It is not news that solar prices are dropping fast, but its high price variability means that not everyone can get a good enough deal to make a rooftop system economic. In 2013, the cheapest 20% of solar systems sold at less than $3.90 per watt and another 20% went for more than $5.60 per watt.

Understanding the factors behind price variability can help installers and distributed energy vendors entering new markets. And as more utilities consider entering the solar space or announce aggressive community solar plans, understanding the price gap in solar modules will be crucial in getting the best deal.

Researchers at the Lawrence Berkeley National Labs (LBNL) studied nearly 100,000 photovoltaic (PV) systems under 10 kW installed between 2010 and 2012 and found some answers – though more eluded them.

“There are a variety of PV system characteristics that matter,” said Ryan Wiser, Senior Researcher at LBNL and co-author of the report "Deconstructing Solar Photovoltaic Pricing; The Role of Market Structure, Technology, and Policy." 

“Large systems are lower cost. Systems installed in residential new construction, relative to retrofits, are also lower cost,” he said.

Adding tracking systems, using thin-film panels, building integrated panels, or incorporating batteries can also make systems more expensive, the LBNL team found.

That's to be expected, Wiser said, and those factors have been studied before. Where the LBNL work "goes off the mainstream" is in its focus on other characteristics, especially government policies and markets. 

Market factors

In the nation's most mature solar market, prices tend to be more uniform across county lines, whereas they spike in other states. Most California prices are between $5 and $7 per watt. 

The more installers in a market, Wiser explained, the more competition there is and the easier it is for would-be buyers to take advantage of the competition to find better prices.

“The larger the amount of competition,” Wiser said, “the lower the system price.”

Economies of scale and more experienced installers produced by such competitive markets also drive prices down, the research shows.

“Local installers have probably figured out how to navigate the local permitting process or how to create efficiencies like installing multiple systems in the same neighborhood,” Wiser explained.

Predictably, where there is a higher “consumer value of solar,” the study reports prices go up. That value can be created by government incentives, prospect of lower utility bills, or simply the desire to live sustainably or achieve a degree of independence from the grid.

Installers may exercise “value based pricing," meaning they raise prices to correspond with consumers' assumptions of the value of solar. The price increase could simply be the result of increased demand or evidence of imperfect competition, Wiser said.

The report also shows how demographic factors such as greater regional household density and household income increase prices and higher levels of education decrease prices. Higher labor wages and other local costs in urban areas tend to drive prices higher.

But the report’s most “sobering” revelation, Wiser said, might have been that after identifying and accounting for a list of major variables, “we were only able to identify a subset, and a pretty small subset, of all the price drivers.”

There were likely very installation specific and therefore unobservable factors, Wiser explained, like the suitability of the roof or the willingness of the customer to search for a lower price.

Policy factors

A better understanding of price “heterogeneity” can serve policymakers in their quest to make solar more affordable, the paper asserts. Where the findings reveal market failures produced by poorly constructed policy, policymakers can intervene.

The report shows that PV system deployment, whether publicly or privately funded, is likely to reduce costs by lowering barriers for customers. Policies that grow markets will, for instance, produce more installers and more experienced installers and, therefore, drive prices down.

In states like Arizona and Texas, research shows local incentive variations can create significant consumer value differentials that drive price differentials.

“The work also provides caution about throwing money at the problem,” Wiser said. “We find some evidence of value based pricing if incentives are overly rich.”

But policymakers can also adjust incentives to drive out value based pricing and restore competition. “Most would agree there are some customers that combine federal and state incentives to get an aggregate level of support beyond what is strictly necessary to encourage adoption,” he explained. Policymakers must therefore be cautious to size the incentive package properly.

Why utilities get the lowest prices

Utilities like Arizona Public Service and Tucson Electric Power are already preparing to enter the rooftop solar market. Many others, like Duke Energy in the Carolinas and Xcel Energy in Minnesota, are aggressively building community solar.

A lot of what the LBNL team found about solar price heterogeneity applies to utilities that subcontract solar work to local installers, Wiser said.

“The utility is a much more engaged and informed customer than the typical homeowner. It should be able to generate a good amount of competition among installers. I would anticipate that utility systems would tend to be lower-priced.”

 “The utilities we work with, Duke Energy and South Carolina Electric and Gas, have a strong drive to meet customer service demands and are very well-informed,” SunStore Solar Energy Solutions CEO Bruce Wood said, affirming Wiser’s theory.

“Customers who look at the status quo and conventional wisdom are behind the curve," he said. "The utilities are much more engaged in the market now so they know where the prices are.”