By converting abundant sunlight directly into electricity without any fuels, photovoltaic modules (PV) are an ideal technology to reduce green house gas emissions. No wonder it has caught the attention of many governments that have made tackling climate change their declared priority. In fact, many publications such as the Energy Trust  list carbon emission reductions as the benefit first mentioned! Not suprisingly, a 2009 McKinsey report  has identified an annual carbon abatement potential for PV solar of 1Gt of CO2 equivalent by 2030 in its medium ‘B’ – scenario. That’s a major challenge. If all panels were to be installed in a not so sunny location (e.g. Germany), and assuming an area of 8m2 per installed kW (kiloWatt), 10,000km2 would have to be covered by solar panels – the size of Jamaica. Only half the panels would be needed if installed in Australia. At this scale, it is crucial where in the world panels are installed.
To date, PV is one of the most expensive ways of reducing carbon emissions. To help this technology to market, and thus drive down costs, several countries subsidise solar electricty, most commonly by guaranteeing a minimum price for a fixed term (feed-in tariff). Yet, those subsidies are also limiting the impact photovoltaics could make in the fight against climate change, because
- Subsidies set at a national level, seemingly un-coordinated, distort the market by attracting investment in locations with relatively high carbon abatement costs.
- Subsidies announced by governments that can only present a weak climate change story for PV in their country or have no own solar industry will very likely be cut more sharply and sooner than expected. These policy risks increase volatility and utlimately deter investors that are badly needed.
What makes a site "carbon emission reduction – effective" for photovoltaics? How do feed-in tariffs distort the market? What is the rationale for setting a particular feed-in tariff? What makes subsidies credible and whose government’s argument in support of photovoltaics is under pressure? Read on.
The Country’s View
The marginal carbon abatement cost through use of photovoltaics can be calculated from@
- lcoepv, lcoereplaced: Levelized cost of energy using photovoltaics versus levelized cost of energy using the technology of the marginal unit that has been replaced by the pv module [€/kWh]
- ηpv, ηavoided,: Green house gas emissions from pv module (mostly from manufacturing) versus avoided emissions from the marginal unit that would otherwise have generated the electricity [t CO2e /kWh]
The levelized cost of energy is the price [€/kWh] for generated electricity that makes the net present value of the installation zero. Without subsidies it is:
For calculations we have made the following assumptions:
- Capital expenditure including equipment and installation of 4,000 €/kWp (kilo Watt peak). This could be higher or lower depending on the type of panel, size of order or location. For the purpose of this article, the precise figure is not important.
- Operational expenditure is held constant at 0.5% of capex per annum.
- A discount rate of 6%. This rate reflects the low technology risk of solar and low annual fluctuation patterns. As the carbon abatement cost is a societal cost, this discount rate is applied universally, rather than aligning it with long-term interest rates. In any case, it would not alter the qualitative result of the calculations.
- The full lifecycle emissions of a crystalline solar module of 1.4t/kWp installed, which equates to 58g/kWh in the UK .
- The levelized cost of energy for the replaced technology is 0.1 €/kWh. Estimates for levelized cost of energy for coal fired or natural gas power stations hover from 0.05 -0.12€/kWh.We have deliberatly chosen a conservative amount in order not to overstate differences between locations.
- A lifetime of the module of 25 years.
- For the energy yield in different countries, we picked a favourable location in the country (though not the absolute peak), assuming optimal surface orientation and a performance ratio of 75%. Values obtained from Photovoltaic Geographical Information System. We also assumed an annual degradation of 0.05% in line with typical manufacturers’ performance warranties.
- Avoided emissions factors obtained from the EIA database .
Avoided Emissions Factor [t/MWh]
Energy Yield [kWh/kWp]
Feed-in tariff [€/kWh]
Electricity Price for industry [€/kWh]
10 year interest rate
Installed PV capacity [MW]
Apart from the obvious technology-specific parameters, there are two major determinants of carbon abatement costs: Energy yield (driven by solar irradiance) and the avoided emissions factor. Locations where there is little sunshine and the replaced energy is cleaner, abatement costs are high. For instance, abatement costs in UK are 40% higher than in Germany, mainly because of differences in the avoided emissions factors. The lowest abatement costs can be found in Australia with both lots of sunshine and mostly coal fired power stations that are being replaced.
In the above diagram, PV modules in the top right corner are most cost effective in reducing green house gas emissions. Locations towards the bottom left corner offer less cost-effective carbon reduction.
levelized cost of energy from PV [€/kWh]
Carbon abatement cost [€/ton CO2e]
Levelized cost of energy from PV, adjusted for feed-in tariff [€/kWh]
Carbon abatement cost for PV- investor [€/ton CO2e]
The carbon abatement cost values calculated with the simple assumptions above are comparable to McKinsey report on carbon abatement in Germany (footnote 27).
The Investor’s View
If emissions trading was the only policy tool around and if the carbon price was sufficiently high, pv modules would be installed according to the above diagram, that is starting at low carbon cost locations first. With today’s carbon price of less than 20 €/t, photovoltaics would never be built on a large scale. Luckily, some governments offer subsidies, in the form of feed-in tariffs (FiT), offering a fixed price for each kWh generated. This way the levelized cost of energy for the investor is reduced and the carbon abatement cost becomes negative, for instance (-50) €/ton in Germany. That negative figure is only a virtual figure, because it doesn’t drive investors. Instead, investors look for returns.
We have calculated the internal rate of return on a roof-top mounted pv module using the same assumptions as above. Furthermore, we are assuming that all electricity generated is sold. Eventual savings from own use have not been taken into account. The placement of countries in this diagram is only for rough orientation.
For all its simplicity, the diagram highlights vast differences in potential returns. In reality, profits tend to be split between investors and manufacturers such that investors get an attractive but not fancy return. More importantly, feed-in tariffs make some countries financially more attractive than their carbon abatement costs would suggest, resulting in a less cost-effective use of financial resources.
The Government’s View
For a government with climate change as a priority, the measure to watch out for is: How much money is spent by the government (in subsidies) for a reduction of one ton of green house gasses.
which is the net present value of the subsidies over the contracted period (which in most cases is shorter than the 25 years assumed lifetime of a panel) divided by the net emissions.
The diagram below shows where different countries are on the abatement cost versus government spend – matrix:
Countries that either don’t subsidise pv (Sweden) or don’t subsidise pv enough (Hungary, Estonia) will only ever attract marginal investment in solar, regardless of their abatement costs. Thus, they are excluded from the following discussion.
For all other countries that provide sufficient support for photovoltaics to be investable, a pattern emerges: There is a strong correlation between size of the government subsidy and the carbon abatement cost. Of the surveyed countries, Switzerland has the highest carbon abatement cost (using pv), mainly because of low avoided emissions factor in that country. Switzerland spends almost 4 times as much on 1t CO2 reduction (using solar PV) as Australia, the UK more than twice, but Germany just 10% more. The climate change argument in favour of supporting photovoltaics in the UK is therefore much weaker than in Germany or Australia.
While all subsidies for photovoltaics carry inherent policy risk, it is much lower in countries where
- the climate change argument in favour of supporting photovoltaics is strong. A government that wants to be seen as effectively working against climate change ought to provide evidence that it spends its money wisely.
- an established home-grown solar industry of size exists. Hence, subsidies flow back into the country’s own economy.
- risk of government default is low.
Note that it is expected that all pv subsidies will decrease over time, in line with cost reduction and market expansion, and many countries have already built this degression into their laws. This is not a risk. The risk is that a government will overturn existing legislation and reduce or abandon support much earlier.
|Switzerland||Very costly to reduce emissions in Switzerland, mostly because its energy mix is already much cleaner than most. Apart from hydro, which is widely used already, Switzerland does not have access to many other sources of renewable energy such as wind or marine energy. Moreover, Switzerland has a significant number of companies in the solar industry that a government might consider worth helping such as Oerlikon, Swiss Wafers, SolarMax, SolarSwiss.||Low|
|Austria||Government subsidy is contained by short contract period for feed-in tariff, thus government spend per emission reduction is relatively low. Also||Medium|
|UK||Climate change argument for pv is weak (see above). As to solar industry, there is some silicon production (PV Crystalox Solar, Nitol-Polysilicon), but no wafer production.||High|
|Luxemburg||Similar to the UK – weak climate change argument, no solar industry.||High|
|Czech Republic||Climate change cost (for pv) below the trend line. However, the absence of many manufacturing facilities may make it too expensive.||Medium|
|Germany||Relatively low subsidies resulting in a credible climate change argument. In addition, large home-grown solar industry (25,500t silicon, 3GW wafers). More than 1/3 of the world’s PV installation is in Germany. In a recent law, tariffs were prematurely reduced, though not as much as the government originally intended due to pressure from regions with large amount of solar companies, especially Bavaria.||Low|
|Ontario||High subidies for photovoltaics in a country generally not known for its sunshine. However, there are some significant solar companies: Arise, 5NPlus, Timminco and Canadian Solar. Ontario is the only state in Canada with such enthusiasm for solar.||Low|
|Slovenia||Better than average location for photovoltaics in terms of carbon emission reduction. But no home-grown solar industry.||Medium|
|Italy||Despite high levels of sunshine, Italy’s subsidy for photovoltaic is relatively high in relation to reducing green house gas emissions. In addition, Italy has some solar companies (e.g. MEMC, Solsonica).||Medium|
Portugal, Cyprus, Greece, Spain
|Thanks to a lot of sunshine, Portugal, Cyprus, Greece and Spain are cost-effective places to employ photovoltaics for emission reduction. Both Spain and Greece have manufacturing capabilities (Siliken, Solar Cells Hellas). However, the real concern here is government default.||High|
|Australia||Excellent climate change story for photovoltaics – Australia is running on coal while basking in hot sunshine! Whilst only a few 100MW installed so far, there are already solar manufacturers (e.g. Prime Solar)||Low|
 McKinsey: Pathways to a low carbon economy, Version 2 of the Global Greenhouse Gas Abatement Cost Curve, 2009
 UK Department on Energy and Climate Change: "The Department of Energy and Climate Change is working internationally to tackle the global challenge of climate change"