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Why Is U.S. Solar More Expensive Than Germany's?

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In the last couple of days, I've focused my attention in my solar analysis on the incredibly strong installation numbers coming out of Germany. What I haven't looked into yet is the underlying driver of those installations: cheap solar power.

A report by the German BSW (an industry association) states that German solar installations have fallen to $2.80 per watt for systems under 100 kW. In a SEIA and GreenTechMedia report, U.S. installations averaged $5.20 per watt with small residential installations coming in at $6.41 per watt. That's more than double the cost of solar in Germany, something that should be examined more closely.

Until more studies are done, the exact reasons and solutions aren't well defined, but there are a few things that stand out in our current cost structure.

Permitting costs
The U.S. has a convoluted permitting process that can change in each city for solar installers. A report called "The Impact of Local Permitting on the Cost of Solar Power," done by SunRun early last year, put the cost of local permits at $2,516 per installation, or $0.50 per watt.

U.S. scale can't compete
One of the big advantages Germany has is the scale the solar industry has built in a short amount of time. In the relatively small country, nearly 15 GW of solar have been installed in the past two years, compared to just over 2 GW in the U.S.

Since Germany doesn't have a large utility scale solar pipeline, most of the installations are rooftop or ground mounted systems that are small in size. The U.S. doesn't yet have the infrastructure to install this type of scale, although companies like SolarCity and SunRun are changing that slowly.

For the next couple of years, much of the backlog in solar will come from utility scale projects that First Solar (Nasdaq: FSLR  ) , SunPower (Nasdaq: SPWR  ) , and Suntech Power (NYSE: STP  ) are building.

There's money to be made
We don't know what margins are like for solar installers because the smaller companies are private, but considering the cost difference, I think we can infer that they're making a nice profit. When NRG Energy (NYSE: NRG  ) began to get into solar, it said that equity return on investment for its projects would be in the mid to high teens, extremely high for the utility industry.

With Trina Solar (NYSE: TSL  ) quoting average sale prices of $1.25 per watt, there's a lot of difference between total installed cost and the module cost. The money has to go somewhere.

The bottom line is until a more competitive installation sector is built, it won't be nearly as efficient as Germany.

This is holding solar back
Balance of system costs are the most important costs in solar right now, and unless we tackle the problem, U.S. installation costs will continue to be far greater than Germany's.

If you have experience installing solar in your home, let us know if your costs are more or less than the national average. And keep track of solar stocks with My Watchlist, our free service that brings our stock analysis to one easy-to-find location.

Fool contributor Travis Hoium owns shares of First Solar, SunPower, and has sold puts in SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2012, at 2:27 PM, ChadDickason wrote:

    Travis -

    We are working to reduce our costs significantly and I'd like to discuss your article.

    Chad Dickason

  • Report this Comment On January 15, 2012, at 10:50 PM, TMFFlushDraw wrote:

    Feel free to send me an email. Just click on my name in the disclosure section at the bottom of the article for the address.

    Travis Hoium

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