Coal already faces tremendous competition in the U.S. from low cost natural gas, and pressure from environmentalists concerned about its pollution. The last thing the coal industry needs are more problems. But when it rains it pours… or in this case when it’s sunny the solar industry looks to rain on coal.
Coal cost an average of roughly $0.06 per kWh globally which makes it the cheapest power source on average around the world. (Natural gas is much more expensive outside the U.S.) Solar is looking to usurp the title of cheapest power source though.
In 2016, countries from Chile to the United Arab Emirates broke records with deals to generate electricity from sunshine for less than 3 cents a kilowatt-hour, half the average global cost of coal power. This year Saudi Arabia, Jordan, and Mexico are poised to hold auctions and tenders which could see solar generation prices fall even further.
The solar industry is operating more and more efficiently each year with solar prices down an average of 62 percent since 2009, and every part of the solar supply chain becoming more efficient and lowering costs. Economies of scale, increasing manufacturing expertise, and new technology like diamond wire cutting tools have all helped make solar’s progress the envy of the energy complex.
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Coal producers are not taking the threat to their price advantage lying down though. The coal industry correctly points out that it has a consistency unavailable with solar (even in Saudi Arabia the sun still sets at night). Solar’s pricing advantage doses not take into account the cost of maintaining backup energy supply (either through battery storage or through alternative generation means).
The industry has a point of course, but it’s getting harder and harder to lean on that argument as solar keeps getting cheaper, and new technologies like perovskite emerge on the horizon.
The cheap solar power is benefiting utilities like Italy’s Enel SpA. The solar industry itself faces very tight margins, but solar users are benefiting. Part of the magic for solar has come from the old backbone of capitalism – competition. Sunbelt countries like Chile and Saudi Arabia are making heavy use of auctions for projects where the lowest price solar provider wins. That’s pushing prices lower compared to the negotiated project costs that often prevail in other sectors of the energy complex such as coal. Related: Saudi Arabia To Spend $50 Billion On Massive Solar Push
An August solar auction in Chile yielded a low bid of 2.91 cents per kWh, while an auction in September for the UAE led to a bid of 2.42 cents per kWh. In bidding on such contracts, solar developers are betting in part on solar prices continuing to fall in the future. The view is that even if a project is marginally profitable with current technology and prices, deflation across the supply chain will fix that problem going forward.
Coal faces enormous cost pressures as well and the industry is doing what it can to cut prices, but the reality is that the industry is not structured in such a way that it can significantly lower costs. There is very little R&D being done in the coal industry on new technology to cut costs in comparison to the solar industry. Coal has tremendous legacy costs including labor heavy high cost work forces that are unionized in some cases. Coal has also been around for so long that all of the low hanging fruit in cost savings has likely already been realized. By comparison, solar is just hitting its stride.
All of this is good news for consumers and particularly utilities that benefit from lower wholesale power prices. It’s not great news for those hoping for a miraculous comeback in the coal industry.
By Michael McDonald of Oilprice.com
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