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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Solar Power To Threaten Conventional Power By 2020

Solar

Researchers project that solar power will become cheaper than conventional, fossil fueled electric generating sources by 2020. (The researchers do not say that directly, but their numbers do.) But the news gets even worse for incumbent utilities. By 2030, solar-plus-storage could threaten the economic relevance of their distribution grids by making less necessary the connection with the local electric utility.

In short, more efficient solar panels combined with lower cost battery storage will threaten the economic viability of the entire electric utility distribution grid by 2030. Stated another way, those supposedly low risk, high yielding distribution utilities like Con Ed, for example, may at some point in the not-too-distant future become high risk and no yield equities if this thesis plays out.

If consumers can economically produce, store, and swap electrical energy, they will not need the power grid. They can replicate it with other technologies and at lower costs. That would strand utility assets on a grand scale as an increasing numbers of consumers cut the cord. If they do, electric utility industry revenue will decline sharply, with certain utilities service areas more vulnerable than others. We suspect the rating agencies will take note of this.

At present an electricity customer in the United States pays 10¢ per kWh on average. Of that amount roughly 3¢ pays for the distribution network, another 1¢ for transmission, 2¢ for fuel and 4¢ for other generation expenses.

The Terawatt Workshop, convened last year by the Global Alliance of Solar Energy Research Institutes, recently published its findings. Its first conclusion: solar photovoltaic power costs could decline to 3¢ per kWh by 2020. (Current costs vary but are around 5¢ per kWh).

Related: U.S. Oil And Gas To Contribute $1.9 Trillion To U.S. GDP By 2035

If solar power costs decline to projected level much of existing electric power generating capacity here abroad will become uncompetitive. This should come as no surprise. That is what new technologies like solar or wind power do. They replace older technologies (I.e fossil based) and do so at lower costs. New technologies, like these, are often relentlessly deflationary.

But this technological replacement/displacement will produce adverse financial consequences for the owners of legacy power generating as well as distribution assets. Many of these assets will be rendered obsolete long before they are fully depreciated. As a result, owners of utility capital (both equity and debt) may end up earning disappointing investment returns in the not too distant future.

Existing generators that now need 6¢ to cover fuel and operating costs would have to drastically cut costs, possibly restructure and surely pressure the fuel suppliers to slash prices in order to remain competitive.

Solar power only works, however, when the sun shines. Consumers relying mainly on solar power need electrical back up from the local utility when clouds roll in or the sun goes down. What form that backup takes has become a major bone of contention in regulatory circles. How much should the solar consumer pay for it? Too high a price discourages solar power development. Too low a price for backup forces the utility and its other customers to subsidize the solar consumer.

Solar consumers often produce more energy than they need, as well. They can, in certain jurisdictions, sell their excess electricity back to the local utility in an arrangement called net metering. But here again, the price the utility pays for this excess energy matters. Should the utility pay a wholesale price on the theory that solar is just like any other electricity once in the wires? Or should it pay the far higher retail price on the grounds that solar power comes into the distribution system where it is needed and does not require any of the assets needed to deliver power from distant sources?

For now these are questions for state and federal regulators. However, once solar consumers combine cost effective battery storage with their solar panels (enabling them to store excess power and reduce their dependence on the grid)--franchise owning utilities will inevitably begin to lose revenues. At that point, as competitive markets emerge at the distribution level, the regulator's role will change. The guaranteed return on invested capital goes out the window.

The Terawatt Workshop projected that storage (that is, round trip in and out of the battery) costs might fall to 2.5¢ per kWh by 2030. Thus, the solar electricity producer with storage might have a total cost of 5.5¢ per kWh, assuming no further improvements in the photovoltaic cells. Related: Gas Looting In Mexico Turns Deadly

Of course, we do not know what grid based electricity will cost in 2030. But for analysis let's assume fuel costs remain flat and other costs reflect historical productivity gains. That results in a grid price in 2017 dollars of 9.0¢ for an average kWh of electricity in the US. This is not even remotely competitive with solar plus battery storage cited in our example.

Solar power researchers know what they have to do to reach the projections that they have set forth. We believe they are likely to attain or even exceed their goals. Conventional, fossil fuel based energy producers and the utilities would require monumental technological strides plus significant R&D efforts merely to remain competitive. As the bard said, sometimes you don't need a weatherman to know which way the winds blow.

By Leonard Hyman and William Tilles for Oilprice.com

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  • Steve Oren on May 11 2017 said:
    Too late. Solar and wind are *technologies* and like cell phones and computers, they get better and cheaper, every single year. The cost of solar and wind have been falling by 5-20% for the last decade, and costs will *continue* to fall for another decade. The cost of utility solar fell 22% in 2016 alone.

    In the best locations, solar is dirt-cheap:

    Unsubsidized solar in Abu Dhabi for 2.4 cents per kWh: http://fortune.com/2016/09/19/world-record-solar-price-abu-dhabi/

    Unsubsidized solar in Chile at 2.99 cens: https://www.bloomberg.com/news/articles/2016-05-03/solar-developers-undercut-coal-with-another-record-set-in-dubai

    Unsubsidized solar in Mexico at 2.7 cents:
    https://www.pv-magazine.com/2017/02/06/mexico-signs-lowest-price-solar-contracts-in-the-world-to-date/
  • zipsprite on May 11 2017 said:
    And that is without any pressures from greenhouse gas reductions. Factor in CO2 regulations and fossil fuel power generation looks doomed.

    Fossil fuel electricity is at the long end of technological evolution. Most of the easy improvements in efficiency have been made. Renewables and storage are just getting started and are in a super competitive environment = fast evolution and improvement. The next ten years in energy should be most interesting.
  • null on May 11 2017 said:
    They wildly understate per kwh cost in US!

    https://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_6_a
  • Kay Parker on May 15 2017 said:
    Keep dreaming. With one power plant the size of a high school gym, you can power a whole city. But you'd need solar panels as large as the whole city to power with solar. The materials used difference is orders of magnitude greater. Which is why solar is so much more expensive.
  • Josh Jones on May 16 2017 said:
    What the @$%! ever. That's why a whopping 1.4% of America's electricity comes from solar. And it's "dirty" energy in terms of what it does to our electrical grid. Conventionally generated electricity is vastly preferable for transmission because it is consistent; hundreds of nickle and dime solar farms destabilize the grid and make blackouts and other major disruptions more likely. Furthermore, solar farms are eyesores that destroy the countryside, and most importantly are intermittent at best; they do nothing at night but waste space. Storing solar-generated electricity in batteries sounds great... massive amounts of lead and sulfuric acid are great for employees and the environment! Just transporting battery materials on the scale required would prohibit their use.

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