I took part in a workshop yesterday entitled “Are we at the start of the solar era?” which was organized by the German energy think tank Agora. The focus of the workshop was a report published some months back by the Fraunhofer Institute entitled “Current and Future Cost of Photovoltaics.”
I had to give a presentation on my thinking on the report and focused on its four key
1. Photovoltaics is already today a low-cost renewable energy technology;
2. Solar power will soon be the cheapest form of electricity in many regions of the world;
3. Financing and regulatory environments will be key to reducing cost of solar in the future; and
4. Most scenarios fundamentally underestimate the role of solar power in the future energy systems.
The first point is indisputable. The cost of producing electricity using solar has fallen by 80% in a decade and there are more than 50 countries across the world that have reached grid parity. The second point is also clear to me. I believe that costs of solar will continue to fall and that will become the cheapest way to generate electricity. But I also believe it will happen quicker than what Agora and the Fraunhofer think. The study shows fully installed costs for ground based system in 2025 in between a best case €640,000 ($711,000) per MW to a worst case of €810,000 ($900,000) per MW. I gave the view that we would reach €700,000 ($780,000) within three years and €500,000 ($556,000) by 2025. It was interesting that this was backed up other panelists and industry leaders in the audience. And just to be clear what this means, at these levels solar will be cheaper on an levilized cost of energy basis (LCOE) in 2025 than all other forms of generation across a large part of the world.
The third I fully agree with. Cost of capital is a very important variable in determining the ultimate financial viability of a solar power station and much more so than say with a gas turbine. The reason for this is that the CAPEX cost of a KWh of generated electricity using solar are at best four times higher than that of gas but the advantage being that there are no fuel costs and very low O&M costs. This implies that solar is all about how cheaply it can be financed, hence the move by solar developers such as SunEdison to set up YieldCos. And this can be clearly seen in the example below, from the study, which shows the enormous range in LCOEs in Spain given a WACC of 5%, 7.5% and 10%.
The fourth was something though I could not fully agree with it. I agree that most investors and research institutes are too conservative about solar growth going forward. I myself have made that mistake in the past and the growth always managed to be faster than I thought! But their Scenario 4 sees 1,000GW of new installations in 2030….Now if that happens we will certainly have a revolution given that combined new fossil fuels additions and new nuclear are under 100GW a year. And is 1,000GW of new solar installations per year possible? Yes but integrating all that intermittent solar energy into our energy system is going to require a radical rethink of how we incentivize and pay for our power as well as how we use it in our system.There will need to be intelligence put in the system particularly on the demand side but we will also require storage which will most likely come in the form of cheap batteries, both stationary, in our homes and businesses, as well as mobile batteries in our electrical vehicles…