This article was originally written on April 16th, 2024; updated on May 2nd, 2025.

Solar energy has come a long way over the past few decades, and today it has become the cheapest source of electricity in history, according to the International Energy Agency (IEA). But how did this happen? What factor or factors led to the massive reduction in solar energy prices? Let’s take a closer look.

Factor 1: Technological Advancement

One of the primary reasons for the dramatic fall in solar energy costs is the rapid improvement in solar technology. Over the years, solar panels have become more efficient, with a higher percentage of sunlight being converted into electricity. This has made solar power more cost-effective, with every watt generated costing less than before. For instance, in the early 1980s, the average cost of solar panels was around $30 per watt. Today, it is less than $0.50 per watt. That’s a 98% reduction in cost over just four decades.

In addition, Advances in manufacturing have made solar panels cheaper to produce. This includes improvements in panel design, with more streamlined and durable panels being developed that require fewer resources overall. In addition, some companies have developed technologies that can produce solar panels more quickly and with fewer defects.

IEA (2023), Solar PV power generation in the Net Zero Scenario, 2015-2030, IEA, Paris https://www.iea.org/data-and-statistics/charts/solar-pv-power-generation-in-the-net-zero-scenario-2015-2030, Licence: CC BY 4.0

Factor 2: Increasing Production

As global demand for solar energy has surged, manufacturers have significantly scaled up production, benefiting from economies of scale. Larger and more efficient factories have allowed companies to reduce the cost of materials, labor, and overall production. In some regions, global manufacturing capacity for solar components nearly doubled.

At the same time, manufacturing processes have become more advanced. Improvements in panel design, making them more streamlined, durable, and resource-efficient. This have helped lower costs. New technologies have also enabled faster production with fewer defects, contributing to higher output and better quality.

Most solar panels produced today are based on crystalline silicon technology, which dominates the global market. The manufacturing process involves four key steps: producing high-purity silicon, shaping it into wafers, converting those wafers into photovoltaic (PV) cells, and assembling the cells into complete modules. Recent innovations across these steps have further brought down costs and boosted efficiency.

In 2023, these combined factors: higher production capacity, better manufacturing processes, and competitive pricing, are contributed to a 50% drop in spot prices for solar PV modules.

IEA (2023), Solar PV manufacturing capacity according to announced projects and in the Net Zero Scenario, 2015-2030, IEA, Paris https://www.iea.org/data-and-statistics/charts/solar-pv-manufacturing-capacity-according-to-announced-projects-and-in-the-net-zero-scenario-2015-2030, Licence: CC BY 4.0

Factor 3: Innovative financing models

Leasing and power purchase agreements (PPAs) have made it easier and more affordable for individuals and businesses to adopt solar power. With these financing options, customers can install solar panels with little or no upfront costs and then pay for the electricity generated at a lower rate than they would pay for traditional grid electricity. This has made solar energy more accessible to a wider range of customers.

Other models, such as community solar and solar subscriptions, have made it possible for people who rent or lack suitable rooftops to benefit from solar energy. These programs let users subscribe to a portion of a shared solar project and receive credits on their electricity bills.

By lowering financial barriers, these innovative models have expanded access to solar energy. This helps drive adoption at both the residential and commercial levels.

Factor 4: Government policies and incentives

Government policies and incentives have also played a significant role in the expansion of solar energy. In many countries, government subsidies and tax credits have encouraged the adoption of solar power, creating a stable and supportive environment for the deployment of solar panels. Governments have also implemented policies that require utilities to use more renewable energy sources, which has helped to spur demand for solar power.

As a result of these factors, solar energy is now the fastest-growing source of new electricity generation worldwide. In 2021, solar PV accounted for nearly half of all new capacity installed globally, with the IEA reporting that solar power is now the cheapest source of electricity in history. According to a recent study, solar energy is expected to become even cheaper in the coming years, with costs projected to fall by as much as 60% by 2030.

Several countries and regions have made notable strides in advancing solar PV:

• China continues to lead in solar PV capacity additions, adding 260 GW in 2023, nearly triple the growth of the previous year. With its ambitious targets outlined in the 14th Five-Year Plan for Renewable Energy, China’s solar capacity is expected to grow rapidly in the coming years.
• The European Union also saw significant growth in solar PV, adding 61 GW in 2023, a 45% increase from the previous year. Policies like the REPowerEU Plan and The Green Deal Industrial Plan are expected to drive further investment.
• The United States, through the Inflation Reduction Act (IRA), has provided generous funding for solar PV, leading to a 70% increase in capacity additions in 2023, reaching a record 32 GW.

These policies and initiatives are setting the stage for even greater growth in the coming years.

Conclusion

In conclusion, solar energy costs have dropped rapidly in recent years. This was driven by better technology, higher production, new financing models, and supportive government policies. Solar energy is becoming cheaper and more accessible. As a result, it will play a bigger role in the global shift to a low-carbon economy. As we move towards a more sustainable future, solar energy is likely to remain a key driver of progress.