As a homeowner, you may focus on the equipment cost when purchasing a solar energy system. However, soft costs are a critical component that you may not have heard mentioned or may not fully understand. We call equipment expenses “hard costs”, and soft costs refer to other expenses in a solar purchase. Despite being intangible, soft costs can significantly impact the cost-effectiveness of a solar project, and sometimes they can be higher than hard costs in a solar purchase process.
The term “soft costs” was coined by the National Renewable Energy Laboratory (NREL) to describe the administrative, permitting, interconnection, and financing costs, associated with solar projects. You can refer to the figure below for soft cost components.
Permitting costs are the fees charged by local and state governments for reviewing, approving, and inspecting a solar project. These costs vary depending on the location, size, and type of the project. For example, residential projects may have lower permitting costs compared to large commercial or utility-scale projects.
Interconnection costs refer to the expenses associated with connecting a solar project to the grid. These costs include the fees for engineering, testing, inspection services, and any upgrades to the grid required to accommodate the new solar project.
Supply chain costs refer to time-consuming tasks such as planning, tracking shipments, gathering documents, handling disputes, and handling communication with the freight forwarder, and may include having to constantly follow up on shipping updates.
Sales and marketing costs are the expenses installers use to promote their business and get customers. It usually occupies a big part of the whole soft cost.
General costs refer to other costs being spent on a solar project. Financing costs could be major expenses in general costs. It relates to obtaining financing for a solar project, including interest payments, fees for legal and accounting services, and the cost of securing a loan or other types of financing. In some cases, financing costs can be substantial, especially for larger projects, and they can impact the overall cost-effectiveness of a solar project.
Administrative costs are the expenses associated with managing a solar project. These costs can vary depending on the size and complexity of the project, as well as the experience and expertise of the project team.
In recent years, the solar industry has significantly reduced soft costs. For example, the development of standardized permitting processes and interconnection procedures has helped to streamline the approval process and reduce costs. Similarly, the availability of new financing options, such as community solar programs and property-assessed clean energy (PACE) financing, has helped reduce some projects’ financing costs.
Despite these advancements, soft costs still represent a significant challenge for the solar industry. The diagram shows they can account for up to 65% of the total cost of a solar project, making it difficult for many homeowners and businesses to take advantage of the benefits of solar energy.
One of the key factors contributing to the high cost of soft costs is the lack of standardization across different jurisdictions. For example, the permitting process in one state may be significantly more time-consuming and expensive than in another state. This can make it challenging for solar companies to operate in multiple states, as they must navigate a complex and often an inconsistent set of regulations and fees.
To address these challenges, several initiatives have been launched in recent years to standardize and streamline the permitting and interconnection process for solar projects. For example, the Solar Energy Industries Association (SEIA) has developed a set of best practices for permitting and interconnection, which is designed to help reduce the time and cost associated with these processes. Similarly, many states and localities have adopted streamlined permitting processes specifically for residential solar projects, which can help reduce costs for homeowners.
In conclusion, soft costs represent a critical challenge for the solar industry, as they can significantly impact the cost-effectiveness of a solar project. However, there are several initiatives underway to reduce these costs, including standardization of permitting and interconnection processes, and the development of new financing options.
With a continued focus on reducing soft costs, it is likely that the solar industry will continue to grow and become increasingly accessible to homeowners and businesses across the country.