It’s widely believed that China is the world’s dominant manufacturer of solar panels because of its low labor costs and strong government support. But a new study by researchers at MIT and the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) shows that other factors are actually more significant — suggesting that the United States could once again become cost-competitive in photovoltaic (PV) manufacturing.



As of 2011, manufacturers in China accounted for 63 percent of all solar-panel production worldwide. But a detailed analysis of all costs associated with PV production shows that the main contributors to that country’s lower PV prices are economies of scale and well-developed supply chains — not cheap labor.



“We developed a bottom-up model,” explains Tonio Buonassisi, an associate professor of mechanical engineering at MIT and a co-author of the new report, just published in the journal Energy and Environmental Science. The researchers estimated costs for virtually all the materials, labor, equipment and overhead involved in the PV manufacturing process.



“We added up the costs of each individual step,” he says, providing an analysis that’s “very rigorous, it’s down in the weeds. It doesn’t rely solely on self-reported figures from manufacturers’ quarterly reports. We really took great care to make sure our numbers were representative of actual factory costs.”



While China does indeed have a small advantage in labor costs, the study found, that has relatively little impact on prices because solar-panel manufacturing is highly automated. The lower cost of labor in China provides an advantage of 7 cents per watt, relative to a factory in the United States, but that amount is countered by other country-specific factors, such as higher inflation.



The bottom line, Buonassisi says, is that today’s regional price differences in making photovoltaic modules are “not inherent [and] not driven by country-specific advantages.” As a result, technological innovations could rapidly level the playing field.



A crucial parameter is something the researchers call the minimum sustainable price, or MSP, which represents a cost of manufacture plus a sustainable profit margin to companies. To arrive at that, Buonassisi says, the team included estimates not only of the costs of producing silicon wafers, making those into PV cells, and mounting the cells in panels, but also estimates of such indirect costs as research and discount rates for the manufacturers.



These nontechnical costs associated with running a business “aren’t always included in other analyses,” Buonassisi says. Today, the average MSP is higher than the market price of solar panels, which is not sustainable long term. That’s why improved technology is essential, he says.



Douglas Powell, a doctoral student in mechanical engineering at MIT and a co-author of the report, says that in 2012, “the analysis suggests that the minimum sustainable price of modules was above current prices” — meaning that many manufacturers were not providing investors with adequate returns.



One reason for that disparity: China rapidly ramped up its manufacturing capacity, and the market was still catching up in 2012 to the oversupply. “They expanded really fast, and caught a lot of people by surprise,” Powell says. Meanwhile Germany, which had been buying half of all PV modules produced worldwide, suddenly decreased its subsidies, drastically cutting demand.



Still, the biggest factor contributing to China’s ability to make solar panels for about 23 percent less than U.S. companies, Buonassisi says, turned out to be economies of scale. Typical Chinese PV factories are four times larger than those in the United States, the study found. That leads to economies in several ways: Those factories can negotiate better contracts with suppliers. Also, their manufacturing equipment can be used more efficiently, since machines can be scheduled to run more of the time by allowing flexibility in matching up the production rates of machines at different stages in the process.



Overall, Buonassisi says, the study makes clear that China’s current price advantage in solar-panel production “can be replicated elsewhere, if the right conditions are met.”



He says the key to making solar panels competitive — whether in the United States, China, or elsewhere — is to bring the cost of installed panels to a level competitive with the current cost of electricity from the grid, without subsidies or tax benefits. Once that goal is achieved — which the researchers estimate will likely occur by the end of the decade — then much larger PV factories will become economically viable worldwide. “This common goal, which can benefit all nations, is an opportunity for international cooperation that harnesses our complementary strengths,” Buonassisi says.



Improvements under way in every step of the PV manufacturing process — from thinner silicon wafers to greater cell efficiency to better ways of mounting the cells in a panel — could end up making them highly competitive with other sources of power, Buonassisi says.



“Today’s technology is not quite there yet,” he says, but adds, “We could be hitting grid-competitive costs … within the next few years,” which could lead to a surge in installations.



In the long run, says Al Goodrich, a senior analyst at the NREL and lead author of the study, the greatest advantages may go to multinational companies that can harness regional advantages. “We envision a globally optimized supply chain that will enable companies to manufacture close to their customers, likely resulting in regional industry clusters,” he says.



Paul Basore, director of the advanced research and development lab for solar-cell company Hanwah Solar America, says, “There is considerable misunderstanding in the global PV industry today about the difference between production cost and sales price, leading to many bad investment decisions. By defining and focusing attention on the minimum sustainable price of PV-module manufacturing, the authors provide a sound basis for decision-making by both industry and government.”



Basore, who was not connected to this study, adds, “The challenge of making solar electricity cost-effective for the majority of consumers is bigger than any one company, or any one country. It requires collaboration on a truly grand scale. The authors do great service to the future of solar by showing that regional biases are of secondary importance when compared to the potential value of scale that can be achieved through global collaboration.”



In addition to Goodrich, Buonassisi and Powell, the study was co-authored by Ted James and Michael Woodhouse of NREL, a DOE facility in Golden, Colo., and was supported by the DOE, the Department of Defense and the National Science Foundation.

