New Study Shows Solar Manufacturing Costs Not Driven Primarily by Labor

Production scale, not lower labor costs, drives China’s current advantage in manufacturing photovoltaic (PV) solar energy systems, according to a new report released today by the Energy Department’s National Renewable Energy Laboratory (NREL) and the Massachusetts Institute of Technology (MIT).

Although the prevailing belief is that low labor costs and direct government subsidies for PV manufacturing in China account for that country’s dominance in PV manufacturing, the NREL/MIT study shows that a majority of the region’s current competitive advantage comes from production scale enabled, in part through preferred access to capital (indirect government subsidies), and resulting supply chain benefits. The study’s findings also suggest that the current advantages of China-based manufacturers could be reproduced in the United States.

“Assessing the Drivers of Regional Trends in Solar Photovoltaic Manufacturing,” co-authored by NREL and MIT, and funded by the Energy Department through its Clean Energy Manufacturing Initiative, was published in the peer-reviewed journal Energy & Environmental Science. By developing manufacturing cost models, the team of researchers examined the underlying causes for shifts from a global network of manufactures to a production base that is now largely based in China.

The study shows that China’s historical advantage in low-cost manufacturing is mainly due to advantages of production scale, and offset by other country-specific factors, such as investment risk and inflation. The authors also found that technology innovation and global supply chain development could enable increased manufacturing scale around the world, resulting in broader, subsidy-free PV deployment and the potential for manufacturing price parity in most regions.

Their analysis indicates that further innovations in crystalline silicon solar cell technology may spur new investment, significantly enhancing access to capital for manufacturers in most regions and enabling scale-up, thus equalizing PV prices from manufacturers in the United States and China.

“Our analysis finds that investments in technology research and development are critical not only to the widespread deployment of solar PV in most locations, without subsidy, but also may equalize factors that affect regional competitiveness, thus creating opportunities for U.S.-based manufacturers,” NREL senior analyst Alan Goodrich said. “The race for cost-competitive clean energy from the sun is far from over and incredible growth opportunities remain.”

“Innovation is critical to driving the technological advancements that can position the U.S. to gain greater market share in the global PV supply chain,” said David Danielson, assistant secretary for energy efficiency and renewable energy at the Energy Department. “We believe that innovation could drive down costs and drive up efficiencies not only in PV manufacturing, but also in the production of other high-tech and high-value clean energy technologies, and position U.S.-based manufacturers to be leaders in one of the most important global economic races of the 21st century.”

The research team relied on industry-validated manufacturing cost models to calculate minimum sustainable prices (MSP) for monocrystalline silicon solar panels manufactured in the United States and in China, simulating how a global manufacturing firm decides where to locate its factories. The MSP represents the minimum price at which a company can sell its products, while providing expected returns to sources of capital – conditions that are necessary to sustain growth without subsidies.

Excluding shipping costs, the team estimated that China-based manufacturers have a 23% MSP advantage over U.S.-based manufacturers today, taking into account differences in the manufacturing costs of modules, wafers, and cells within each country. Scale and supply chain advantages account for the majority of a Chinese factory’s MSP advantage. These advantages, which are not inherent to China, could be replicated by U.S.-based manufacturers if comparable scale can be achieved.

To motivate serious capital investment in the U.S. to manufacture PV at scale, the technology must be truly innovative, low cost, and able to compete subsidy-free.

“The ‘holy grail’ is an innovative PV module with high efficiency, low material costs, streamlined and scalable manufacturing, and unquestionable reliability,” said Tonio Buonassisi, associate professor at MIT and co-author of the study. “The PV modules you can buy today have a few of these attributes, but not all of them together. Thus, practical technological innovation is a key driver to accelerate the convergence between photovoltaics and traditional energy sources, both in terms of price and scale. This common goal, for the benefit of all nations, is an opportunity for international cooperation that leverages our complementary strengths.”