources and their emerging markets.
Two thoughts to keep in mind as you read this:
- What happens when solar efficiency (conversion of sun into power) goes from 20% to 50% or higher?
- How will solar success impact EVs, the energy industry and geopolitics?
We’re not going to provide the answers today as it would make this research never ending. However, we want everyone to think about the potential paths forward and how this can impact longer term investment and strategy.
Solar Energy: How it Works and Production Technology
Solar energy production is the technology through which solar radiation or sunlight is converted into electrical energy. There are two main types of solar energy technologies: photovoltaics (PV) and concentrating solar-thermal power (CSP). While solar PV uses solar panels, consisting of PV cells that absorb energy from sunlight to create electrical energy, CSP systems utilize mirrors with receivers to reflect and concentrate sunlight, converting solar energy into heat, which can then be stored or used to produce electricity. To date, virtually all solar energy generation comes from PV technologies, while CSP systems account for only 1% of global solar energy generation, and are used mostly in very large power plants.
Solar PV systems are constructed in a modular structure, where small PV cells (each typically producing 1-2 W of power) are connected together in a module or panel (the main component of the PV system). Modules can either be used individually, or several modules can be connected to form an array, which could also exist individually, or several can be connected to the electrical grid. Given the structured nature of PV systems, cells, modules, and arrays can be added to build small- or large-scale PV systems to suit power generation needs.
Module manufacturing mostly relies on crystalline silicon, to produce high-purity and fine-grained polysilicon in the shape of rods or beads. Polysilicon is then heated and turned into mono-crystalline or multicrystalline ingots, which are then sliced into very thin wafers. The wafers are then used to produce PV cells, to be assembled into the module (Figure 2).
Figure 2 – Solar PV Module Manufacturing and Components
Source: U.S. Department of Energy
In addition to modules, solar PV systems consist of other components such as racking, wiring, and mounts to support modules, in addition to power optimizers and inverters to convert direct current electricity – DC (generated by the panels) to alternating current electricity – AC (which can be connected to the grid).
The Two Methods of Solar Deployment: Utility-Scale vs Distributed PV Systems
Solar energy can either be deployed through utility-scale PV projects or distributed PV systems. Utility-scale projects are large-scale power plants, with a capacity exceeding 5 MW, which generate electricity and sell it to wholesale utility markets through connecting to the national transmission grid (Figure 3). Utility-scale solar PV systems represent a centralized approach to solar energy generation, leveraging large-scale infrastructure to supply electricity to regional or national grids.
Figure 3 – Utility-Scale Solar PV System
Source: RENEW Wisconsin
Distributed solar PV systems, on the other hand, are small-scale systems which use most electricity on-site, where it is generated. Those are typically rooftop residential or commercial PV systems, with a capacity of less than 5 MW. They can either operate off-grid (behind-the-meter) or can be connected to the main transmission grid, operating under net metering arrangements or feed-in tariffs with utilities (Figure 4). Distributed solar PV systems promote decentralized energy generation, allowing individual households or businesses to generate their own electricity and potentially sell excess energy back to the grid.
Figure 4 – Distributed Solar PV System
Source: Zunroof
While both systems have advantages and drawbacks, utility-scale PVs benefit from large economies of scale, standardized designs, and optimized operations, reducing the cost of generation per kWh. They are more reliable and effective in accelerating the green energy transition at scale. However, they face higher upfront costs, stricter regulations, and greater negative environmental and social impacts. Distributed PV systems require lower investment costs, reduce the need for grid connections and transmission losses, and empower multiple individual acts at low investment. However, they tend to have higher costs per kWh generation and may need customized designs based on installation site requirements.
The Rapid Growth of Solar Energy Capacity and Generation
Solar PV installed capacity has grown more than 70-fold since 2009, reaching almost 1,200 GW in 2022. Utility-scale PV capacity expanded at a particularly impressive compound annual growth rate (CAGR) of close to 40%, compared to a 24% CAGR for distributed PV. In 2022, around 60% of total solar installed capacity was from utility-scale systems, while 40% was from distributed PV systems (Figure 5). This substantial growth highlights the increasing prominence of solar energy in global energy, with utility-scale projects playing a significant role in this expansion.
Figure 5 – Utility-Scale and Distributed Solar PV Cumulative Capacity, 2009-2022
Source: IEA Renewables 2023
Parallel to the rapid expansion in installed capacity, solar electricity generation reached an all-time high of around 1,300 TWh in 2022, almost 40 times its value in 2010. In 2022, solar PV was the third largest source of renewable energy generation, following hydropower (which remains the world’s largest source of renewable energy at over 4,300 TWh) and wind (onshore and offshore) at around 2,130 TWh (Figure 6). This surge in solar electricity generation highlights its increasing contribution to the global energy mix, positioning it as a key player in the transition to renewable energy
Figure 6 – Solar PV and Wind Energy Generation, 2009-2022
Source: IEA Renewables 2023
While solar PV generation still lags wind (and Hydro), standing at around 15% of total renewable energy generation in 2022 (compared to 25% for wind energy), solar is the fastest growing renewable energy source in terms of capacity and generation. In 2022, the growth rate of solar PV generation was almost double that of wind generation, at 27% and 14%, respectively. Moreover, solar PV capacity additions stood at 540 GW, compared to 167 GW of wind and 24 GW of hydropower capacity additions, making solar the fastest growing renewable energy technology. This shows the significant momentum behind solar energy, with its growth outpacing that of other renewable sources.
At the regional level, China continues to dominate global solar PV capacity and generation. In 2023, China accounted for 43% of global installed solar PV capacity, followed by the U.S. at 10%. Together, the eight countries of Japan, Germany, India, Brazil, Australia, Italy, Spain, and Korea, add a 28% share, for the top-10 countries to account for more than 80% of global capacity (Figure 7).
Figure 7 – Top-20 Countries by Solar PV Capacity, 2023
Source: IRENA’s Statistics Data
Solar PV Technology Innovations and Efficiency Improvements
Rapid technology innovations in the solar industry have contributed to significant efficiency gains in recent years, thanks to manufacturing and design optimizations. Half-cut cells, multi-busbars and high-density cell packings have led to significant optimizations, less material usage, and impressive power and efficiency gains. As the market shifted from multi-crystalline cell modules to more efficient monocrystalline passivated emitter and rear cell (PERC) architectures, average commercial module efficiencies increased almost 2 folds from two decades earlier, reaching 20.5% in 2020 compared to 12% and 14.5% in 2000 and 2010, respectively. In 2020, the typical commercial PV cell consisted of mono-PERC, 166 mm half-cut pseudo-square cells (with less corner losses), placed in a 72-cell module, with power ratings of up to 550 W. This represented impressive efficiency improvements over the 2010 multi-crystalline, 156 mm full-square cells, with lower module power ratings of 250-300 W (Figure 8).
Figure 8 – Changes in Module Technology Overtime
Source: IRENA (2022), Renewable Technology Innovation Indicators Report
Moreover, solar PV capacity factors increased by almost 25% from 13.8% in 2010 to 17.2% in 2021, thanks to greater deployment in sunnier locations and technological improvements that enabled the better harnessing of more solar power for a given solar resource (Figure 9). Improvements include, for example, the rise in the inverter loading ratio, the increasing trend towards the use of trackers, which automatically orient PV panels towards optimal sunlight positions, as well as the adoption of bifacial PV technology, which produces more energy than any mono-facial technology (known as the bifacial gain).
Figure 9 – Global Weighted Average Capacity Factors For Utility-Scale PV Systems, 2010-2022
Source: IRENA (2023), Renewable Power Generation Costs in 2022
Solar PV: The Cheapest Energy Technology
Technological innovations and efficiency improvements in solar PV have led to significant cost competitiveness gains, driving the rapid global success and scale-up of solar energy (Figure 10).
Figure 10 – Major Performance Improvements Led to Significant Cost Reductions
Source: Author’s diagram, based on IRENA (2022, 2023)
The unsubsidized levelized cost of electricity (LCOE) of utility-scale solar PV declined by close to 90% over the last decade, according to a recent analysis by Lazard. In 2021, utility-scale solar PV LCOE stood at $36/MWh, lower than onshore wind ($38/MWh) and all other forms of energy generation, including fossil fuels and nuclear. Despite the recent solar power price increase, amid the supply chain disruptions and increase in commodity and logistics costs, utility-scale solar PV remains the most cost-effective energy source. Unsubsidized LCOE for utility-scale solar PV can reach as low as $24/MWh, competing with onshore wind and surpassing fossil fuels, including natural gas. Moreover, the highest utility-scale solar costs can reach up to $96/MWh, lower than the maximum values of fossil fuel sources (Figure 11)
Figure 11 – Unsubsidized Levelized Cost of Energy by Technology, 2023 Estimates
Source: Lazard’s Levelized Cost of analysis, April 2023
The rapid decline in the LCOE for solar PV has been driven by the decline in total installed costs, increasing capacity factors and falling operations and maintenance costs. The total installed cost of utility-scale solar PV can range from as low as $640/kW in India and nearly $700/kW in China, to as high as $1,905/kW in Japan. Total installed cost components for utility-scale solar PV consist of: (1) module and inverter costs, which together accounted for an average of 37% in 2022 across major markets, and (2) balance of System (BoS) costs, which include non-module and inverter hardware, installation costs, and soft costs (e.g., financing, system design, permitting, etc.). In 2022, BOP costs accounted for an average of 63% of total installed costs (Figure 12).
Figure 12 –Breakdown of Utility-Scale Solar PV Total Installed Costs by Country, 2022
Source: IRENA (2023), Renewable Power Generation Costs in 2022
The reduction in module and inverter costs, in addition to soft and installation costs, have been the main forces behind cost competitiveness gains over the past decade (Figure 13). Between 2010 and 2020, module price reductions were the major force (contributing 46% of LCOE reduction between 2010 and 2020), followed by other soft costs (14%), installation and development costs (12%), inverter costs (9%), racking and mounting costs (7%), capacity factor improvements and cost of capital reductions (each 4%), in addition to operations and maintenance costs (2%).
Figure 13 – Solar PV Levelized Cost of Energy Decline, 2010-2020
Source: IRENA (2022), Renewable Technology Innovation Indicators Report
The rapid reduction in global solar module costs has particularly been impressive, as it dropped by almost 90% from $1.54/W in 2011 to $0.2/W by June 2023 (Figure 14).
Figure 14 – Global Solar Module Prices, 2011-2023
Source: Inside Climate News, based on BloombergNEF
Challenges Facing Solar Energy Generation
Intermittency, Location Dependence & Politics
Among the major challenges facing solar power generation and consumption is intermittency, or varying solar intensities by time, location, and other environmental factors, which makes solar energy more effective in specific regions and seasons and creates reliability challenges when connecting to the electricity grid. By nature, the sun is not visible for 24 hours a day, except for short periods of the year and at extreme latitudes. Moreover, while locations such as those in Southern California, Arizona or New Mexico can receive an average of over 5.75 kWh of solar energy per day, most locations in New England get less than 4 kWh. Moreover, the U.S. receives much more solar energy during the hottest month of July than it does in winter months. This intermittency makes solar investments economically viable in certain locations with more intense and stable sunlight than in others (e.g., Washington, Main, or Minnesota). Moreover, higher panel temperatures and dust decomposition in certain locations could reduce the performance and efficiency of solar panels.
Accordingly, utilities cannot solely rely on solar energy for electricity, as other sources would be needed after sunset or when sunlight is low. Energy storage is one solution to intermittency, although not without its own challenges. Despite the cost competitiveness of solar PV, additional battery costs could make it a less viable energy source compared to other technologies. Despite recent improvements, battery costs are still relatively high ($8,500-$10,000 for home energy in the U.S., excluding installation) and many technological advancements and the right policy directions are needed to make them a more viable addition. Nevertheless, advances such as more efficient lithium-ion batteries, faster-charging solid-state batteries, trackers, and dual-axis panels that use AI tools to orient the panel toward the ideal angle could all provide promising solutions.
One of the biggest challenges is politics. Permitting across state lines has been a serious detriment to moving energy from where it’s created to where it’s needed. Transmission lines are hamstrung by local laws, zoning codes and environmental impact reviews. This seriously impedes rapid growth in the United States. Several attempts have been made in Congress to bring up a permitting bill to overcome these inhibitors (Sen. Manchin’s last bill) but have stalled out as many in Congress fear a backlash from providing a federal capability to overrule state and local authorities. According to Utility Dive, there are 10 permitting reforms before Congress, two major federal regulatory initiatives and a bipartisan House caucus call for action on permitting reform, (but) progress remains delayed. Senate Majority Leader Chuck Schumer has stated that getting a permitting bill done is “virtually impossible.” This translates into the inability to move solar (or wind) from Texas to Illinois. Yet, reforms are being made at the state level with New York creating a single agency to oversee permitting in the state. California is moving forward on similar regulatory changes.
Finally, the trade dispute between China and the US (rest of the world) over cheap, subsidized solar panels is creating the potential for increased costs. On May 14th, President Biden announced major new tariffs on Chinese EVs and green energy including solar panels. AP reports, “Industrialized nations including the United States and its European allies fear a wave of low-priced Chinese exports will overwhelm domestic manufacturing. On the U.S. side, there is particular concern that China’s green energy products will undermine massive climate-friendly investments made through the Democrats’ Inflation Reduction Act that President Joe Biden signed into law in August 2022.”
Low Efficiency, Despite Massive Improvements
While solar power is the most abundant source on earth, today’s solar PV efficiency remains below 20%. The average commercial solar panel can only convert 17-19% of captured sunlight energy into electricity, while the remaining 81% of solar energy is wasted. This, however, represents an impressive improvement over the 12% efficiency a decade earlier. Yet, despite the impressive technological advancements, there are still ample opportunities for improving solar cell efficiency. Further efficiency increases could reduce costs for manufacturers, consumers, and retailers, making the adoption of solar technology more economically viable. Recent technologies, including multi-junction PV cells and bifacial panels, provide promising steps in that direction.
Land Requirements and Environmental Concerns
Large-scale solar power projects require huge areas of land to produce energy, which is at least 10 times the land used to produce the same amount of energy from coal and natural gas plants. Not only does this increase the investment cost for solar projects, but it also raises environmental concerns around habitat loss and the dedication of arable land, which could limit agricultural development. On such a front, technological advancement to improve panel efficiency and power, by using fewer panels would be essential to reduce the area of needed land.
Moreover, while solar power is a leading renewable energy source and contributor to the climate agenda, solar cell manufacturing typically uses toxic chemicals across its value chain, with negative environmental impacts and health hazards. Future manufacturing advancements should limit or restrict the use of these chemicals. However, despite the mentioned environmental impacts, solar power generation remains the safer option compared to fossil fuels.
Rising Cost Challenges and Sensitivity to Supply Chain Disruptions
Solar PV costs can particularly be sensitive to rising commodity prices (used as inputs), shipping costs, and macroeconomic instability (such as increasing interest rates and rising financing costs). Recent supply chain disruptions and the rise in shipping costs amid the COVID-19 pandemic, in addition to commodity price increases from the war in Ukraine, have resulted in temporary price increases for renewables over the last two years, particularly so for solar. According to the IEA, solar PV LCOE has increased by almost 20% between 2020 and 2022-2023, mostly driven by commodity prices and cost of capital increases (as interest rates increased), which exceeded the corresponding gains from technological improvements (Figure 15).
Figure 15 – Main Drivers of Solar PV Cost Increases, Variation in Index (2020=100)
(+ indicates cost increase; – indicates cost reduction)
Source: IEA (June 2023), Renewable Energy Market Update
The average price of polysilicon, an essential material for PV cell production, surged in 2022 to 4 times its 2020 level. Moreover, in 2022, the construction price for both solar PV and onshore wind picked up as the prices of steel (the main construction material) and copper increased between 75-270% and 60-89%, respectively, in China, the U.S., and Europe. Cost pressures are expected to partially reverse in 2024 as prices stabilize and technological improvements continue to produce efficiency gains, however, it will remain above the 2020 pre-pandemic levels.
The Potential of Solar Energy and its Importance to the Green Transition
Solar energy is one of the most, if not the most, promising and economical renewable energy technology for accelerating the green energy transition and reaching net-zero by 2050. It is estimated that additional global solar PV deployment between 2019 and 2023 has resulted in around 1.1 Gt of avoided CO2 emissions, equivalent to Japan’s total annual emissions. China has been the major contributor to emission reductions from solar scale-up, accounting alone for 56% of the reductions, followed by the EU, U.S., and India, which together accounted for a quarter (Figure 16).
Figure 16 – Avoided Emissions from Solar PV Deployment by Country, 2019-2023
Source: IEA (March 2024), Clean Energy Market Monitor
Scenario forecasts for solar PV growth rates vary, projecting rapid acceleration up to 2030. Solar Power Europe projects low, medium, and high scenarios for global PV growth up to 2027. The analysis forecasts cumulative PV capacity to increase 2.6-, 3.0-, and 3.5-fold by 2026, reaching 2,075 GW, 2,532 GW, and 4,096 GW, respectively (from 1,177 GW in 2022) (Figure 17).
Figure 17 – Solar PV Capacity Growth Forecasts: Low, Medium, and High Scenarios
Source: Solar Power Europe
Although they vary slightly, those projections are in line with IEA’s estimates (Figure 18), which forecasts that cumulative PV capacity by 2028 would reach 3842 GW under the Main Case (business as usual) and 4,339 GW under the Accelerated Case (if optimal policies and conditions were to support further deployment as needed), on track to achieve the 2030 needed 6,044 GW of cumulative capacity to reach Zero Emissions by 2050 Scenario. Under all scenarios, utility-scale solar PV is expected to remain at the forefront, with a market share of 56-57%, while distributed PV systems are expected to also play an important role, accounting for the remaining 44% of the PV market.
Figure 18 – Solar PV Capacity Growth Forecasts: Main and Accelerated Scenarios
Source: IEA Renewables 2023
Global Investment Trends in Solar Energy
Global investments in solar PV almost tripled since 2013, hitting a record $298.2 billion in 2022 (Figure 19), surpassing wind as the leading renewable technology, particularly since 2020. Despite increased generation costs amid the pandemic and war in Ukraine, solar PV investments grew by nearly 40% during 2021-2022, compared to stable wind investment growth.
Figure 19 – Global Investments in Solar PV and Wind Energy
Source: IRENA’s Statistics Data
Owing to such growth, solar technologies capture close to 60% of global investment flows into renewables, compared to less than 40% for wind. In the four years leading up to 2022, the share of wind investments slightly dropped as Solar rapidly took over. (Figure 20).
Figure 20 – Global Renewable Energy Investments by Technology, 2022, %
Solar PV Progress and Policy are On Track, Yet more can be Achieved!
Solar PV is the only renewable electricity technology evaluated by the IEA as fully “on track”, upgraded from the previous “more efforts needed” status, thanks to the rapid improvement in generation in recent years. Strong policy support across countries has indeed driven the acceleration in its global deployment. This includes regulatory reforms such as auctions, net-metering, and feed-in tariffs, as well as national-level plans and incentives to set the direction and incentivize capacity growth. In China, for example, the National Renewable Energy Plan envisions 33% of electricity generation from renewables by 2025, including from wind and solar. In India, the country targets 50% renewables share by 2030 and net-zero by 2070. In the EU, a target is set for 45% renewables in the energy mix by 2030, as part of the REPowerEU Plan, which mandates 600 GW of solar PV installed capacity. Finally, in the U.S., the Inflation Reduction Act (IRA) provides support through tax credits and incentives to turbocharge solar and other renewables over the coming decade.
Since passing the IRA, 65 GWh of energy storage manufacturing capacity and 155 GW of new production capacity have been announced across the U.S. solar PV supply chain, including 85 GW of module capacity, 43 GE of PV cells, 20 GW of silicon ingots and wafers, and 7 GW of inverter capacity. Moreover, it is projected that the IRA will result in 48% additional solar deployment in the U.S., compared to a no-IRA scenario. Yet, despite the promising incentives, it is estimated that 250 million Americans are unaware of the $369 billion in federal clean energy benefits and tax credits available through the IRA (Figure 21).
Figure 21 – U.S. Survey on IRA Awareness and Perceived Cost to Switch to Solar
Source: SunPower
Moreover, despite the progress, policies that might restrict investments and curtail the rapid growth of solar energy, including high permitting costs and lengthy approval timelines still exist. In addition, providing incentives to reduce common solar generation challenges is important. Global subsidies and low-interest-rate financing should be made available to promote solar investments further and reduce its sensitivity to macroeconomic instabilities. In addition, priorities should be given to infrastructure developments, including grid developments, particularly in developing countries that lack the necessary funds to do so on their own, but for which rapid economic growth without the necessary transition could imply additional emissions if not avoided through rapid renewables deployment. Incentivizing and providing low-cost funds for research and development to drive technological advancements in areas such as low-cost energy storage and more efficient and effective PVs is also critical.
Finally…
Thanks to the rapid technological advances, efficiency gains, policy-supported deployment efforts, and multiple cost savings, solar energy capacity and generation have substantially grown over the past decades. Solar PV is the fastest growing renewable energy source and the only one evaluated by the IEA to be on track, positioning it as the most promising technology to accelerate the green transition towards a net-zero scenario by 2050.
Moreover, Solar PV is the most attractive renewable energy industry for investors, attracting the lion’s share of annual clean energy investment flows, even surpassing that of wind. Nevertheless, despite the impressive progress, policy support, and rapid growth, challenges still do exist. Adequate regulations, policies, and incentives should be put in place to further support investments into solar energy and promote research and development and technological advancements to further increase efficiency, make storage more affordable, and address the issues related to intermittency and land use.
Although national policies and legislations such as the U.S. IRA have achieved further accelerated progress, more awareness towards how such policies can help reduce the costs of distributed and utility-scale PV projects is needed. Finally, internationally coordinated efforts to set adequate policies to build strong supply chains outside of China and make them more resilient to macroeconomic and commodity shocks are essential for solar PV to remain on track.
