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What Are Soft Costs? The Frontier of Solar Cost Reductions

Posted by Gwen Brown on Nov 6, 2019 8:56:55 PM

If you work in the solar industry, chances are good that you’ve heard the term soft costs. But what does it mean and why should you care? Soft costs are a critical topic for the solar industry (and solar customers) because they are one of the barriers to making solar more affordable—and thus more accessible. In this article, we look at what soft costs are and what’s being done to address them.

What Are Soft Costs in the Solar Industry?

Soft costs are simply the “non-hardware costs associated with going solar” as the U.S. Department of Energy’s Office of Energy Efficiency & Renewable Energy explains. That includes the costs to acquire customers—from marketing and sales costs to assessing if a customer is a good candidate for solar based on their roof type and how much sunlight their property receives. It also includes the costs associated with permitting, interconnection to the grid, installation labor, and other assorted costs like supply chain and transaction costs.

Soft costs are the non-hardware costs of solar. This chart shows what they are comprised of. Soft costs, the non-hardware costs, of solar are made up of many components. Source: U.S. Department of Energy.

Why Are Soft Costs So Important for the Solar Industry to Address?

Soft costs are vitally important to address because they represent one of the greatest opportunities to reduce the cost of solar PV. That’s because soft costs have remained stubbornly high—despite the fact that the cost of solar hardware, like panels, has fallen dramatically. (The cost of solar modules fell by 99% from 1980 to 2018!) Soft costs now comprise more than half of the cost of a solar PV system in the U.S.

As of Q1 2019, soft costs comprised 67% of the cost of a residential PV system according to the Solar Market Insight Report by the Solar Energy Industries Association (SEIA) and Wood Mackenzie Power & Renewables. SEIA calls soft costs the “biggest cost-decline opportunity in residential and small commercial solar.”

By lowering the cost of solar, soft cost reductions are a key step to getting more solar on the grid—thereby helping the solar industry to keep growing and mitigate climate change.

Soft costs now make up 67% percent of the cost of solar in the U.S.Although the total cost of residential PV in the U.S. has declined over time, the proportion of soft costs—like supply chain and overhead, labor, design, permitting and engineering—has grown (see gray line). Source: SEIA and Wood Mackenzie Power & Renewables.

What Are the Opportunities If We Reduce Solar Soft Costs?

We’ve established that soft costs are high in the U.S. and represent the majority of the cost of a solar PV system—but that’s not the case everywhere. In fact, we see dramatic differences in soft costs in different countries. A 2018 report by Lawrence Berkeley National Laboratory (LBNL) report finds that solar installation soft costs "tend to be considerably higher in the U.S.”

Although hardware costs are relatively similar across countries, “the U.S. installed price was twice that of Germany's $1.50/W and significantly higher than Australia's $1.80/W, although both countries are comparable to the U.S. in other factors, like labor and safety standards,” explains Utility Dive, citing LBNL. Bringing down U.S. soft costs would help bring the cost of solar here in line with much the lower prices we see in these more mature solar markets.

A study by the Rocky Mountain Institute and the Georgia Tech Research Institute identified lessons from the Australian solar market for improving installation efficiency which could make solar installations faster in the U.S.—allowing installers to serve more customers and significantly reduce costs.

As the cost of solar falls, more solar is installed. As the cost of solar comes down, installations and the proportion of energy generated from solar go up. These projections from the U.S. Department of Energy’s (DOE) Sunshot initiative, while focused on the total cost of energy, illustrate the importance of reducing solar costs. Driving down soft costs, which comprise over half of the total cost of solar in the U.S., will be key. Source: DOE Sunshot Initiative.

What’s Being Done to Lower Solar Soft Costs?

The importance of soft cost reductions to the growth of solar in the U.S. has not gone unnoticed. Solar industry groups and companies and the U.S. government have taken steps to bring these costs down by addressing a number of different factors. Approaches to lower soft costs range widely—from efforts to reduce customer acquisition costs to programs to streamline codes and permitting.

The DOE SunShot Initiative

One of the major efforts to reduce the cost of solar is the Department of Energy’s Sunshot Initiative. Launched in 2011, the program aimed to “reduce the total cost of solar energy by 75 percent,” setting ambitious targets for the Levelized Cost of Energy (LCOE) in residential, commercial, and utility-scale sectors. (In 2016 the program was 70% of the way to its 2020 targets, and in 2017, Sunshot announced that its 2020 utility-scale cost target was reached three years ahead of schedule.) While the initiative focuses on solar costs overall, supporting efforts to tackle soft costs has been one of the key ways that SunShot supports solar energy cost reductions.

Aurora Solar is a two-time Sunshot grant recipient for our efforts to make solar design and customer acquisition more efficient. One way that soft costs can be reduced is by eliminating some of the time-consuming manual labor involved in designing a solar installation for a customer and in assessing whether a prospect is a good fit for solar based on solar access/irradiance.

Sign up for a demo to see how Aurora can help cut your soft costs!

Aurora pioneered the ability of solar contractors to use software to remotely design an accurate PV system, using satellite imagery and other data like LIDAR and other 3D data, rather than driving out to the customer’s property to take measurements. The U.S. National Renewable Energy Laboratory (NREL) found that remote system design can reduce the cost of a solar installation by as much as $0.17/W—or $850 for a 5kW system!

Since the completion of our two Sunshot grants—one 2014 for R&D to automate the process of designing an optimal PV system and another in 2015 to pioneer the use of computer vision to improve remote site assessment speed and accuracy—we’ve continued our efforts to make solar contractors’ work easier and more efficient.

See how Aurora helps solar companies grow revenue, cut costs, and impress their  customers!

Solar APP: Streamlining Solar Permitting

Another important effort to reduce U.S. solar soft costs is the SolarAPP initiative, or Solar Automated Permit Processing program. Initiated by SEIA and The Solar Foundation in 2018, SolarAPP seeks to expedite and lower the cost of solar permitting.

Permitting is a key barrier to lower soft costs because the permit requirements for solar installations vary widely across jurisdictions. According to GTM, permitting adds about three months to a typical residential solar system installation and was responsible for about $1.00 of the 2017 median residential system cost of $3.70 per watt.

SolSmart

A related initiative by The Solar Foundation, the SolSmart Initiative, helps local governments reduce red tape and make their communities more supportive for the growth of solar energy. Over 300 communities have worked with the program to earn a SolSmart designation, indicating that they are solar-friendly communities.

California’s Solar Mandate: An Opportunity for Lower Soft Costs?

Another forthcoming policy, California’s Title 24 mandate which requires solar installations on all new homes starting in 2020, may also offer soft cost benefits. Citing NREL research, Utility Dive reports that the cost per watt of solar on new construction is likely to be considerably lower than traditional retrofit solar installations. Reduced customer acquisition costs, shared installation costs, and economies of scale are expected to drive these cost savings.

(Learn more about Title 24 here—and in our recent webinar with Solar Power World!)


Soft costs have stagnated for quite some time, keeping the cost of solar higher than it could be. However, there are many promising developments in the works, including our own initiatives here at Aurora, that are helping to reduce solar soft costs. With continued innovation and collaboration to tackle this issue, the future looks bright for affordable solar energy.

 

Topics: soft costs, solar industry

SolarAPP: The Solar Permitting Solution You’ve Been Waiting For?

Posted by Sara Carbone on Oct 30, 2018 6:20:47 PM

As a solar contractor in the U.S., you probably have to contend with the complicated and costly permitting process. You may view it as a frustrating but necessary obstacle to getting a job completed. But a new initiative was announced last month that may help remedy the situation.

Solar Energy Industries Association (SEIA) and The Solar Foundation unveiled the Solar Automated Permit Processing (SolarAPP) initiative which seeks to expedite and lower the cost of solar permitting. SolarAPP would streamline the process by offering online tools to implement a rules-based, automated permitting and inspection process. It would also allow for instantaneous permitting for eligible installers on non-complex solar projects on the local level.

In this article, we explore some of the problems caused by the current permitting process and discuss the SolarAPP initiative and what it may mean for the U.S. solar industry.

The Problem of the Permit

Many solar contractors point to the permitting process as a problematic aspect of doing business. It tends to be expensive, time-consuming, and occasionally costs them clients. Some of the major issues are significant inconsistency in permitting processes between jurisdictions and long turnaround times.

“How does your service administrator plan a job when the permitting process is so variable?” asks Reeves Clippard, CEO of A&R Solar. “Managing the paperwork and requirements and doing it in a timely manner is a real challenge. So many exceptions and variations makes streamlining this hard."

Permitting challenges are more than just a logistical headache for solar companies and clients–they result in real costs that impact the growth of the solar industry. According to GTM, permitting adds about three months to a typical residential solar system installation. It also adds approximately $7,000 in direct and indirect costs, about $1.00 of the 2017 median residential system cost of $3.70 per watt.

Permitting is one source of added solar costs–another is ineffiecient design  processes. See how Aurora can help you costs with accurate remote solar design  in a live demo.

According to Sungevity co-founder Andrew Birch, simplified, automated solar permitting processes in major overseas markets like Australia have translated to significantly lower price per watt, rapid industry expansion, and minimal cancellation rates.

Permitting has long been recognized as a pain point in the solar industry. There have been a variety of state and regional efforts over the past 15 years to streamline permitting, with varying degrees of success. States such as California and Massachusetts have tried to simplify and expedite the process, as have certain regions like Long Island and the Northwest. To date, however, there has not been a broad, coordinated effort to solve the issue.

“How does your service administrator plan a job when the permitting process is so variable? Managing the paperwork and requirements and doing it in a timely manner is a real challenge." – Reeves Clippard, CEO of A&R Solar

SolarAPP: A Potential Game Changer?

This new initiative represents the most comprehensive attempt at solar permitting reform. SolarAPP would allow residential contractors, small commercial contractors, and battery storage installers to become accredited via a central online registration portal. It would remove the need to appeal to local authorities for permission to install a system. The main components of the plan are:

  • Replacing the current multi-step process with a skills training and certification program that would ensure contractors are compliant with applicable codes, laws, and practices;
  • A free, standardized online platform for local governments to “register” and automatically screen qualifying systems;
  • A list of equipment standards and certified equipment;
  • Codified system design standards for qualifying solar projects;
  • A model instantaneous permitting regime for systems installed by certified contractors;
  • A program administrator who oversees and implements the plan and provides technical assistance to state and local jurisdictions and utilities.

The initiative may mimic other countries and utilize quality control measures like spot checks–with the threat of loss of accreditation for noncompliance–to ensure solar systems are being installed to code.

The creators of SolarAPP are looking to relieve the burden of permitting for both customers and solar contracting businesses by removing unnecessary red tape, standardizing the steps, and lowering overall costs. “The goal is to make solar permitting more straightforward, and more routine, while at the same time maintaining the safety and reliability that U.S. solar projects are known for,” says SEIA President and CEO Abigail Ross Hopper.

The Solar Foundation asserts that SolarAPP will help make solar available to a wider range of income levels, cultivate a high level of excellence among solar companies, and help energize the industry across the value chain.

The next steps to make SolarAPP a reality include policy discussions on multiple levels of government, which SEIA will spearhead. The Solar Foundation will lead efforts to create the accreditation process with certified products and the online registration system. One of the remaining challenges to be addressed is to communicate how a centrally managed system addresses present concerns about safety and quality. Birch argues that a centralized process can actually offer greater safety, compared to a “completely disparate group of building offices… trying to individually manage the safety of solar and distributed energy.”

If successful, SolarAPP could be the much-needed change the industry has been waiting for. It could mean an easier, more cost-effective approval process for customers and contractors alike that helps usher in considerable industry growth. Billy Parish, CEO of Mosaic, states that the creation of an automated solar permitting process that reduces soft-costs "is the next frontier in affordability, critical in moving us toward clean energy for all."

  

Topics: soft costs, Solar Permitting

The Basic Principles that Guide PV System Costs

Posted by Christian Brown on Oct 7, 2016 8:00:00 AM

Costs Associated with a PV System

In order to determine financial returns, it is important to have a solid understanding of the basic economics that dictate PV system costs. There are two general categories of PV systems costs: capital costs and operation and management (O&M) costs.

Capital Costs

Capital costs refer to the fixed, one-time costs of designing and installing the system. Capital costs are categorized into hard costs and soft costs.

Hard costs are the costs of the equipment, including modules, inverters, and BOS components, as well as installation-related labor.

Soft costs include intangible costs such as permitting, taxes, customer acquisition costs, etc.

Cost breakdown of PV systems Figure 1. Cost breakdown of PV systems. Source: B. Fiedman, et al, "Benchmarking Non-hardware BoS Costs for US PV Systems, Using a Bottoms-Up Approach and Installer Survey," National Renewable Energy Laboratory, Second Edition, December 2013.

Figure 1 illustrates the relationship between soft and hard costs, and breaks down hard costs into its components. According to SEIA, while hard costs have come down dramatically over the last decade, soft costs have remained largely constant.

Operation and Management Costs

O&M costs refer to costs that are associated with running and maintaining the system. These can include fuel, repairs, and operation personnel. PV systems generally have low O&M costs.

Incentives and Policies that Benefit Solar Energy

The high capital costs are one of the biggest factors that discourage people from going solar. To combat this, there are a number of incentives and policies in place to make PV systems financially competitive.

Cost-Based Incentives

Cost based incentives, such as the Solar Investment Tax Credit (ITC), allow those who invest in a solar system to apply a tax credit towards their income tax. The incentive is determined by the cost of the system, and is independent of its performance.

Performance-Based Incentives

Performance based incentives (PBIs) encourage PV system owners to install and maintain efficient systems through payments that are based on the monthly energy production of the system.

Net Energy Metering

In addition to incentives, many states, such as California, implement a net energy metering (NEM) policy that allows consumers who generate excess electricity to be reimbursed at the then-prevailing rate of electricity. For instance, if a residential PV system produces an excess of 100 kWh over the course of the month, the owner will be reimbursed for 100 kWh at the market rate of electricity for that time period. The owner is then free to use that reimbursement credit towards electricity they consume from the grid when solar is not meeting their current energy load. Therefore, households with solar PV and NEM are able to significantly reduce their electricity bill.

Home load profile and PV production over 24 hours Figure 2. Visualized relationship between PV energy production and household electricity use for an average home in New South Wales, Australia. Source: solarchoice.net.au

Figure 2 shows the relationship between PV electricity production and electricity consumption during the day. Note that while the PV system can generate more than enough electricity during the daytime, it can fail to deliver electricity during peak consumption hours.

Basic Financial Calculation for a Residential PV System

In return for a large upfront investment in a solar installation, homeowners that go solar benefit from a reduced monthly electricity bill. Thus, for NEM regimes the benefit of solar comes in the form of avoided costs.

For instance, assume that upon installing a rooftop PV system, a home electricity bill is reduced by $1,500 per year and the cost of the hypothetical PV system is $10,000 after incentives. In order to calculate the simple payback period, which is the approximate time for a PV system to pay for itself, we divide the cost of the PV system by the savings.

$$ \text{Simple Payback Period} = \frac{\text{System Cost}}{\text{Annual Savings}} = \frac{$10,000}{$1,500\mathrm{/year}} = 6.7\mathrm{years} $$

Thus, the payback period for a system that costs $10,000 and reduces the electricity bill by $1,500 per year is 6.7 years.

However, a PV system can last much longer than the duration of its payback period. A typical rooftop PV system has a lifetime of about 25 years. This means that for the last 18 years of its life, after it has paid itself off, the hypothetical PV system described above will generate revenue in the form of additional savings. To calculate this revenue, we multiply the annual savings by the remaining lifetime of the system, after it has paid itself off.

$$ \text{Net Revenue} = \text{Annual Savings} \times \text{Years left in lifetime after system is paid of} $$ $$ \text{Net Revenue} = $1,500\mathrm{/year} \times 18.3\mathrm{year} = $27,450 $$

Based on this simple analysis, the system will generate approximately $27,450 in savings over its lifetime. It is important to note that this is an approximation, and does not take into account factors such as maintenance costs, changes in electricity price and usage, as well as system degradation over time.

The figure below shows another financial analysis for a hypothetical residential PV system. In both graphs, the y-axis is the dollar amount and the x-axis is the year.

Aurora's basic financial analysis for a hypothetical residential PV system Figure 3. The cumulative (top) and annual (bottom) cash flows of a hypothetical PV system. Source: Aurora Solar

The top graph, which shows the cumulative cash flow of the project over time, and indicates that the project has a payback period of approximately four years. Additionally, the dollar amount in the 25th year, which is about $25,000, is the cumulative net revenue that the system generated. The bottom graph is the annual cash flow of the project. The first year is characterized by a large negative cash flow, due to the large upfront cost required to install the system, but after that there is positive annual cash flow with the exception to this is in the 14th year, which is when the inverters are being replaced.

About Solar PV Education 101

The Basic Principles that Guide PV System Costs is part of Solar PV Education 101, a six-article series that serves as an introductory primer on the fundamentals of solar PV for beginners.

Article 1: The Beginner's Guide to Solar Energy
Article 2: How a Photovoltaic System Produces Electricity
Article 3: Reading Your Electricity Bill: A Beginner’s Guide
Article 4: How to Size a PV System from an Electricity Bill
Article 5: Shade Losses for PV Systems, and Techniques to Mitigate Them
Article 6: The Basic Principles that Guide PV System Costs

Topics: Solar PV Education 101, PV System Costs, O&M costs, cost based incentives, net energy metering, Capital Costs, Hard costs, soft costs, performance based incentives, simple payback period, Solar Primer

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