The Road to PV

by Terje Osmundsen

Terje Osmundsen (Norwegian, born 1957) is a former state secretary to the prime minister of Norway, with a varied career from international business (natural gas, engineering, telecom) to publishing and scenario-based consulting. Since 2009, he has been senior vice president of Scatec Solar AS, a leading developer and supplier of solar power plants.

In 2012, the prospect for renewable energy looked gloomier than it did a year ago. Particularly in Europe, the financial crisis has led to radical cuts in incentives and targets for renewables.

In the United States, and other markets, electricity prices are stagnating or even declining, not least due to abundant supply from the newborn shale-gas industry. The prospects for a global climate deal that could trigger the required investments in green energy seem depressingly far away. It is not surprising, therefore, that shares in clean-tech companies have dropped more than in any other industry sector over the last eighteen months.

But there are other signs of change. Despite the economic crisis, new solar capacity around the world increased by a staggering 54% to about 28 GW of installed capacity. Solar investment touched $140 billion during the year, up 36% relative to the year before. The misfortune of numerous equipment suppliers didn’t deter the global oil company Total from entering the photovoltaic (PV) industry via the acquisition of SunPower and two other companies. And from Beijing, news came that China will follow the example of Germany and introduce a guaranteed tariff for solar PV to support its goal of installing 50 GW by 2020. Where is this heading?

From Nuclear to Gas?

The most important long-term trend shaping electricity generation is the urgent need to decarbonize the sector. This is taking place slowly, but irreversibly, despite the fact that coal appears to be the winner in the medium term: close to 40% of all new power-generation capacity under construction or planning in the period up to 2016 is coal-fired. Pre-Fukushima, conventional wisdom had it that nuclear was the only low-carbon source that could be a real alternative to coal.

Today, the outlook for nuclear looks grim. I predict that the majority of current plans to add nuclear capacity in the coming years will not materialize—particularly because a utility burning shale gas will be much cheaper. The projected costs of new nuclear plants have regularly been revised upward and will most likely be upped again to meet new safety regulations post-Fukushima. Already today, in the southern parts of the United States, developers are offering solar PV power at a lower cost than the calculated generation cost of a new nuclear plant.

There are many reasons to applaud a gradual phaseout of nuclear, but it does make fighting climate change even harder. How much harder depends on the outcome of the looming battle between coal and natural gas. One year ago, it looked like only coal was abundant and cheap enough to replace nuclear. But with the recent discovery of shale gas resources, many parts of the world will have an abundant supply of natural gas for several decades to come; the faster the shift from coal to gas, the better for the climate.

There will be regional differences. In Europe, North America, and Japan, stiffer regulations and the rising cost of carbon combined with competitive available gas will tempt most utilities to switch to gas. In emerging markets like China, India, and South Africa, coal-fired power generation will most likely remain the utilities’ preferred choice to 2020. But even here there will be a gradual switch toward gas.

What are the implications for renewable energy? In the next five to ten years, I am afraid the natural-gas revolution combined with the deep financial crisis in the “old world” will lead to reduced support for renewable energy, particularly in countries with significant gas resources.

But in the medium and long term, the rise of gas will be good news for renewables, mainly because gas fits better with the intermittent power from wind and solar. Gas-fired power-generation plants can relatively easily be turned up and down, when there is need to supplement the variable flow of electricity from solar and wind plants. We will see numerous “hybrid” solar/gas or wind/gas power plants, offering continuous power to the network. This will be the case even if the current controversies around shale gas fracking will limit somewhat the new supply of unconventional gas.

As a result of these trends, the share of renewables in the world’s electricity mix will grow from less than 20% in 2010 to more than 30% in 2030, equivalent to more than a doubling of electricity produced.

Initially hydro and wind will be the biggest contributors of green power, but beyond 2025–30 solar PV will take the lead and become the principal source of electricity generation by 2050. This transformation will be driven by dwindling costs and subsiding investment risk.

Dwindling Costs

The cost of electricity from PV has continued to fall by more than 10% per year. This impressive performance is illustrated in figure 2-2 on page 22. With every doubling of PV capacity, the cost of PV panels falls by 20%. There are two drivers to this rule of thumb: the cost of manufacturing the panels is declining, and the efficiency of each panel is increasing. Much R&D money is being spent on increasing efficiencies and learning curves in capturing solar energy, and advances could reduce the cost of solar power to one-tenth of current cost. But it will take time. Still I believe that the average investment cost per watt capacity will continue to fall by 5%–10% per year and that average performance of the panels will improve by 3%–4% per decade.

Even at today’s prices, utilities can reduce costs by replacing diesel- and oil-generated power with solar PV at peak hours. In sunny regions (solar radiation above 1,700 kWh per square meter per year) the cost of electricity will approach 10 US cents per kWh in 2015, falling to 7–8 cents in 2020. This will make PV competitive with the cost of adding new nuclear, coal, or natural gas7 capacity in 2020. By 2030, the cost of PV power will have dropped as low as 5 US cents per kWh in major parts of the world, making it cheaper than any other alternative. PV power will then have become the preferred choice for most utilities.

Subsiding Investment Risk

Massive investments are required, however, to reach these cost targets and to grow the industry from 0.1% to 20%–25% of the world’s electricity production: more than $10 trillion (= 10 T$) in PV power plants only, according to IEA.8 Several times more will be needed in the grid extensions and storage solutions needed. This amounts to around 1% of global GDP every year over the next forty years.

In this decade, the required investments will occur only if governments continue to provide support in the form of fixed tariffs, quotas, tax credits, or a real carbon levy on fossil fuels. The higher costs and perceived political risks of investing in PV mean it will remain a daily struggle to attract investors and lenders. But as we approach 2020, things will look different. No longer dependent on government incentives, PV power plants will suddenly look like the low-risk alternative, virtually a “safe haven” for long-term investors: zero technology risk, no fuel costs, no carbon risk, and—not least— the prospect of the amortized PV plant operating at almost no cost for many years beyond the guaranteed twenty-five-year lifetime. When this becomes reality in five to ten years’ time, a whole range of cashrich players will flock to the PV investment market: utilities, energy companies, pension funds, development banks, private investors, infrastructure investors, and energy-consuming industries, among others. Ideas and technology will meet capital, and the world will get disruptive innovation.