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.

 

Comments
  • joshua December 23, 2013 at 12:07 pm

    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.

    • Michael Sankowski December 23, 2013 at 3:09 pm

      This is a big concern, but it seems like the price of solar generated electricity will drop so much it will greatly incentivize people to create technologies and delivery systems that can solve these problems. If you are paying .01kwh for solar generated electricity, all of a sudden you have a lot of money to pay for other technologies which solve the problems of storage and delivery.

  • Christopher Hancock December 23, 2013 at 1:28 pm

    “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.

    • Michael Sankowski December 23, 2013 at 3:07 pm

      Well, our experience in other tech hardware fields has been extremely positive. Note that swanson’s law relates “Cost” and “adoption”. PV panels do not have to become more efficient to cost less. For example, you could put out 2x as many solar panels for the same input cost, and this could be how swansons law works in the future.

      Swanson’s law isn’t about PV efficiency. It’s about price.

      Simply finding and delivering Solar panels is still a problem, compared to other basic household things like pipes, toilets, electrical wire, wood, and carpeting. Yet, 15% of the houses in California, Arizona, and New mexico could use them. Next year, it will 17%, and the year after that 20%.

      Supply chain improvements could easily cut the cost of solar by 50% on its own.

      This is something which I think people really miss – there is so much fat in the Solar chain right now, and this will all evaporate in the next 10 years. This alone is going to push solar to be far cheaper.

      Remember back in the 1970s, when you had a guy in a lab coat holding a solar cell in tweezers? That guy is expensive. He’s not some dudes in a pickup, or even a homeowner putting it in himself.

      At some point in the next 15 years, you will see solar panels thrown away along side the road. You’ll see cheap, thin cells which were cheaply glued to some kids toy in the gutter, like you used to see CDs thrown away.

      Then, how about manufacturing costs? Yes, building chip plants is expensive, but then once it’s done, you churn out millions of chips for pennies each. This is going to happen in solar too. Even if the PV don’t get above 60% or so, you’ll see generations of plants which put out progressively cheaper PV cells as the manufacture and materials technology improves.

      I could be wrong though.

  • jan van mourik December 23, 2013 at 6:37 pm

    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 http://ecowatch.com/2013/12/05/alec-solar-reeriders-december-summit/

  • Nick Rowe December 24, 2013 at 8:24 am

    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?

    • Michael Sankowski December 24, 2013 at 10:45 am

      This is generally the case in the US. Many utilities have a setup where there go before a board to set rates for the year, with some allowance for input price increases.

  • Greg December 24, 2013 at 10:38 am

    “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 December 24, 2013 at 1:35 pm

      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.

  • Clonal Antibody December 24, 2013 at 3:34 pm

    Mike,

    You might be interested in this article Grid parity faster than anticipated in India

    The recent aggressive bidding under state policies for solar power generation has made solar on somewhat equal footing with coal and this is a remarkable situation in India. Presently the average price of grid electricity traded is about 5 INR5/kWh (0.07 €/kWh) to 12 INR/kWh (0.17 €/kWh). India Energy Exchange reported electricity prices are sailing northwards on the exchanges, touching as high as 12 INR/kWh in recent weeks.

    The latest bids for solar power called by Tamil Nadu state in southern India witnessed the lowest bid at 6.48 INR/kWh (0.09 €/kWh). The tariff for commercial establishments in the same state is 7 INR/kWh (0.1 €/kWh) so almost at grid parity. Another example is Rajasthan state in western India where the lowest bid received was 6.45 INR/kWh (0.09 €/kWh). The highest tariff rate for commercial power in this state is 5.5 INR/kWh (0.08 €/kWh).

    The state of Maharashtra in western India has the highest tariff for commercial establishments at 10.9 INR/kWh (0.16 €/kWh) and solar power is already feasible in this state.

    This turnaround is made possible thanks to the National Solar Mission announced in January 2010 by the federal government. It was then anticipated that by 2016 India would achieve grid parity, but now it seems that it may be much faster and is in the offing.

    • Michael Sankowski December 28, 2013 at 4:31 pm

      Hi Clonal – hope all is well.

      Incredible news – this is really happening much faster than people anticipate. Note every time Solar goes down just a bit in price, it becomes competitive with far more of the market.

      I have tried to draw a curve of this, and it looks like an S curve on it’s side. As far as I can tell, the amount of energy Solar is competitive with today is on the order of 12% of global capacity. Solar is about 2% now, so it would need to double 2x just meeting what it is competitive at today. Solar has gone down at 20% per doubling, so this implies Solar could get 35% cheaper just on todays demand.

      However, the market opened up by just being 20% cheaper is a huge market – we are talking close to 50% of the world demand for electricity.

      My guess is that places like India – where the infrastructure is not so well developed – will lead the way. People know infrastructure costs have a tendency to come in 50-100% higher than planned on giant build outs. It happens all the time, everywhere in the world. Solar is smaller in infrastructure footprint and cost, so coming in over cost is less of a problem. You can come in 50% over cost and it’s simply less in absolute costs, and you get next generation solar for your next plant.

      I hadn’t thought of this before, but anyone doing a real financial analysis of a large country wide build out has to be thinking solar even if it is more expensive today, because your total cost of building new power plants for people in 7 years needs to be included in your plans.

      Note even if coal and solar are close to competitive, people are going to prefer solar due to speed and clean development. This isn’t a raw cost consideration.

      Additionally, it’s entirely possible solar panels of today will last for 30 years instead of the expected 20. If this turns out to be true, then all of a sudden Solar is wildly competitive with coal today. That’s 10 years of essentially free energy.

  • stone December 27, 2013 at 3:21 am

    It is weird though that in Texas solar seems to be just plodding along despite the enormous potential. I guess that is because natural gas is so cheap there
    http://www.triplepundit.com/2013/03/electricity-deregulated-parts-texas-lagging-solar-energy/
    http://en.wikipedia.org/wiki/Solar_power_in_Texas

    Where we live in the hills in Northwest England we are bizarrely eligible for subsidies for roof top solar BUT because we get about three sunny days per year, the only hope for harvesting energy from solar panels would be by harvesting the moss that would grow on them and burning that moss.

    • KainIIIC December 29, 2013 at 6:11 pm

      Well, Texas appears to be leading the nation in wind power, with more than double the output of California:

      http://www.earthtechling.com/2013/12/texas-wind-energy-set-for-grid-connection/

      I believe the main problem in Texas has mainly been a problem of transmission from the main wind and solar areas (Western Texas / panhandle / Great Plains) to the major cities, probably leading to an aversion of major solar projects which, if you still look at the capacity installed, is still increasing at an astounding rate. It just isn’t being built up in North or East Texas, apparently, not enough to benefit the denizens of the majority of Texas’ population.. yet. 8.6 million mw capacity in 2009 to 140.3 mil in 2012 is still pretty impressive, with crazy growth levels (Austin, for example, incentives it directly:http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=TX11F ).

      damn you for getting me uber-excited about Solar’s possibilities! :)

      • joe bongiovanni January 4, 2014 at 3:18 pm

        Very true.
        Key environmental ‘fail’.
        Economic investment in production REQUIRES a transmission mechanism to economic consumption. And that transmission mechanism requires both investment and a contribution of public space. The utilities are willing to make the investment, but the enviros are not willing to dedicate the public space.
        Otherwise solar production is a lot like QE.
        A lot of it ‘there’, but none of it here.
        Thanks.

  • Fed Up December 29, 2013 at 7:39 pm
    • JKH December 30, 2013 at 5:44 am

      More like a pit in the stomach.

      One’s interpretation of the monetary system becomes slightly complicated when getting the most fundamental aspect of banking backwards – that capital is held against assets, as a ratio of assets (or measured asset risk), not against liabilities.

      And still he inserts a bit of mockery at “loans create deposits”. That’s too rich.

      Oddly, rescued by another MMer, he patched up the error (sort of) in the post, without revealing in the post that he had updated/ “fixed” it. Seems uncharacteristic.

      Earth to Nick: try laying off the mocking; it can boomerang.

      • DismalEconomist December 30, 2013 at 10:40 am

        Sorry to sabotage the original post on solar, which I find pretty fascinating Mike, but this link got to me. After encountering numerous posts from Nick Rowe, in my opinion he demonstrates the gap in understanding of those with a purely academic background and those who have worked inside of a bank and understand its accounting, regulation, risk exposures and operational fund flows. Economists who opine on money and banking should spend some time working in banking before doing so, or at the very least not be so dismissive and snarky of alternative views given their lack of experience dealing directly with the issues being discussed. I’ve spent my entire career working in retail lending and bank capital markets risk management, but have gone down the academic economics path. As a result, it has become pretty clear that economists need to be a lot more like engineers (understanding the tiniest operational dynamics of the machine) and a lot less like physicists theorizing about the dimensions of the universe.

        • JKH December 30, 2013 at 11:10 am

          (Also sorry to distract from an excellent subject, Mike, but the post referred by Fed Up was just too jaw dropping to pass by without comment, and this topic off ramp can be nested.)

          Well said and couldn’t agree more, DE.

          There’s a fundamental educational asymmetry that’s developed in the blogosphere – the genuine interest shown by practitioners as to how academics think about the subject, versus the extreme attention deficit disorder and general disinterest exhibited by academics in understanding how the world actually works. This is a tragedy, and indicative of foolish hubris by the economics profession. They’re not learning the real lesson of not having understood the financial crisis.

        • Fed Up January 1, 2014 at 11:19 pm

          Also sorry to distract from the original solar topic. I didn’t know how else to contact JKH. Maybe a new post is needed.

          DismalEconomist, someone recently told Nick to ask some bankers about how a bank works. Nick said he is contact with some bankers at least once a year. I’d say the capital requirement trips up most economists.

          P.S. I hope to be able to use solar panels in the near to mid future.

      • winterspeak January 2, 2014 at 2:07 pm

        Just happened upon that myself. Didn’t go into it too deeply, but it did seem that loans created deposits in his model. In the original did he say something different?

  • joe bongiovanni December 29, 2013 at 8:22 pm

    The grid is already in place. The homes are connected to the grid and the people have a meter.
    There is no need to disassociate the solar revolution from the grid and utilities.
    The present use of net metering and other incentive programs by the utilities and regulators are a tremendous boost to the solar markets and thus to the growth of solar technology.
    When the all-in true cost of bringing solar online is equivalent to the next marginally priced source, there is an incentive for the utilities to make an investment and earn a return.
    Coming soon to a utility near you, maybe a co-op or a Municipal.
    The end result is just more solar energy production, which producers will undoubtedly respond with even greater technical advancements.
    Putting it onto the grid has advantages all around.
    More power to solar.

  • beowulf December 31, 2013 at 1:38 am

    Fascinating topic, the answer to this death spiral is the same for the inevitable health insurance death spiral– socialism; universal Medicare for the latter, a national version of the TVA for the former. The TVA was the dream of the namesake of Norris, Tennessee– Sen. George Norris. Curiously Norris lived nowhere near the Tennessee Valley, he was a Republican senator from Nebraska (which itself has no private utilities, thanks to Norris).
    http://www.tva.gov/heritage/titans/

    I suppose Congress could strike the TVA debt cap (long issued via Federal Financing Bank so TVA bonds can be held by the Fed), and then legislatively define the Tennessee Valley to include any state touching or between the Atlantic and Pacific oceans. The boys in Chattanooga could take it from there.