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The Rise of Cheap Solar Energy ... How are existing utilities reacting to solar energy becoming cost-effective?

Burgess COMMENTARY

Peter Burgess

In Focus Previous The Rise of Cheap Solar Energy ... How are existing utilities reacting to solar energy becoming cost-effective? Jana Schoenknecht - Shutterstock.com

Solar energy could soon supply 18% of electricity demand in parts of Europe without subsidies.

  1. 1. Solar panels will be increasingly attractive as they keep getting more efficient and vastly cheaper while household power bills keep rising.
  2. 2. From a cost-saving standpoint, every family home and commercial rooftop in Germany, Italy and Spain should install solar panels by 2020.
  3. 3. If these countries did install that much solar power, it would have a huge impact on conventional coal-, gas- or nuclear-based power firms.
  4. 4. Thousands of power customers in Europe are flocking to renewables-based utilities with the rise of solar energy.
  5. 5. Solar energy is becoming so cost-effective now, an “unsubsidized solar revolution” could soon supply 18% of electricity demand in parts of Europe.
From Renewables: A Rising Power by Pilita Clark (Financial Times)
August 8, 2013 6:12 pm Renewables: A rising power By Pilita Clark, Environment Correspondent

Plunging prices are finally making solar power competitive with conventional sources of energy

Harnessing the sun: solar panels march across California’s Mojave desert. The industry expects global capacity to double by 2016

When Ricard Jornet opened his organic beachside restaurant outside Barcelona in 2007, he was determined to power it with the solar panels the Spanish government was then lavishly subsidising. He had to think again when he saw the price tag. “I looked into it and the cost of the system was nearly €60,000,” he says. “It was too expensive.” Today, cash-strapped Spain has slashed those subsidies but Mr Jornet has gone ahead anyway. He has covered nearly half the roof of his Lasal del Varador restaurant with solar panels. The reason? “They cost €15,000,” he says, adding he had put in an 8.6 kilowatt system without any subsidy at all.

Until now, the idea that unsubsidised solar power could make enough financial sense to be competitive with conventional electricity has been largely confined to the realms of environmental campaigners and renewable energy advocates.

However, as solar panels become more efficient and vastly cheaper, and household power bills keep rising, analysts at some of the world’s largest financial institutions say such a prospect is indeed possible – and likely to cause profound disruption in the energy industry.

“We’re at a point now where demand starts to be driven by cold, hard economics rather than by subsidies and that is a game changer,” says Jason Channell of Citigroup.

Another global bank, UBS, says an “unsubsidised solar revolution” has begun that could eventually supply as much as 18 per cent of electricity demand in parts of Europe.

“Purely based on economics, we believe almost every family home and every commercial rooftop in Germany, Italy and Spain should be equipped with a solar system by the end of this decade,” it said in a research note. Such an outcome would have enormous implications for a conventional power industry long accustomed to its coal, gas or nuclear plants being the sole source of its customers’ electricity.

The industry’s belated recognition that thousands of its customers are turning into competitors has spurred some utilities to fight back – and the solar manufacturing sector itself faces a sweeping shake-up. But the economic drivers behind solar’s surge are unlikely to go away, analysts say.

“It is very significant,” says Jenny Chase, head of solar analysis at the Bloomberg New Energy Finance research company. “It is not only significant for the future of the solar industry but also for the future of the energy industry. It will cause problems we haven’t even begun to imagine.”

One large problem for utilities is the loss of customers during daylight hours when the industry typically makes most money. Compounding this, the same companies are still expected to build, maintain and operate the power stations needed to meet overall demand.

The strain is being felt in countries such as Germany, the world’s biggest solar market with nearly a third of global generating capacity.

Solar photovoltaic systems accounted for nearly 5 per cent of electricity generated there last year, up from 3 per cent the year before, according to BDEW, the German association of power generators. Renewable power, including wind and hydropower, took a 22 per cent share of generation last year while natural gas fell to 11 per cent from 14 per cent.

Eon, the country’s largest utility by sales, says the rise of subsidised green energy was one reason it had to ditch its profit targets for this year. With renewable energy enjoying priority access to the German power grid, Eon says one of its gas-fired power plants ran for only nine days last year.

The surge in clean energy, and solar power in particular, has taken traditional power companies by surprise, says UBS analyst Patrick Hummel.

“The utilities simply ignored the topic of solar power for too long,” he says. “They didn’t really see it as a significant threat to their conventional thermal power generation. Now they are feeling the impact, which is already quite massive.”

The utilities’ dilemma is a little-appreciated consequence of what has turned out to be a remarkably effective – if expensive – piece of public policy making.

Globally, solar power accounts for less than 1 per cent of electricity supply. But its growth has been extraordinary, largely because of the renewable energy subsidies EU countries began introducing in the 1990s.

Only 10 years ago, the generating capacity of the entire world’s solar photovoltaic systems totalled just 2.8 gigawatts, about the same as that of six average-sized coal power stations.

Today there is more than 102GW and solar PV power has been the biggest source of new electricity generation for two years in a row in Europe. The industry predicts global capacity will double to 200GW by 2016.

European solar installations fell back last year in the wake of the eurozone crisis but they have powered ahead elsewhere, notably in China, amid a stunning decline in prices.

. . .

When the solar panels that convert sunlight into electricity first came on to the market in the 1970s they sold for more than $70 a watt in 2012 prices. Today they cost less than 80c a watt, with prices plummeting by 80 per cent in the past five years alone, according to Bloomberg New Energy Finance. “I’ve never seen a crash in prices like this,” says Eddie O’Connor, industry veteran and founder of Ireland’s Mainstream Renewable Power.

Part of the price fall has been driven by a glut in supply that grew as solar power manufacturers around the world ramped up production to meet the demand created by the EU subsidies. More recently, a flood of low-cost Chinese solar panels, fuelled by government support, has driven prices down further.

The market’s growth has also accelerated an industry learning curve driving overall solar plant costs down and efficiency up that some compare with Moore’s law, the 1965 prediction by Intel co-founder Gordon Moore that the electronics industry could double the number of transistors on a chip roughly every two years.

These advances are important, although they are overshadowed by the wave of bankruptcies that have battered the industry, from the US to Europe and now in China, too. China’s Suntech, once the world’s biggest solar-panel maker with a market value of $16bn, filed for bankruptcy in March and others are expected to follow. In fact, the solar landscape looks so messy it is difficult to imagine it poses a threat to anyone, let alone the much larger conventional power industry.

Appearances can be deceptive, says Ash Sharma, senior director of solar research at the IHS research company. “The solar industry is still having teething problems,” he says. “It looks chaotic but the industry is in its infancy. You would expect to see a shake-out like this. We will see more companies going bankrupt, further consolidation and then a return to healthier times.”

As yet, unsubsidised solar systems worldwide probably number in the low thousands and account for less than 0.1 per cent of global solar installations, he says, but they are set to grow quickly as costs keep falling.

. . .

Prices vary widely depending on location but in Europe the average cost of power generated by residential solar PV systems ranges from €151 per megawatt hour to €275 MWh – more than double the cost of power from new nuclear, gas or onshore wind plants, according to IHS data.

However, solar PV systems are now so cheap they still make sense in countries with high power prices – even those without much sun that are cutting subsidies, such as Germany. The lifetime cost of solar PV power fell below industrial power prices in Germany last year, IHS says, making it cheaper for businesses to install and use their own solar power instead of buying it from a utility. That some have done exactly that explains why even those worst hit by the industry’s woes remain optimistic.

One of the recent failures in Europe was Hamburg-based solar manufacturer and developer Conergy, which last month filed for insolvency. Mr Jornet’s restaurant solar panels were among 56 unsubsidised solar systems Conergy says it has installed in Spain, as well as others in Australia and South Africa. A spokeswoman said the company expected to continue such work now that a US investor is poised to take over most of the business, but not its struggling panel-making divisions.

Further south in Freiburg, Germany’s 15-year-old SAG Solarstrom company is developing several subsidy-free solar projects, including a massive 440 megawatt project in Extremadura, in the west of Spain.

“People think solar PV is only possible with subsidies and that is totally wrong,” says Karl Kuhlmann, the chief executive. “We’re happy that the industry is moving into an unsubsidised phase. It makes it simpler, better and totally independent from politicians.”

This is not quite true. The impact of cheap Chinese solar panels on western solar-panel makers has stirred political tensions, with trade rows over the threat of punitive tariffs erupting in the US and Europe.

The effect on solar prices is unlikely to be large or long-lasting, analysts say, pointing out the truce Brussels agreed with Beijing last month was so favourable to China that EU ProSun, a coalition of European manufacturers, is threatening to sue the European Commission.

The more immediate threat to the nascent unsubsidised solar industry may be closer to home.

In the US last month, Arizona’s largest utility, APS, asked regulators to look at imposing fees on people installing new rooftop solar systems to help pay for the cost of a grid they still use “essentially for free”.

“As the number of customers installing solar goes up, it drives rates even higher for non-solar customers, making the problem more difficult to solve,” it said in a statement. Utilities in other US states want similar action, infuriating solar companies.

Another outcry has broken out in Spain, the EU’s third-largest solar market after Germany and Italy, where the government last month also produced a proposal to impose new charges on rooftop solar owners.

“It’s really crazy,” says Mr Jornet. “They want me to pay for the electricity I take from my own solar panels. It’s amazing.”

The government argues the levy is fairer and will also help it keep tabs on the growth of solar power at a time when Spain’s overall electricity capacity is far higher than peak demand.

Iberdrola, Spain’s largest power utility by sales, said it did not push for the new levy but believes Spain’s once-generous solar subsidies created a “bubble” of uncontrolled growth in solar installations. “This effectively meant that people with solar panels in their homes were not contributing equitably to the maintenance of the grid which everyone benefits from, so from that point of view it’s a logical and fair decision,” a spokesman said.

Regulators still have to decide if the utilities will get their way. What does seem certain, however, is that the surge in solar power is changing energy markets in ways we have only begun to understand.

Developing nations: Cheap solar could ‘leapfrog’ subsidies

The plummeting cost of solar power systems is driving more than a surge in suburban rooftop panels in Bavaria and Barcelona.

It also promises to provide regular electricity to the 1.2bn people who have no access to it today. Low-cost solar panels could help them leapfrog traditional power grids in the same way parts of the developing world sidestepped fixed-line telecommunications networks and went straight to mobile phones.

An 80 per cent fall in the cost of solar panels since 2008 has opened up new business opportunities for companies such as Germany’s Donauer, which has just developed the D: Hybrid, a system that allows thousands of solar panels to be attached to the diesel generators that are a fixture in industrialising countries with rickety electricity systems.

Diesel fuel is still expensive in these countries and there is the added cost of transporting it and maintaining generators.

Donauer claims that by integrating solar power with a diesel generator, it can extend the life of the generators and sharply cut the use of fuel.

As there is no need to use expensive batteries for storage, the cost of the system is lower and operators can recoup initial outlays in as little as five years in some countries.

Since it launched the D: Hybrid this year, Donauer has put one on a hospital in Haiti that was spending about €150,000 a year on diesel and has just won a contract for a much larger one on a Namibian brewery.

It says the Haitian system is already saving the hospital up to €4,000 a month and the brewery should recoup its initial costs within six years.

It is set to install similar systems in South Sudan and other Caribbean countries.

“There is a lot of potential because more than 40 gigawatts of new diesel generation capacity is sold every year,” says Benedikt Böhm, Donauer’s D: Hybrid sales manager.

The subsidies wealthy countries introduced to encourage the growth in renewable energy have driven the steep fall in solar costs but barely exist in countries such as Haiti or much of Africa. But if solar power continues to get cheaper, the solar subsidy itself could end up being leapfrogged as well.

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