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As equipment costs decline, the share of balance of project costs and operations and maintenance costs in the LCOE will increase unless increased efforts are made to accelerate their decline as well. Seven major components largely determine the LCOE for renewable power generation technologies – resource quality, equipment cost and performance (including capacity factor), the balance of project4 costs, fuel (if any), operations and maintenance costs (and reliability), economic life of the project and the cost of capital. As equipment costs drop, the importance of the balance of project, or balance of system (BoS), and operations and maintenance (O&M) costs, and the cost of capital increases. For instance, BoS costs in the United States have not declined as fast as in more competitive markets, meaning that the average installed price for residential PV systems were more than twice as expensive as in Germany in the second quarter of 2012. In contrast, O&M costs for wind in most major European markets are typically twice as high as in the United States. These issues merit much more analysis and policy attention than they receive today in order to prevent a slowing in the rate of reduction in the LCOE of renewables. This is particularly true for smaller systems. For residential PV systems, BoS costs (including installation) can account for 60% to 80% of the total project cost. Non‐equipment costs are also higher in developing countries where transmission lines and roads must be built as part of the project. The share of the BoS or balance of project costs and the importance of O&M costs, indicate the order of magnitude of the opportunities for local content and value added, that may help meet local social and economic development goals. For renewables, access to affordable financing and capital is often not the norm globally, yet it is critical to the ability to develop a renewable project and the LCOE generated. In new markets for renewables, special attention needs to be paid to ensure the regulatory and investment framework is favourable and that projects can access funds in the initial growth phase of the market. Once banks and other local financing sources have experience with new technologies in their markets, 4 Sometimes referred to as “balance of system costs” for when small-scale applications of technologies like solar PV and wind are being discussed. financing should, but may not necessarily always, then be easier to access on favourable terms. Further equipment cost reductions can be expected to 2020, which will lower the weighted average LCOE of renewables. The rate of decline to 2020 for solar PV is likely to be slower than in recent years, but wind and CSP may see an acceleration. The technologies with the largest remaining cost reduction potential are CSP, solar PV and wind. Hydropower, geothermal and most biomass combustion technologies are mature and their cost reduction potentials are not large (Figure ES.2). The range for LCOE of solar PV systems will decline more slowly in absolute terms than in the past, given that module prices have fallen so far. However markets which have higher than average cost structures for BoS today could see dramatic cost reductions in installed prices by 2020, lowering the weighted average costs significantly. Solar tower CSP plants costs could come down significantly by 2020 if deployment accelerates, given the potential of the technology and the current very low level of deployment. Wind turbine prices are falling after a period of high prices and increasing LCOEs, despite turbine improvements that increased capacity factors. If the wind turbine market follows a similar dynamic to the solar PV market, where overcapacity has led to large price reductions, some degree of convergence with Chinese and Indian turbine prices might occur. This would see LCOE cost reductions accelerating compared to in 2011 and 2012. Although this is the likely outcome, risks remain to the outlook for the competitiveness of renewables that are beyond the scope of their control, such as commodity price increases (e.g. cement and steel) or falls in the price of fossil fuels. In 2020 the LCOE ranges for the other technologies are not likely to be significantly lower than at present. Also, since today’s best practice projects in China and India in particular are unlikely to be beaten, the main shift for wind and biomass will be in a convergence of equipment costs towards Chinese and Indian levels as their suppliers start to compete more actively internationally and improve the quality of their overall offer (e.g. warranties, O&M contracts and reliability guarantees). The cost range therefore masks the projected decline in the weighted average costs that are likely to occur in OECD countries till 2020. 6 Renewable Power Generation Costs in 2012: An OverviewPDF Image | International Renewable Energy Agency
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