After having deep-searched the internet for three months, our editor Karel Beckman has come to the conclusion that the solar power revolution is upon us – and will have devastatingly disruptive effects on established energy markets. The energy world is about to change radically.
Photo: sun emits mid-level flare (NASA)
Not having had to write anything for three months, after I left European Energy Review, I was able to lean back and follow the energy news from a bit more distance. As I was anxious not to lose touch – and was doing research for my new website (i.e. this one) – I explored the worldwide web every day for sources of energy news and information. What struck me most during this time, was that there was one energy topic that really stood out: solar power. It was not just that there was a huge amount of solar news, but what struck me most was the remarkably bullish nature of that news. It has forced me to come to a radical conclusion: the solar power revolution is unstoppable. It is here, it is happening – and it will change the global energy landscape for good.
Now I have to admit to a slight prejudice here. I have always believed more in the potential of solar power than wind power, for the simple reason of space. Solar power can be installed simply everywhere, on every rooftop, on every street corner, on every lamp post, on every mobile phone. It is the ultimate form of decentralised power – although very conveniently it can also be produced in centralised plants. In comparison, the contribution of wind power to the total energy system will always be much more limited, as it cannot be confined to small spaces (as far as I can tell). You cannot cover the world with wind turbines, but you can cover it with solar cells.
Solar power always used to be relatively costly of course, but that is changing rapidly. According to a highly intriguing Citi Research report published on 30 April and written by Jason Channell and Phuc Nguyen (which someone sent to me, it is not freely available on the internet), solar power is already cost competitive at the residential level in many countries (“socket parity”) and is becoming so also at the “utility scale”. In fact it already is at parity with combined-cycle gas turbines (CCGT’s) in some markets.
The “parity timeline” has always been much talked-about of course when it comes to solar power, but the Citi report underlines that the speed at which the price of solar panels has been reduced continues to be amazing. Since 2008 the “learning rate” has improved by 40% each year, i.e. for every doubling of capacity, costs have gone down 40%. These very fast learning rates are “likely to continue”, say the researchers.
I will come back to the Citi report in a moment. First let me say that what has convinced me most that this time the solar power revolution is real is that after Germany now the US, China and Japan have definitely jumped on the bandwagon. This means the four great economic powers of the world have embraced solar power wholeheartedly. And the emerging economies are following close behind.
To illustrate this trend, let me go through a few of the more revealing news items I came across in the last two months or so.
Just recently, the website Daily Finance reported that in the US solar installations grew “an incredible 76% last year on the back of rapidly falling costs and growing capabilities by solar installers”. Companies like First Solar and SunPower are building large (550 MW and 250 MW) solar power plants in the deserts in Arizona and California, but Daily Finance expects that the residential market will become an even bigger driver across the US.
Indeed, various US states are stepping on the solar gas. New Jersey, for example, recently approved two solar power proposals worth $446 million, including the installation of solar collection points on brownfields and landfills and grid facilities on parking lots.
In Japan, domestic shipments of solar cells and modules leapt by their most in at least 30 years, reported Bloomberg on 31 May, rising to 3809 MW in the 12 months to March 31 compared to 1404 MW in the year before. According to Bloomberg, the market is being driven especially by new feed-in tariffs from the government, which wants to stimulate renewable energy in the wake of the Fukushima disaster. The government approved 12,258 MW of new projects in just one year. Consultancy IHS expects that $20 billion worth of PV systems will be installed in Japan this year, compared to $11 billion in 2012.
According to the 10th edition of Ernst & Young’s annual “Renewable Energy Country Attractiveness Index” (RECAI), which came out in May 2013, the US unseated China as the most attractive country for renewable energy investment, but China “remains an extremely attractive investment prospect, thanks to strong political support, growing energy demand and a robust project pipeline”, noted the report.
An even more important trend was highlighted by RECAI’s Chief Editor Ben Warren in his foreword: “The global renewable energy sector today is much more aligned to energy market and general economic fundamentals, rather than being wholly reliant on fiscal support regimes that have proven to be vulnerable to both economic health and politics. The affordability of renewable energy, and the important role it can play in the global energy mix, is now more critical than ever. And it will likely be these factors, in addition to the decarbonization agenda, that will provide a much more robust foundation for growth in the foreseeable future.”
And Warren made another important point, nothing that “Declining government support, particularly in Western markets still struggling with austerity, may have put the brakes on some segments, but emerging markets appear eager to fill the gap as renewable energy plays an increasingly important role in energy security, enabling economic growth and stimulating economic diversification.” In other words, renewable energy, in particular solar power, is conquering the world.
Thus, for example, Tina Casey, Senior Reporter at the invaluable website Cleantechnica.com, reports on yet another interesting website, The Energy Collective, that in Mexico, in La Paz, a 30 MW solar photovoltaic power plant is being constructed, which will be the largest so far in Latin America. Now the news about that is not that solar power is such a big thing in Mexico or Latin America, but rather the reverse: it is just beginning. As of now, just 13 MW of PV projects have been installed in Mexico, a country which is not known for its cloudy skies. If you want to make money, here is your chance: Mexico is expected to experience a solar power boom in the coming years, writes Casey.
The same no doubt goes for other Latin American countries. The Ernst & Young report singles out Chili as one country with “perfect conditions for a renewables rollout”. Brazil for its part is building solar-powered stadiums for the World Cup in 2014 that are partly financed by the German investment bank KfW and will no doubt serve as showcases for the world.
Similar stories can be told for other emerging economies across the world. Morocco, for example, in May launched the construction of a 160 MW solar power plant near the desert city of Ouarzazate, which is intended to be, as AFP reports, “the first in a series of vast solar projects planned in the country”. Ouarzazate is partly financed by the World Bank, the African Development Bank and the European Investment Bank – and being built by Saudi developer ACWA Power. (Thanks no doubt also go to the stimulus provided by the Desertec vision.)
Saudi Arabia is well-known by now of course as a country with huge solar ambitions (although so far they have not been realised). It is even planning to export electricity to Europe in the future. The country wants to build 24,000 MW of renewable power capacity by 2020. Other countries in the Middle East are not far behind. Qatar wants to build 1800 MW by 2018. And what to think of a country like Indonesia, which aims to build 36 new solar power plants in 2013.
Burn the model
So what does this mean for the energy markets of the future? For the established utilities in particular? It means, in short, the end of the world.
Why? The reasons can be found in the Citi report, but also in another rather shocking report issued in January by a very unsuspecting source: the Edison Electric Institute (EEI), a highly established, incumbent, conservative trade group of U.S. investor-owned utilities. Let’s have a look at this one first. Thanks for unearthing this treasure go to David Roberts of the website Grist.org, who in April wrote a revealing article about the report, which had up to that time gone almost unnoticed in the press. The Edison report, Roberts notes, details how solar power and other distributed renewable energy technologies will “burn the utility business model, which has remained virtually unchanged for a century, to the ground”. It is “a rare thing”, he adds, “to hear an industry tell the tale of its own incipient obsolescence”. And he is not exaggerating.
Why will solar power “burn the utility business model to the ground”? First of all of course because the power generated by solar panels is not owned by the utilities. Secondly, because solar power production peaks at the times when power demand is at its highest, thus shaving away other power sources at the time when power prices are at their highest. Thirdly, and this is the final nail in the utility coffin, it is not unlikely that in the future the intermittency problem of solar power will be overcome through “battery storage technology or micro-turbines”, in which case customers will be able to become fully independent of the electric grid. Once that happens, it is clear that the entire business model of the traditional utilities falls apart.
The Edison report paints a chilling picture of what could happen next:
“The financial implications of these threats are fairly evident. Start with the increased cost of supporting a network capable of managing and integrating distributed generation sources. Next, under most rate structures, add the decline in revenues attributed to revenues lost from sales foregone. These forces lead to increased revenues required from remaining customers (unless fixed costs are recovered through a service charge tariff structure) and sought through rate increases. The result of higher electricity prices and competitive threats will encourage a higher rate of DER additions, or will promote greater use of efficiency or demand-side solutions.
Increased uncertainty and risk will not be welcomed by investors, who will seek a higher return on investment and force defensive-minded investors to reduce exposure to the sector. These competitive and financial risks would likely erode credit quality. The decline in credit quality will lead to a higher cost of capital, putting further pressure on customer rates. Ultimately, capital availability will be reduced, and this will affect future investment plans. The cycle of decline has been previously witnessed in technologydisrupted sectors (such as telecommunications) and other deregulated industries (airlines).”
Here is where we turn back to our earlier-mentioned Citi Research report by Jason Channell and Phuc Nguyen, for this report shows that the future described in the Edison report is already happening: in Germany.
In this country, which has the largest solar power capacity in the world, solar power is already “stealing demand from previously installed generation, and doing so at the most valuable ‘peak’ part of the demand curve’”, note the researchers. Indeed, it is even starting “to eat into baseload”. In fact, if solar installation rates continue at the present level, we will see “all German demand at peak times in the summer being covered by solar within three years”.
The reason solar power elbows out conventional power is of course that its variable costs are zero. The Citi report shows that on hot sunny workdays and weekends in Germany, “the peak, (which would previously have been supplied by gas) has almost entirely gone over to solar. What is even more troublesome about this is that this is the most valuable part of the curve, as electricity prices are highest at period of highest demand…. Hence while the amount of units supplied by solar are currently relatively small, their share of the ‘value’ is considerably higher.”
As is well-known by now, this peak effect has had a devastating effect on gas-fired power plants, which tend to have higher variable costs than the “baseload” nuclear and coal-fired power plants, and thus tended be used primarily at peak times. Interestingly, however, the researchers point out that in future, as solar power will start to eat into baseload power, the demand for gas-fired power might well go up again compared to that for nuclear and coal-fired power. After all, the economics of baseload operation are such that those plants need to be run all the time, and if that is not necessary anymore, it is more attractive to run the more flexible gas-fired plants at times when solar power is insufficient.
Nevertheless, the news is bad for all conventional power producers, as they will all essentially be reduced to suppliers of backup capacity. This, in turn, will have far-reaching effects on the future of the major power producers. In the EU there is a lot of discussion now about how to set up backup capacity schemes, but there is a deeper issue involved here that has not been discussed at all yet: namely why would we need private power producers to supply backup capacity? As the Citi report points out, under a capacity payment model, convential utilities “would ultimately be likely to revert to being rate of return, regulated asset-based companies.”
For the regulated network companies (in Europe utilities are mostly split up into production companies and network companies) there are also serious consequences. As distributed solar generation does not flow through the grids, this leads to lower revenues for network operators, which then have to charge higher unit charges. This “combined upward impact on bills (of capacity payments and higher grid per-unit charges) is in our view only likely to make consumers more likely to put panels on their roofs in a desire for a greater degree of energy independence”, write the researchers.
They also point out another troubling trend for German power producers. At this moment, German companies are still able to export excess power generation to neighbouring countries, but as other countries are also expanding their renewable power production, this will become much more difficult. As a result, “grid stability” will become a major headache. How will this be resolved? Here the Citi researchers come to the same conclusion as the author of the Edison report: this will trigger a drive to develop storage solutions. Indeed, on 18 April of this year, the German state investment bank KfW announced that it will start an energy storage subsidy programme that could well lead to new, advanced storage solutions. And if that happens, renewable energy will only become more attractive of course.
The upshot of it all, say the Citi researchers, is that we might see the “utility industry split into centralised back-up rate-of-return generation (much as it was throughout the world pre-privatisation), with much smaller local companies managing local supply and demand, potentially even on a ‘multi-street’ basis. Whether those companies are traditional utilities, metering/technology companies, or branded ‘customer service’ companies is also open to question.” In other words: the end of the world.
For those of you who are still not convinced (and of course, I am not saying solar power will be our only power source by any means, I am just saying it will change the world), there is really no need to be surprised. The International Energy Agency (IEA), often viewed as a spokesman for the Western oil and gas industry, already envisioned a bright future for solar power in two Technology Roadmaps it published in 2010, about Photovoltaic Solar Power and Concentrated Solar Power. According to the IEA, solar power could deliver between 20 and 25% of global power production by 2050. And that takes into account a steep rise in global GDP. The two Citi researchers, by the way, believe that the IEA’s investment forecast for solar power, high though it is ($1.3 trillion between 2012-2035) is far too conservative – they think it will be more like between $3 and $4 trillion.
Finally, I should note that the consequences of a solar power revolution will not be confined to the utility sector. Think for instance of what it will mean for the geopolitical relations in the world. This is the subject of an interesting treatise that is scheduled to appear later this year, Alexander Mirtchev’s “The Alternative Energy Megatrend”. Or think about websites like this one. Why discuss energy policies if the energy problem is solved? If it is any consolation to our readers who work in the utility industry, we will become obsolete too!
At least you can’t say we did not see it coming. There was a reason why we chose an orange logo for our website.