China Asks: How much will it cost us to make Solar Cheaper than Coal?

Do you remember when Dr. Evil was going to hold the world ransom for $1,000,000?

Screen Shot 2014-06-05 at 9.53.19 AM

This is what we are facing today in Solar – the Dr. Evil ultimatum. The cost to get Solar to coal parity is going to be laughably tiny.

The cost sounds like a lot of money to old people, or to people who haven’t thought it through, or to people who do not know how large world GDP is today and how much we spend on energy already.

But the cost is tiny, and China laughed when they found out the cost.

I’ve been in a twitter argument with Michael Shellenberger. Michael Shellenberger is a sharp guy,so please read what he has to say on Solar. But I think he is missing the big picture about solar. He is:

  1. arguing for innovation driven approach to driving solar costs lower
  2. arguing for a market driven approach to implementing solar

This is a great approach for something like the a handheld computer like the iPhone, as Steve Jobs found out the hard way with the Newton. But with solar, he’s missing the biggest driver and reason solar is happening today and not 25 years in the future.

Solar is happening right now because China needs Solar to be cheaper than coal in China. Pollution is terrible in China.

Bejing PollutionWe’ve all see the pictures of China’s pollution problem, but here is one just as a fresh reminder of how bad it is there.

China decided back in 2000 they wanted needed to go green due to what was obviously going to be a massive environmental problem. I had friends tell me pollution was  a terrible problem for China in the early 2000’s. Everyone in China knew this was a problem that had to get worse because they needed the electricity and energy.

China needed a solution to provide huge amounts of cheap electricity and not cause pollution. There are not many ways to do this. Solar was one possible path to clean and cheap energy way back in 2000, but it was very expensive then, and could not supply much capacity because there were few Solar production facilities.

So the Chinese leadership asked a question:

“How much will it cost to make Solar Cheaper than Coal?

This question has an answer. It turned out to be a dollar value China was willing to pay.

The dollar answer to this question requires knowing a few stylized facts about solar:

  1. Solar gets 20% cheaper for every doubling of worldwide installed capacity. This is called Swanson’s Law and has held for at least 40 years.
  2. The amount of installed solar is tiny today and was much smaller in the early 2000’s. This means Doubling capacity would cost very little in absolute dollar values in the early days. Even today is quite low. Testing Swanson’s law is “cheap”.
  3. Solar plants are extremely quick to develop compared to coal plants, which means the planning and possible cancellation time is very low.
  4. The market is willing to pay more for solar than it is for coal.
  5. Some increasing portion of the current year cost to test Swanson’s law will be willingly funded by the market because the market will pay more for Solar than it will for coal power.
  6. Installation capacity has a high but real upper limit to how much it can grow each year
  7. Solar plants have almost 100% of their costs up front, so the financing is an important cost factor.
  8. Solar cells last about 30 years, which is longer than the financing term, so the last 10 years are free electricity even if Solar turns out to be a boondoggle during the time you are paying for it.
  9. Electrical energy storage costs have their own Swanson’s law.

Analysts at places like McKinsey make models based on observations like this all the time. Industries are given estimated growth rates, and end up with some level of market penetration, with some mitigating factors and limits.

Swanson’s law predicted 20% price declines for every doubling of installed capacity. Since capacity was so low in the early 2000’s, doubling total world capacity a few times would cost just a few billion dollars.

The Chinese leadership turned the model on its head, and asked how much it would cost to get them to get Solar cheaper than coal.

I can imagine the conversation between the Chinese leadership and the engineers who were asking for funding.

“We have a looming environmental problem due to wanting much more electricity.”

“What are some possible solutions?”

“Solar could one day be cheaper and solve both the cost and pollution problems.”

“How much money do you need to find out?”

“A lot, about $10 billion”

At this point the leadership fall on the floor laughing. China is a country where they build entire ghost cities with nobody in them. They build massive public transportation systems in 15 years because they can. Spending $10bn to find out if they can solve both energy and pollution was completely worth it to them.

China found out something even more interesting when they asked this question about the total cost to get Solar to coal parity. The initial, upfront costs to investigating solar would be comically trivial, and they could stop at any time. Finding out if Solar was a possible solution to the energy/pollution problem would be relatively cheap.

I suspect China decided to test Swanson’s law in the 10th plan from 2001-2005. When Swanson’s law held up, they decided to dramatically up production during the 11th plan. This production build out caused the huge price drop in 2008, when the factories built in 2006-2007 began shipping in 2008. Today in the 12th guideline from 2011-2015, China is pushing production to see if they can get cheaper than coal sooner rather than later because pollution is so bad.

Environmentalism is a guiding principle in the 12th guideline – mentioned on page three! The environment is clearly an important part of the Chinese plan – not many ideas are mentioned in the guiding principles, and China takes these principles seriously. Look at how many times sustainable growth is mentioned in the guiding principles.

It turns out Solar will be cheaper than coal for China very, very soon. SunTech estimates Solar will be cost competitive with coal power in China by 2016 and 2017 at the latest. This is in line with what people expect for Solar parity in the United States, given the cost of coal based power.

Still, let’s assume SunTech exaggerating, and the time for Solar/coal parity is really 2018.

Both parts of this assumption are reasonable. Suntech is probably exaggerating the time for Solar to get cost competitive with coal. But it can’t be more than a year or two, because electricity is so much more expensive in China than it is in the United States.

(Aside: Swanson’s law probably needs to be modified a bit. Swanson’s law uses installed capacity as the driver for prices. The driver for solar prices is probably “total potential manufacturing capacity of current solar PV manufacturers”.  I am certain someone important in China noticed this by 2008 at the latest.)

Coal power is expensive in China, simply because they need to import coal from Australia. China can’t make the cost of coal lower with cheap wages.

Industrial users in China should pay about 80% more for electricity as similar users do here in the United States. So if unsubsidized Solar is about double the cost of coal here – which we know was true a lifetime year ago – then Solar must be close to coal parity in China today.

It’s important to note electricity prices for China are massively subsidized by the Chinese government even if companies are not paying the cost. Here is a Bloomberg article on this important topic:

“Support to industry totaled about 10 percent of gross domestic product, according to a 2010 study led by Huang Yiping, vice president of the National School of Development at Peking University and former chief Asia economist at Citigroup Inc. That equals about $593 billion.”

So how much was the total cost to China to make Solar Cheaper than their cost for coal power in 2018? It’s going to cost China a total of about a trillion dollars. It will cost China about 2 years of their existing subsidies to make their energy costs cheaper than dirty coal.

China is and was willing to pay this amount to get cheaper, cleaner energy.

Again, remember this $1 trillion was not an all up front cost. China was able to invest about $10 billion over the years 2001-2005 to find out if this could possibly work. China then invested another $100bn to completely dominate the world solar panel market and bring prices close to coal parity in 2006-2010. When Swanson’s law held during this expansion, they decided to go all in, make true parity an explicit goal, and so will spend another $900 billion, for a total of around a trillion dollars.

The total cost to the world is roughly $10 trillion USD. It’s going to take longer to get to coal parity everywhere, so the total amount is going to be high for the entire world. Still, this is a tiny amount of money. That’s right, over the 10 years Solar is getting cheaper than coal, it will cost about 1% of total GDP.

The total cost to the world to get cheaper, clean energy is about 12% of 1 year of GDP. World GDP in 2012 was 84 trillion. During that time, the world will spend about 8-10% of GDP on energy. This ends up being roughly $100 trillion on energy over the same time span.

Here is a link to the spreadsheet I used to get these numbers, called Solar Growth. Note I’ve overestimated China’s investment according to recent figures. Recent figures put it at 20% of the world investment, but I used 40% in this spreadsheet. Lowering the investment to 20% vastly reduces China’s cost calculation.

I don’t have the numbers yet, but it’s pretty clear we’re going to save giant portions of GDP every year by 2030. We’re talking saving 3%+ a year, and growing! This could raise our long term growth rate to 5% or more. (Take that Pikkety! That’s for another post.)

Much of the decline in price was driven by China’s decision, even if the costs are shared globally. You might see a few important things missing in the spreadsheet, which would make the cost actually paid by China far, far lower than $1 trillion.

  1. Does not account for foreign income purchasing Chinese Solar panels which would lower the cost to China
  2. The sheet assumes the market does not pay anything for Solar power, when the world seems willing to pay a premium for clean energy (Cough, Germany, Cough)
  3. Assumed China paid 40% of the world investment in Solar when it is only paying 20%
  4. Solar panels last longer than the financing duration, so at some point, solar provides zero cost electricity.

All of these points would reduce China’s paid out cost to get them to cheap, clean energy.

The next 5 year guideline spans from 2016-2020. This is the time frame in which SunTech expects solar to be cheaper than coal in China. I expect another massive buildout for China Solar which greatly exceeds expectations as Solar is economically cheaper than coal for China. Then in 2021-2025, the build will be vast – think Shanghai skyline over 1995-2000

Many people are calling for thousands of coal plants to be built in China in the years from 2020 to 2030. However, if you think about it from the perspective of how China has acted in the past, this does not make much sense. China has shown again and again it is willing to make what appears to be insane levels of investment to achieve goals.

I contend given the current levels of pollution in China, paying a modest premium for energy is completely worth it to them. If Solar ends up being the same cost as coal in just a few years, China will shift over to Solar power in an astonishing way. They will just stop building coal plants, and build an incredible amount of Solar plants instead.

Look at what China did in Shanghai. The city was entirely transformed in 20 years. China put up the equivalent of Chicago in 20 years.

Why would their response to cheap, clean energy be different? It won’t. China had a Dr. Evil moment with Solar, where it was shocked at how little it would cost to get clean energy. They tested Solar and it worked as expected. China is now laughing as they almost certainly preparing to roll out a truly huge amount of solar in the next 10 years.

This is going to drive down Solar prices far more rapidly than anyone expects. They are beginning to put together the information for the next 5 year guideline today and it looks great for Solar. The capacity China will add beginning in 2016 is likely to exceed even the highest estimates, simply because the combination of lower cost and pollution-free energy will be so compelling to China.

#FTW

Comments

  1. beowulf says:

    Outstanding piece Mike. Aside from pollution issue, this makes a tremendous amount of sense for China on national security grounds.
    Their problem is that we (the US) control their energy supply. Besides the fact t the US Navy and its allies control the world’s sea lanes, US allies control Middle Eastern oil and of course Australian coal (Australia’s Navy has been a de facto part of the US Pacific Fleet since 1942). Even without use of military force, the US and Saudi Arabia have long controlled the price of oil. Several years ago Jim Norman of Platt’s Oilgram News wrote an interesting book (“The Oil Card”) about how since at least the 1980s the US and SA have manipulated the price of oil as a wedge to keep Russia and China in line. Drive down the price of oil to depress Russian energy income, drive up the price of oil to jack up Chinese energy costs.
    http://theoilcard.com/

    That divide and conquer energy strategy may have run its course; Norman’s book couldn’t anticipate the US Government would figure out a way to piss off Saudi Arabia at the same time it used Ukraine sanctions to drive Russia into an energy pact with China. Nevertheless, China can’t count on American foreign policy incompetence lasting forever, moving to solar power (for utilities first and then electric cars) liberates their energy supply from US intervention– our Navy controls the seas but can’t blockade the Sun.

    One small caveat on this part:
    “I don’t have the numbers yet, but it’s pretty clear we’re going to save giant portions of GDP every year by 2030. We’re talking saving 3%+ a year, and growing! This could raise our long term growth rate to 5% or more.”

    The problem here is a point William Greider made in his history of the Fed “Secrets of the Temple”. The Fed always clamps down on mortgage and other credit markets whenever unemployment drops or GDP grows too fast (per Okun’s law, U3 drop and GDP growth are basically the same thing). What that means is the Fed will take whatever solar power dividend the GDP nets and view it as an inflation signal. Then, in order to restore balance to the Force (that is, whatever crappy DSGE model they’re using), they’ll hammer their real estate market with higher rate. As you’ve pointed out, its the real estate market which is the tail that actually whips the economy. It will probably take legislative reform of the monetary system to get out of this growth straitjacket.

    • Hey great point! I didn’t even think of considering national security. They have a serious national security concern about carbon energy.

      It’s entirely likely the Chinese government has some formula for estimating their true *cost* of coal. It probably looks something like this:

      economic cost + pollution cost + geopolitical cost = true cost of coal electricity

      The economic cost is the largest part, but the other parts of this equation are big enough to be considered.

      Then on the solar side, they are thinking the benefit of dominating the next huge global market is worth something, so the *cost* of solar is something like:

      economic cost – benefit from dominating multi-trillion dollar energy market for 20 years = true cost of solar

      As soon as they sniff out solar is anywhere close to good enough on a *true cost* basis, they are going to go freakishly huge on it. When true coal > true solar, the shift could be beyond anything we’ve ever seen.

      How much is the national security kicker worth in the coal equation? It has to be pretty large – on the order of a full penny. The pollution cost is probably less than the geopolitical cost for the Chinese government.

      So these concerns of national security and pollution are real to the leadership, and almost certainly a material consideration when evaluating the national policy to electricity and Solar. It’s easy to see how they could consider their true cost for coal based power to be 20% higher than the economic cost.

      It seems like the Chinese leadership is relatively committed to improving the lives of the Chinese people. It’s hard to say otherwise when they have committed to putting in 8%+ GDP growth for decades and decades.

      Then, when China decides to do something, it does it. It’s building a coal plant every day or something crazy now because they decided to build enough electricity.

      What’s going to happen the moment they think Solar is ready for prime time? A reasonable guess would be an overnight shift to building as many solar facilities as needed. We are talking 400% available supply growth for a few years running. They could have 20x the capacity they have today in 3 years, just because they need the capacity to push coal out of the way.

      I’d imagine this would happen in 2016, so we could see another quantum drop in prices around 2018.

      Did you see how they are literally moving mountains to build new cities?

  2. Great post, Mike!

  3. Mike,

    Check out the technology that Solar Wind Energy Tower Inc. (Ticker: SWET) is trying to build. I am not a scientist so I can’t comment on the tech. I am interested in hearing your thoughts regarding the project.

    http://www.solarwindenergytower.com/

    They have been approved to build one in Arizona.

    http://www.marketwatch.com/story/solar-wind-energy-towers-first-solar-wind-downdraft-tower-approved-in-arizona-2014-04-28

    Best Regards,
    Clancy

    Disclaimer: I do own some of the stock but a small amount that I can lose and it wouldn’t bother me at all.

    • Hi Clancy,

      I’ve only seen this tech a few times. This is similar to the solar chimney idea:

      http://en.wikipedia.org/wiki/Solar_updraft_tower

      The efficiency seems low, and the land use seems high. My guess is this will outperform the models but not be able to compete with PV.

      PV is crazy cheap. The good thing about PV is that the costs can continue to fall, just like the costs for printing paper fell for decades and decades. We are so far from optimizing costs on just the processes of manufacturing PV. We could see price drops of 50% or more just from improving manufacturing processes even without doing anything to improve the technology of collecting energy.

      FYI- comments with more than one link are automatically put into moderation! That’s why your comment was held up for a few minutes.

  4. Fatal flaws in this are 4, 5, and 8. Almost everyone will say they are willing to pay more. The vast majority of people say they would pay more to buy American yet most products sold in the USA are NOT made in the USA. 4-5 gone. None of the green items last as long as projected. Just look at the car batteries that lasted half the time advertised, 8 gone.

  5. #4 I don’t know

    We’ve seen people already paying more. I know my wife’s best friends family paid double 6 years ago. Now that it is paid off, the installation is saving them money big time, but they bought in 2008. So this is why I find it easy to think people will pay more – because there was a market at double rates.

    #5: This is not even remotely controversial. The market is willing to pay for coal energy. The claim is the market is willing to pay the same price for solar as it is for coal, so the price of Solar is equal to coal + solar extra.

    When someone buys solar, they are funding only the “solar extra” part in addition to what they would have paid for coal electricity. They would have bought coal electricity anyway. This part of the cost is not an additional cost to the world at all. It’s what they would have spent anyway.

    This price stays the essentially the same as solar goes down in price. Right now, about 50% of the cost of solar is power that would have been purchased anyway. So the cost of “funding” this amount of solar is only 50% of the total cost, because that is how much more solar costs than coal.

    However, Solar only cares about the total funding – because price is driven by installed capacity via to Swansons law. So now, we’re getting a huge boost to the funding simply because Solar is now close to coal costs. The amount we are spending to fund Solar is only 50% of the entire cost spent on solar – because the other 50% would have been used to fund coal.

    Then #8 – just look at this:

    https://www.google.com/search?q=how+long+do+solar+panels+last&oq=how+long+do+solar+&aqs=chrome.1.69i57j0l5.3851j0j7&sourceid=chrome&es_sm=119&ie=UTF-8

    It’s pretty common for panels to be warrantied by the manufacturer for 20 years. They are confident, so I am confident these panels have a life of at least 20 years. We’ve seen panels lasting 40 years and counting.

  6. beowulf says:

    As for the 4th point, China isn’t exactly a market economy. They can, and probably will, use brute force to reshape its energy market. Hell, we could too if it was important enough to Congress (which, lacking an obvious source of campaign cash, it never will be). During WWII, you had to have ration stamps to buy gasoline.
    http://www.oldchesterpa.com/ww2/images/gas_stamp_1.jpg

    • They use markets to get prices, then use those prices in their decisions. They are moving mountains for their new cities – literally 700 of them:

      http://www.businessinsider.com/china-will-flatten-700-mountains-to-build-a-city-in-the-desert-2012-12

      They want city there – they are putting a city there.

      At some point, they will move into Solar. When China does this, how are they going to build out? Everybody is thinking price signals are going to be how Solar rolls out, through some rational choice of Solar over coal which is only ever decided by price.

      China uses prices to make comparisons, yes, but does not wait for market forces to compel behavior. China just acts.

      We could see them ramp up production to 20x todays levels by 2018-19, and roll out terrawatts of generation in 2021.

  7. “Electrical energy storage costs have their own Swanson’s law.”

    I think this bit is a little hyperbolic. Pumped storage and battery cost haven’t shifted a lot in 100 years.

    It is also worth pointing out that China has an all of the above approach. They are rapidly building hydro, wind and nuclear. And have recently signed a new gas deal with Russia. Solar is also on the table – but will generate significantly less TWh/year for the next few decades than any one of these other sources.

    Anyways good to see China getting ambitious with cleantech. 70GW by 2017 is a lot of PV!

  8. Joyce Matthews says:

    So for the capitalists outside of China, how is money to be made from this story, short KOL, long AZ land??

  9. Meanwhile China is disputing undersea minerals rights (and the odd island or two above them) with everyone in the South China Sea.
    http://weeklywonk.newamerica.net/articles/south-west-point/

    Dumb move because its driving everyone onto Team America. I wouldn’t be surprised if Vietnam invites the US Navy back to the Cam Rahn Bay. That would certainly be a plot twist.

    • Dumb move? LOL This was a brilliant move by China. It is calling the US’s bluff. It knows US will not get involve militarily. And short of a thermonuclear war, it appears China is succeeding in showing the world that the once great USA is not so great in protecting its allies or future ally .

  10. Bruce Karney says:

    Embracing solar PV will also allow China to create hundreds of thousands of jobs designing and installing solar systems. These jobs will help reduce unemployment, especially in the West, Central and North parts of the country which have the most sun. This is one more reason why China’s leaders would be bullish on solar.