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Solar Energy: The Sunny Side of the Street

by Bennett Voyles

December 9, 2013

Solar Panels from iStock resized

Why solar energy is growing, how it will change the world, and who will profit from it.

By 2020—or sooner, depending on how much sun you get and how expensive store-bought electricity is in your region—power from photovoltaic solar cells on your roof will be the same price as power from your local utility. And after that, the price will probably continue to fall.

This isn’t a wild-eyed prediction. So-called grid parity has already been achieved in some sunny places where electricity is expensive, such as southern Italy and Hawaii. In a 2012 report, Solar Power: Darkest before Dawn, McKinsey & Co. analysts noted that as the cost of photovoltaic modules has fallen (from $4 per watt in 2008 to just under $1 by January 2012), installed capacity grew from 4.5 gigawatts to more than 65 GW.

Now, with the price per watt as low as 75 cents, demand continues to grow. GTM Research, a Boston-based clean energy research firm, has noted that it took solar energy 50 years to achieve 50 GW capacity in 2011 but just 2.5 years to double that number—and it expects the capacity will double again over the next 2.5 years. At the same time, they have noted that prices fall roughly 20% each time the installed base doubles. Even in years when prices move more slowly, they still tend to move in the right direction: on average, the cost of solar panels has dropped about 7% a year for the last 30 years, according to International Energy Administration Statistics.

A New Moore’s Law?

The decline seems to be happening so consistently that some commentators argue that it can even be described as a kind of Moore’s Law for solar power. M.J. Shiao, a senior research analyst for GTM Research, says he doesn’t like the Moore’s Law analogy, as the dynamics of solar power manufacturing are very different from those of semiconductors. However, the general forecast for relentless gains in efficiency is correct. Over the next 20 years, most analysts now expect that solar energy will keep on getting cheaper.

Widespread solar power won’t mean a world of clean and limitless energy, at least at first. Current limits to power storage mean that when the sun goes down, a lot of the power does too. But it does promise to be a hugely disruptive force that will transform century-old business relationships in the developed world and the lives of the 1.3 billion people who currently live without electricity.

Most of the recent cost reductions have been thanks to the growth of a competitive solar manufacturing industry in China, according to Shiao, who predicts that costs will now be taken out of the installation system. Such costs now represent more than 50% of the cost of an installed PV system, and Shiao predicts that this part of the value chain will be the biggest source of near-term cost savings.

McKinsey also believes that rationalizing the logistics and operations of that process will lead to a dramatic reduction in overall total system costs. In 2012, McKinsey estimated that installation costs might be brought down 40% by 2015, to $1.70 per watt from roughly $2.90 per watt, and by approximately another 30% by 2020, down to almost $1.20 per watt.

Promise for the Developing World

Many of those new solar installations are expected to be on rooftops in developed countries. However, perhaps the most dramatic changes are happening on the margin, in some of the poorest parts of the world, where micro-networks are being formed that provide a little electricity to places that previously had almost none.

Mera Gao Power, for instance, a four-year-old for-profit start-up in Uttar Pradesh, India, has already brought electricity to 13,000 households and 60,000 individuals, most of whom previously relied on kerosene for their lighting. Each micro-grid installation costs roughly $1,000 and includes two solar panels and two batteries. It can be installed in a day by three workers, and provides each subscriber with enough power to charge two LED lights, and a cellphone charger.

Convincing consumers to switch to solar power is easy in a remote village: as the founders like to say, their competition is kerosene. “The price point is actually below what people are currently spending for lighting and phone charging and the service is also superior (for less than the price of fueling a single dim kerosene lantern for three hours a night, customers get two lights each 10 times brighter than a kerosene wick lantern which run for seven hours per night; and customers like that it’s cleaner). The phone-charging element is also more convenient,” says Nikhil Jaisinghani, co-founder of Mera Gao, in an email interview.

Obstacles Ahead

Some market watchers expect adoption will accelerate as government and business iron out more of the kinks in the delivery of solar power.

In the off-grid market, Jaisinghani says he thinks the principal challenges facing other potential micro-grid providers are mostly financial and operational. “It took us a few years to get as good as we are and develop the tools we have (a database, mobile app, strong collection processes, etc.) but we also have a long way to go we believe,” Jaisinghani notes.

In more developed energy markets, regulators will need to work out in more detail how to integrate home-based solar systems with the larger grid, says Shiao.

Financing is another challenge, he adds. In the classic model of power generation followed by most of the world since Thomas Edison built the first electric company, a centralized generator supplies power to a variety of homes and businesses. Solar power means that individuals will become increasingly responsible for generating their own electricity—paying upfront for their electricity years ahead of when they will use it.

To help meet the needs of cash-strapped consumers, some installers are setting up installment loans. Others offer long-term leases designed to eliminate the cash flow problems. In US states where the leasing model is being used, 70-90% of homeowners signing up for solar power choose to lease rather than buy, according to Shiao.

But perhaps the biggest limitation to solar power at present is intermittency. Battery technology is still not advanced enough to store power in a way that would permit full self-sufficiency, so utilities will still be needed to produce most of the power needed after dark, most analysts say.

Knock-On Effects

Small-scale solar power generation is likely to have a number of large-scale business effects.

In the developed world, perhaps the biggest losers will be traditional utilities, whose importance is expected to gradually decline. Already, Shiao says, RWE, E.ON and other European utilities have faced difficulties because renewable generation sources are undercutting their traditional power plants. “Similarly in the United States,” he says, “we have a lot of rate cases and debate about net metering because some of these utilities feel that solar is threatening their business model of selling mostly traditional electricity.”

A number of power companies have begun to try to get behind this shift, but Shiao is unsure of how successful they will be. “There are starting to be cases where these utilities have seen the writing on the wall and are starting to get more involved in the actual sale or installation of solar, but there’s still a question of how does that model work and are they in the right space?”

Winners, at least in the short run, will include those Chinese manufacturing companies that have survived a recent global shakeout of solar power due to overcapacity, and European firms that have survived despite slashed government subsidies, says Shiao.

Now, with production costs squeezed, buyers are likely to turn toward reducing installation costs, Shiao believes, and he expects many installation companies will now face increasingly hot competition as the scale of the installation business grows.

The Chinese survivors are likely to do particularly well, in Shiao’s view. “I think the Chinese companies out there now will remain important in the near future,” he says.

Overall, vertically integrated solar companies “may be in a little bit better position to weather the storm… just because they’re a little more diversified,” Shiao says.

Of course, those who stand to gain most of all will be the world’s 6-plus billion regular breathers. Roughly two million people die early every year because of air pollution, many of them in the developing world, according to a 2013 estimate by scholars at the University of North Carolina at Chapel Hill.

Especially fortunate could be the three billion people who currently cook and heat on open fires and leaky stoves using wood, dung or coal, according to a 2011 estimate of the World Health Organization, including the billion or so who light their homes with kerosene.

 

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