The Solar Powered Death Spiral For Utilities Begins – In Hawaii

A solar powered death spiral for utilities and conventional power has already begun. Solar power is proving to be more disruptive, more quickly than anyone imagines.

People think “Solar needs to get to grid parity before it’s widely adopted.” This is simply false. There is no one price for electrical power. Electrical power has different prices to different consumers and at different times of the day.

Solar only needs to be less expensive than the most expensive electricity for market participants to make a rational decision to switch to solar.  Solar is already cheaper than a large part of the electricity market. This will vastly accelerate adoption of solar and also completely disrupt the business model for utilities.

This Solar Powered Death Spiral for Utilities is already starting in Hawaii. It’s going to spread across the U.S. faster than a zombie plague – and there is nothing the Utilities can do to stop it.

The conventional wisdome is eventually Solar will be cheaper than most other forms of electricity. But what does eventually mean in terms of years?

Becoming the cheapest power in 5-7 years or solar taking 25 years to beat coal would have vastly different impacts on our world. Most people think that Solar will be cheaper than coal in somewhere between 20 to 30 years. This is what the EIA and other traditional energy sources expect.

Yet, Solar is far closer to being cost competitive than anyone realizes, as I showed in my last post on Solar. Still, even this low price shock doesn’t fully capture the speed Solar will be adopted. I suspect Solar energy will be adopted far faster than anyone expects – and get much cheaper, much faster than anyone expects. Solar could easily be the cheapest form of electricity in just a few years.

How does happen? Solar just needs to be cheaper than the most expensive energy provided by utilities for the utilities death spiral to begin, and for solar to explode in use. And the death spiral has already begun, in Hawaii of all places.

How the Solar Powered Death Spiral Works

Utilities rely on large numbers of customers to pay for the gigantic fixed cost infrastructure required to deliver energy to your home. The first 80% of customers is important – but the last 20% of customers are the most important to utilities. They need every customer in their range to participate and pay for the huge infrastructure costs. Utilities can then spread the massive costs of power plants, power lines, and last mile maintenance across the entire pool of paying customers.

Not all customers pay the same rate. Some customers pay more than others, and sometimes these differences in costs can be quite high. For example, in California, it is entirely possible to pay 3.5 times as much for as your base rate for electricity. If you happen to use a lot of electricity one month, or if there is unseasonably warm weather, you can easily see an electricial bill which is extremely high.

Solar disrupts this business model entirely. Solar vastly reduces the energy usage from some customers, and therefore reduces the amount these customers pay to support the infrastructure. Those major fixed costs the utilities must pay – such as the loans to pay for power plants and infrastructure – do not go down at all when people switch to solar.

These fixed costs must then be distributed among a smaller client base. This causes energy prices to go up for the remaining customers. Of couse, this just makes solar more attractive to the remaining customers for the utility.

You don’t have to believe me on this. It’s already happening in Hawaii, and the Edison Electrical Institute published a huge paper on this risk just a few months back. The Utilities are terrified of this happening.

 But there is another problem for utilities – Solar gets cheaper to install as more is adopted.

There is a “law” similar to Moore’s Law for Solar – it’s called Swanson’s law. Swanson’s law states Solar energy gets 20% cheaper every time capacity doubles. So if there is a reason to install a lot of Solar over the next few years, then we can expect prices to drop at a relatively high rate.

Swanson’s law has actually accelerated over the last few years. Since 2008, Solar is dropping at 40% for every doubling of capacity. This is double the predicted rate of Swanson’s law.

If only there was a reason for Solar energy to double in capacity two or three times in the next 7 years!

It’s pretty clear there is a great reason to install a truly gigantic amount of solar over the next few years. Solar is cheaper than the most expensive forms of electricity, and provides the most electricity exactly when electricity is most expensive.

You can see what is going to happen. A relatively small amount of people adopt solar in a specific geographic area. This causes prices for utility delivered power to go up. This makes solar an even more attractive alternative – which pushes prices for installing solar down even more…hello death spiral.


How competitive is Solar? There is a proposed plant in New Mexico to be completed in 2014, and the price paid per kwh is going to be 5.79 cents per kwh.

“Shayle Kann, Director of Research at GTM, said, “This is an extremely low PPA price for a project of this size and with this delivery date (May 2014). Comparably sized projects in California have PPAs generally above 8 cents per kilowatt-hour before incorporating time-of-use (TOU) factors — and those are mostly for delivery in 2016 or 2017. However, note that the project will likely be eligible for New Mexico’s state production tax credit (PTC), which will effectively add something like 2.5 cents per kilowatt-hour to the system’s revenue for the first ten years.”

Wow. 5.79 cents per kwh is low price. 5.79 in 2014, not 2020.

This price competes with natural gas, coal, nuclear – it is competitive with all existing technologies. Still, 5.79 per kwn isn’t the price that caught my eye, because this is with incentives. The raw 8 cents per kwh is the important number.

Competing with the most Expensive Electricity – Peaker Electricity

Solar doesn’t have to compete with the cheapest electrical base load plants. No, Solar only has to compete with the most expensive forms of electricity to be adopted enough to push prices down to near grid parity. 8 cents per kwh is a low enough price to crush the price of “peaker” electricity.

Peaker energy can cost as much as 10 times as much as base load electricity. PPE charges companies $1.20 per kwh for peaker energy! It’s commonly accepted natural gas peaker electricity costs $.18 per kwh. It’s common for peaker to cost twice as much as regular base power, and 4 times as much is common too.

This peaker power is demanded on the hottest, sunniest days of the year – exactly when Solar is best at producing energy.

8 cents per kwh is easily cheap enough to be cost competitive with peaker electricity. If a company has a choice between installing Solar and installing a peaker natural gas plant, Solar can be an economic choice, even before incentives. 

The size of the peaker market is gigantic compared to the current amount of Solar installed. The Economist:

“SOLAR energy currently provides only a quarter of a percent of the planet’s electricity supply, but the industry is growing at staggering speed.  “

Solar only accounts for .25% of the market, even after huge buildouts in 2011 and 2012. And how big is the peaker market? It’s about 5% of the total electrical market. Solar can easily compete with some significant amount of the peaker market – easily 1/2 of the peaker market.

How many times would solar have to double capacity to capture 2.5% of the entire electricity market? Well, if it has .25% now, then it would need to double capacity 3.5 times.

Even if the rate Swanson’s law slows to 30% for each doubling over the next 3.5 times, then solar will fall in price by 70%. Solar prices will be 30% of what they are today if companies simply install the cheaper solar to provide more capacity for peak demand.

If Solar keeps up its 40% price declines, then Solar will fall in price by 80% if solar could install another 500GW or so.

How much Solar will be installed over the next 7 years? Over 5oo gigawatts – at least this is how much Citi analysts think:

However, as Figure 12 shows, current annual installation levels are around 35GW per annum (Citi forecast), and have been over 30GW for the last two years. Accordingly the IEA estimates would imply a dramatic slowing (by 35%) of solar installations. While this is possible (given grid issues etc), we find this scenario unlikely, especially so because of solar’s rapid learning rates, which mean that the cost should continue to become cheaper (as conventional fuel sources become more expensive, assuming that the ‘lowest hanging fruit’ has been used first)….

Indeed our forecasts imply that 503GW will be installed between 2010 and 2020 alone, almost as much as the IEA estimates for 2010-2035. It is clearly incredibly difficult to forecast the longer-term energy mix, not least due to ‘black swan’ events such as the shale revolution. However, if our figures prove correct, the implied investment out to 2035 would be considerably larger than the £1.3trn forecast by the IEA. Were we to assume that annual installations remained flat post 2020 at 71GE per annum, this would imply cumulative new solar installations of 1573GW between 2010 and 2035, almost three times the expected installations suggested by the IEA model. Clearly this would imply investment figures way in excess of the $1.3trn of solar investment in the IEA model (simplistically it would imply investment of $3-4trn, assuming that these higher installed volumes would allow for learning rates to continue to reduce the cost of solar).

There is only 100GW of solar installed across the world as of today, so we are going to add 35% to capacity in 1 year. Over the next 7 years, we are going to install 400% more solar than we have installed in history. Increasing capacity will drive down costs another 10-15% just this year, and cause solar to be cheaper than even more of the current market.

Utilities will install lots of solar power simply because it’s cheaper than installing alternatives. This then drives down the cost of future solar installations. Homeowners benefit from this lower cost as well. Homeowners pay retail rates for power, not grid rates, so adopting solar makes even more sense for them.

You can see how this is going to play out:

  • Solar only accounts for a tiny, tiny percentage of electrical capacity today.
  • Solar is significantly cheaper than a large amount of the market right now, today, with todays technology
  • Solar falls in costs as more is adopted
  • Utilities will install solar because it is cheaper than their most expensive power, pushing costs of Solar down for homeowners
  • Large numbers of homeowners will install solar because it is cheaper than their power costs
  • Utilities will be forced to raise prices to their remaining customers to pay for fixed costs in the system
  • This dynamic drives down the price of solar enough to make solar competitive with ever more of the market

As solar gets cheaper, the price becomes even more compelling against the most expensive sectors, spurring faster adoption. Swanson’s law has been in overdrive and it’s entirely likely we’re going to see 30% – and possibly 40% – price drops for every doubling of capacity.

Just capturing a decent amount of the peaker market will be enough to drive solar prices to levels competitive with the the next tier of electricity. Every time solar drops in price, it gets that much more compelling for the next cheapest price levels.

Solar doesn’t need to compete with $.05kwh coal in the United States – at least not yet. Solar needs to compete with $.23kwh peaker plants. It needs to compete with $.35 peak prices for homeowners in California. It needs to compete with prices well above $.20kwh around the world.

And solar easily does this, right now, today.

This is very good to remember when thinking about solar:

“There is no one cost number that defines utility grid parity. There are different levels of parity depending on what the generation system is. Solar has already penetrated the most expensive generator – the “peaking plant”, also known as a “peaker”.

The Solar Powered Death Spiral for Utilities has begun, and it won’t stop until we have vastly cheaper electrical power in much more quickly than people expect.



Expert in business development, product development, and direct marketing. Developed strategic sales plans, product innovations, and business plans for multiple companies. Conceived the patent pending Spot Equivalent Futures (SEF) mechanism, which allows true replication of spot and swap like products in the futures space.

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3 years 2 months ago

“Those major fixed costs the utilities must pay – such as the loans to pay for power plants and infrastructure – do not go down at all when people switch to solar.”

But this seems a rather easy problem to solve, or at least ameliorate. This is exactly the type of thing I can envision a responsible central bank working to
smooth out. When those investments were made the world looked like “A”, well
now the world looks like “A” + achievable solar technology, which makes that prior investment in energy technology less profitable. So do we1) kill solar technology just so we can keep our prior investment at a certain profit level? Or 2) do we use the powers of our CB and make sure the investment losses don’t end careers completely, throw workers children out of college, diminish health coverage for families who need it and basically ruin life as they know it for thousands of people (maybe hundreds of thousands)? This doesn’t even consider what those income losses would mean to countless other entities living off the spending of those folks.
(Now I know “easy” in my first sentence is only easy in the sense that it simply involves spread sheet adjustments and not easy in the sense that our leaders can find the political will to do so, or that they even have the sense to see the difference between the two)

Oilfield Trash
3 years 2 months ago

I once read a article which posed the question “Can one go windsurfing in Schumpeter’s gale?” Does not seem like something a CB can handle.

Nick Rowe
3 years 2 months ago

Interesting post.

There’s one implicit assumption in your post. It’s OK as an assumption, but it would make it easier to understand if you made it explicit. You are assuming (I think) that electricity utilities are regulated natural monopolies, with a regulated price set at Average Total Cost (plus % markup). Right?

jan van mourik
3 years 3 months ago

As Joshua mentioned, many solar customers are still connected to the grid. They need power at night too 🙂 Note also that ALEC/Edison Electric Institute are currently waging a campaign against solar energy and net metering. See for example

Christopher Hancock
3 years 3 months ago

“Swanson’s law” is just an observance of this being a declining cost industry recently, but why should we expect it to continue? I think I remember reading that PV is reaching a plateau in terms of how efficiently they can convert solar power to electricity, but I’m not 100% on that. If that is not the case, then that is a reasonable explanation for future declining costs.

And aren’t a large amount of these PV being subsidized as part of Chinese industrial policy – how much of that is the cause of these observed declining costs?

I think Hawaii is exactly where you’d expect to see this start to take place. It’s prohibitively expensive for Hawaii to use natural gas powered plants (transportation and storage costs), and coal plants aren’t exactly getting built quickly or easily these days. And of course there is ample, consistent sunlight.

3 years 3 months ago

I’m excited about solar as well, but I’m afraid you may be overstating things. The evidence you present for accelerated installations beginning a death spiral also points to halting installations due to hitting a sort of ‘uncanny valley’ where more customers are getting some power from solar, but still needing the old grid, which is causing resistance since the solar power risks killing the old grid by making the old grid unsustainable while it is still needed even for the very customers that are beginning to kill it. If this continues to be a problem I’m unsure whether or not solar can keep advancing like it has been.

Could you address if you consider this valley to be a problem or if you believe it will be easily surpassed, i.e. through increased efficiency or storage allowing complete grid-independence for typical solar installations within the next 5-10 years. I’m cautious about overstating advances like these and afraid they will lead to us getting stuck in the valley for a little while, though I would love to be wrong.