Efficiency vs. Cost

A solar panel converts 22% of sunlight into electricity. A combined-cycle gas plant converts 60% of its fuel into electricity. The gas plant is nearly three times more "efficient." Yet solar now produces cheaper electricity in most of the world. Efficiency and cost are not the same thing.

For any generator that burns fuel, efficiency directly reduces operating cost: every extra percent recovered from combustion is a percent you don't pay for in fuel. But solar and wind have no fuel cost. Their electricity price is set by two factors: capital cost per kilowatt installed, and capacity factor (how many hours the plant actually generates). A more efficient solar panel produces more watts per square meter, which can save on land and racking, but the panel price itself dominates the equation.

Compare a gas plant and a solar farm. Gas plant: $1,000/kW capital, 85% capacity factor, $3/MMBtu fuel, 55% thermal efficiency. Solar farm: $900/kW capital, 25% capacity factor, zero fuel.

Calculate simplified cost. The gas plant produces more MWh per dollar of capacity (higher capacity factor), but every MWh costs fuel. The solar farm produces fewer MWh per dollar (lower capacity factor), but each MWh has zero marginal cost.

Which cost dominates each technology's total electricity price?

Fuel vs. capital. For gas, fuel is 60-70% of total cost, making efficiency critical. For solar, capital is nearly 100% of cost, making panel price and sunshine (capacity factor) critical. Efficiency matters most when fuel is the largest expense.

This distinction explains why the solar industry focused on manufacturing cost reduction rather than cell efficiency records, and why gas turbine makers obsess over every fraction of a percent in heat rate.

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