Financial incentives

The political purpose of incentive policies for PV is to facilitate an initial small-scale deployment to begin to grow the industry, even where the cost of PV is significantly above grid parity, to allow the industry to achieve the economies of scale necessary to reach grid parity. The policies are implemented to promote national energy independence, high tech job creation and reduction of CO2 emissions.

Three incentive mechanisms are used (often in combination):
investment subsidies: the authorities refund part of the cost of installation of the system,
Feed-in Tariffs (FIT): the electricity utility buys PV electricity from the producer under a multiyear contract at a guaranteed rate.
Renewable Energy Certificates ("RECs")

With investment subsidies, the financial burden falls upon the taxpayer, while with feed-in tariffs the extra cost is distributed across the utilities' customer bases. While the investment subsidy may be simpler to administer, the main argument in favour of feed-in tariffs is the encouragement of quality. Investment subsidies are paid out as a function of the nameplate capacity of the installed system and are independent of its actual power yield over time, thus rewarding the overstatement of power and tolerating poor durability and maintenance. Some electric companies offer rebates to their customers, such as Austin Energy in Texas, which offers $4.50/watt installed up to $13,500.

With feed-in tariffs, the financial burden falls upon the consumer. They reward the number of kilowatt-hours produced over a long period of time, but because the rate is set by the authorities, it may result in perceived overpayment. The price paid per kilowatt-hour under a feed-in tariff exceeds the price of grid electricity. Net metering refers to the case where the price paid by the utility is the same as the price charged.

Where price setting by supply and demand is preferred, RECs can be used. In this mechanism, a renewable energy production or consumption target is set, and the consumer or producer is obliged to purchase renewable energy from whoever provides it the most competitively. The producer is paid via an REC. In principle this system delivers the cheapest renewable energy, since the lowest bidder will win. However, uncertainties about the future value of energy produced are a brake on investment in capacity, and the higher risk increases the cost of capital borrowed.

Financial incentives for photovoltaics have been applied in many countries, including Australia, China, Germany, Israel, Japan, and the United States

The Japanese government through its Ministry of International Trade and Industry ran a successful programme of subsidies from 1994 to 2003. By the end of 2004, Japan led the world in installed PV capacity with over 1.1 GW.
In 2004, the German government introduced the first large-scale feed-in tariff system, under a law known as the 'EEG' (Erneuerbare Energien Gesetz) which resulted in explosive growth of PV installations in Germany. At the outset the FIT was over 3x the retail price or 8x the industrial price. The principle behind the German system is a 20 year flat rate contract. The value of new contracts is programmed to decrease each year, in order to encourage the industry to pass on lower costs to the end users. The programme has been more successful than expected with over 1GW installed in 2006, and political pressure is mounting to decrease the tariff to lessen the future burden on consumers.
Subsequently Spain, Italy, Greece (who enjoyed an early success with domestic solar-thermal installations for hot water needs) and France introduced feed-in tariffs. None have replicated the programmed decrease of FIT in new contracts though, making the German incentive relatively less and less attractive compared to other countries. The French and Greek FIT offer a high premium (EUR 0.55/kWh) for building integrated systems. California, Greece, France and Italy have 30-50% more insolation than Germany making them financially more attractive. The Greek domestic "solar roof" programme (adopted in June 2009 for installations up to 10 kW) has internal rates of return of 10-15% at current commercial installation costs, which, furthermore, is tax free.
In 2006 California approved the 'California Solar Initiative', offering a choice of investment subsidies or FIT for small and medium systems and a FIT for large systems. The small-system FIT of $0.39 per kWh (far less than EU countries) expires in just 5 years, and the alternate "EPBB" residential investment incentive is modest, averaging perhaps 20% of cost. All California incentives are scheduled to decrease in the future depending as a function of the amount of PV capacity installed.

At the end of 2006, the Ontario Power Authority (OPA, Canada) began its Standard Offer Program (SOP), the first in North America for small renewable projects (10MW or less). This guarantees a fixed price of $0.42 CDN per kWh over a period of twenty years. Unlike net metering, all the electricity produced is sold to the OPA at the SOP rate. The generator then purchases any needed electricity at the current prevailing rate (e.g., $0.055 per kWh). The difference should cover all the costs of installation and operation over the life of the contract. On October 1, 2009, OPA issued a Feed in Tarrif (FIT) program, increasing this fixed price to $0.822 per kWh.
The price per kilowatt hour or per peak kilowatt of the FIT or investment subsidies is only one of three factors that stimulate the installation of PV. The other two factors are insolation (the more sunshine, the less capital is needed for a given power output) and administrative ease of obtaining permits and contracts.
Unfortunately the complexity of approvals in California, Spain and Italy has prevented comparable growth to Germany even though the return on investment is better.

In some countries, additional incentives are offered for BIPV compared to stand alone PV.
France + EUR 0.25/kWh (EUR 0.30 + 0.25 = 0.55/kWh total)
Italy + EUR 0.04-0.09 kWh
Germany + EUR 0.05/kWh (facades only)

Energy payback time and energy returned on energy invested

The energy payback time is the time required to produce an amount of energy as great as what was consumed during production. The energy payback time is determined from a life cycle analysis of energy. The energy needed to produce solar panels will be paid back in the first few years of use.
Another key indicator of environmental performance, tightly related to the energy payback time, is the ratio of electricity generated divided by the energy required to build and maintain the equipment. This ratio is called the energy returned on energy invested (EROEI). Of course, little is gained if it takes as much energy to produce the modules as they produce in their lifetimes. This should not be confused with the economic return on investment, which varies according to local energy prices, subsidies available and metering techniques.
Life-cycle analyses show that the energy intensity of typical solar photovoltaic technologies is rapidly evolving. In 2000 the energy payback time was estimated as 8 to 11 years[74], but more recent studies suggest that technological progress has reduced this to 1.5 to 3.5 years for crystalline silicon PV systems

Thin film technologies now have energy pay-back times in the range of 1-1.5 years (S.Europe). With lifetimes of such systems of at least 30 years[citation needed], the EROEI is in the range of 10 to 30. They thus generate enough energy over their lifetimes to reproduce themselves many times (6-31 reproductions, the EROEI is a bit lower) depending on what type of material, balance of system (or BOS), and the geographic location of the system.

Advantages

The 89 petawatts of sunlight reaching the Earth's surface is plentiful - almost 6,000 times more than the 15 terawatts of average electrical power consumed by humans.[76] Additionally, solar electric generation has the highest power density (global mean of 170 W/m²) among renewable energies.
Solar power is pollution-free during use. Production end-wastes and emissions are manageable using existing pollution controls. End-of-use recycling technologies are under development.
PV installations can operate for many years with little maintenance or intervention after their initial set-up, so after the initial capital cost of building any solar power plant, operating costs are extremely low compared to existing power technologies.
Solar electric generation is economically superior where grid connection or fuel transport is difficult, costly or impossible. Long-standing examples include satellites, island communities, remote locations and ocean vessels.
When grid-connected, solar electric generation replaces some or all of the highest-cost electricity used during times of peak demand (in most climatic regions). This can reduce grid loading, and can eliminate the need for local battery power to provide for use in times of darkness. These features are enabled by net metering. Time-of-use net metering can be highly favorable, but requires newer electronic metering, which may still be impractical for some users.
Grid-connected solar electricity can be used locally thus reducing transmission/distribution losses (transmission losses in the US were approximately 7.2% in 1995).
Compared to fossil and nuclear energy sources, very little research money has been invested in the development of solar cells, so there is considerable room for improvement. Nevertheless, experimental high efficiency solar cells already have efficiencies of over 40%[citation needed] and efficiencies are rapidly rising while mass-production costs are rapidly falling.

Disadvantages

Photovoltaics are costly to install. While the modules are often warranted for upwards of 20 years, an investment in a home-mounted system is mostly lost if you move. The city of Berkeley has come up with an innovative financing method to remove this limitation, by adding a tax assessment that is transferred with the home to pay for the solar panels. Nine U.S. states have duplicated this solution.
Solar electricity is seen to be expensive. Once a PV system is installed it will produce electricity for no further cost until the inverter needs replacing. Current utility rates have increased every year for the past 20 years[citation needed] and with the increasing pressure on carbon reduction the rate will increase more aggressively[citation needed]. This increase will (in the long run) easily offset the increased cost at installation but the timetable for payback is too long for most.
Solar electricity is not available at night and is less available in cloudy weather conditions from conventional silicon based-technologies. Therefore, a storage or complementary power system is required. However, the use of germanium in amorphous silicon-germanium thin-film solar cells provides residual power generating capacity at night due to background infrared radiation.[citation needed]
Apart from their own efficiency figures, PV systems work within the limited power density of their location's insolation. Average daily insolation (output of a flat plate collector at latitude tilt) in the contiguous US is 3-7 kilowatt·h/m² and on average lower in Europe.
Solar cells produce DC which must be converted to AC (using a grid tie inverter) when used in current existing distribution grids. This incurs an energy loss of 4-12%