Solar sceptics may need to reconsider: power from the sun is becoming more economic
Solar power has had some bad press in recent years. The case against it seemed increasingly persuasive: it cost too much: it would never replace fuels (like oil, coal and nuclear) which offered reliable base-load power generation; and even if solar systems could be made more efficient and, helped by better and better storage batteries, to produce reliable electricity even when the sun wasn’t shining, solar still couldn’t compete on price with other fuels, particularly coal.
We’ve heard all these arguments and, in the case of this writer, pushed them ourselves.
Well, maybe it’s time for a rethink. According to some reports just out, not only are we going to have to use more solar (as fossil fuels become depleted) but the economics of harnessing the sun are improving. Solar is back on the agenda, it seems.
And with some good timing, too. As the U.S. Solar Energy Energies Industries Association reminds us, we are just 11 days away from an important anniversary. “Sixty years ago on April 25, 1954, Bell Laboratories demonstrated to the world one of the most significant breakthroughs ever recorded in the history of solar energy and of electricity – the first solar cell capable of converting enough sunlight into electricity to generate useful amounts of power. The press watched in awe as light poured on the first watt of silicon to run a 21-inch Ferris wheel. The next day The New York Times stated on its front page that the Bell invention marked ‘the beginning of a new era, eventually leading to the realization of one of mankind’s most cherished dreams – the harnessing of the almost limitless energy of the sun for the uses of civilization‘.”
According to the association, too, more solar has been installed in the U.S. in the past 18 months than over the past 30 years. And a study just out from McKinsey & Co says solar energy is far more cost-competitive than it was a decade ago. The price American residential customers pay to install roof-top solar photovoltaic systems has plummeted from near $7 per watt in 2008 to $4 or less in 2013.
Indeed, German renewable energy consultancy Eclareon says that, once all its costs are accounted for, the price of commercial solar power in that country and in Italy has pulled even with retail electricity rates. This was based on installing a standard 30 kilowatt solar PV system for a commercial building and calculating the outlay on “levelled cost of energy”, or LCOE (which includes installation, maintenance, investment, the price for buying the source of the electricity itself, depreciation and other costs) on solar, natural gas, wind, coal and other fuels. With Germany and Italy already seeing solar at grid parity, they will soon be joined by Spain and Mexico, the report says.
Get our daily investorintel update
McKinsey’s view, meanwhile, is that the cost reductions in installing solar put this power source, in economic terms, within striking distance of being competitive with building new projects using coal, natural gas and nuclear energy. The consultancy looks to China, Japan, the U.S. and Europe as the leaders in this trend, but also notes what is happening in Saudi Arabia. The Saudis are spending $100 billion on solar installations with an eye to having the sun provide 30% of their electricity by 2030.
(Saudi Arabia wants to reduce the amount of its oil and gas used for domestic fuel generation, allowing it to export more hydrocarbons without lifting extraction rates. But there may be a sting in the tale: commentator Ambrose Evans-Pritchard, writing in London’s The Daily Telegraph, points out that New York-based financial analysts Sanford Bernstein have concluded that the technology momentum is all going one way, and that way is solar. Sun-generated energy, although now only 0.17% of the world energy market, will keep on growing and erode the domination of fossil fuels. Solar will thus squeeze the revenues of petro-economies such as Russia, Venezuela and Saudi Arabia. “They will have to find a new business model,” says Evans-Pritchard.)
Sanford Bernstein say solar is making inroads by providing more power in the middle of the day, when air-conditioners and factories are at their peak consumption of electricity. And, as pointed out by McKinsey, Wal-Mart has pledged to go from its present 20% dependence on solar to 100% by 2020.
McKinsey also has its own “sting in the tail” scenario regarding solar. Most U.S. utilities depend for revenue growth not on their current generation base but on installations of new capacity. “Solar could seriously threaten the latter because its growth undermines the utilities’ ability to count on capturing all new demand which has historically has fuelled a large share of annual revenue growth.”
McKinsey argues that new solar installations could now account for half of all new consumption. By altering the demand side of the equation, solar directly affects the amount of new capital that utilities can deploy at their predetermined return on equity.