Energy Industry Entrepreneurs

Economics of Solar Power

Written by Gautam Patil for Gaebler Ventures

The feasibility of large scale use of solar power is governed by a multitude of factors. A multitude of promising photovoltaic technologies being developed and the jury is still out on which one of these will dominate. Sound policy making could fuel demand and encourage research while distorting fuel subsidies and price insulation could mean solar power will remain financially unviable.

Although solar energy can be used for varied applications like water heating and space heating, the discussion will be restricted to the economics of electricity generation through solar energy.

Both thermal and photovoltaic principles are being tested extensively to generate electricity with maximal efficiency and minimal capital investment for a given capacity.

Generation of power through thermal principles is a fairly old technique. Initial efforts were directed at concentrating solar energy through a set of mirrors to generate steam which in turn produced mechanical motion.

Certain companies have been able to build stand alone arrays fitted with a Stirling Engine (a special regenerative engine noted for its higher efficiency) and produces 25KW peak power but these are still not suited for domestic or small scale usage.

For large scale projects, the capital cost involved is the biggest concern. While gas or coal fired plants typically cost about $3-$5 million per MW of installed capacity, solar power projects of similar scale could cost twice that. The savings however come from zero (neglecting maintenance and repairs) running costs in terms of fuel to run the solar power plant. Thus, increasing fossil fuel prices or suitable policy decisions may make these projects lucrative for utility companies.

Photovoltaic panels are also being extensively used to produce electricity, though this usage is mostly domestic or off-grid. Photovoltaic panels mainly constitute specially fabricated silicon or other semiconductor crystals and are usually the most important and expensive component.

The cost of this panel, measured in $/Watt Peak, determines its financial viability. In addition, geography (higher incidence of solar radiation means peak performance lasts for longer duration) and region specific factors are also important.

The simplest measure of financial viability of solar panels is the payback period - the period over which the installation will pay for itself given the currently applicable electricity tariffs.

To calculate the payback period, we estimate the amount of electricity generated by the installation over a period of time, say a year. Assuming a standard 160Wp panel (Wp refers to the peak wattage, or the maximum power that the panel can generate under peak solar conditions) and about 5.5 hours of peak solar radiation per day, the amount of electricity generated per day is about (160 * 5.5 =) 0.88KWhr (KWhr is the unit used by utility companies to measure electricity consumption). Further, assuming that there are about 300 clear days every year, this equals about (300 * 0.88 =) 264 KWhr of electricity.

Assuming electricity tariff rates of $.05 per unit (KWhr) this translates into savings of (.05 * 264 =) $13 per year. With the retail cost of the panel at around $260, it can be simplistically stated that the payback period of the panel is (260/13 =) 20 years.

As can be seen, 20 years is not a very attractive payback period but what is more important is an understanding of the factors that influence this figure - capital cost, electricity tariffs, local geographic conditions etc.

Capital cost is mostly dictated by the technology used to manufacture these panels. Various technologies are currently being used with the poly crystalline silicon being the oldest and most widely used.

Rapid advancements have also been made in 'thin film technologies' which, although are less efficient, use only 5-10% of the silicon raw material and could thus halve the cost of the panels. To avoid supply constraints of silicon, other non-silicon alloys have also been successfully tested but their efficiency and long term performance are still a matter of concern.

In terms of policy making, certain government initiatives like net metering, tax credits and other industry sops have seen successful wide spread use of solar energy. Net metering allows individuals to sell surplus electricity produced during the day to utility companies at pre-determined tariffs and tax credits up to a certain amount can be obtained against capital investments on solar installations.

Gautam Patil is a recent MBA graduate from the Indian Institute of Management, Bangalore. In addition to serving as a contributing writer for, he will join the consulting firm Oliver Wyman at their London office.

Share this article

Additional Resources for Entrepreneurs

Lists of Venture Capital and Private Equity Firms

Franchise Opportunities


Business Glossary


Conversation Board

Do you have something to say about the economics of solar power? We welcome all questions, comments and suggestions.

Leave a Reply

Questions, Comments, Tips, and Advice

Email will not be posted or shared
Code Image - Please contact webmaster if you have problems seeing this image code

Problem Viewing Image? Load New Code