In recent years, falling prices for solar panels and rising capacity for batteries has made solar an increasingly feasible source of energy for many businesses and households. Here we discuss what has been going on, and what it may mean for broader energy prices and technological changes in the coming decades.
A world with energy scarcity
As living standards have risen in the developing world, demand on the stock of available energy resources has risen. This increased energy demand has driven up energy costs, particularly the price of oil – leading to complaints that we are suffering from peak oil, as we touched on in our article What price peak oil in 2008. Although the Global Financial Crisis, the ensuing recession, and the rising supply of natural gas in the United States have all managed to put a lid on energy prices, the price of energy remains at a historically elevated level.
Solar power has been seen as one of the potential solutions to growing energy scarcity, by providing a renewable and clean energy source. We are going to look past any environmental impacts in this article, and focus solely on what solar power is, what innovations in the industry mean for firms, and consider areas where lower energy costs stemming from solar power will have an effect.
What is solar power?
Solar power, and the use of solar cells, is not a particularly new idea. The first solar cells were developed in the 1880s – a development that took place due to concerns about energy scarcity (a worry that coal was running out).
Significant technological advances in solar power have tended to follow on from increases in demand due to concerns about energy scarcity. During the oil shocks of the 1970s, the cost of fuel rose sharply. This led to significant investment in solar power from the mid-1970s onwards.
In modern solar power systems, energy is gained from crystalline silicon photovoltaic cells (solar cells). Although we acknowledge that more efficient forms of solar generation may potentially be discovered in future, power from these current solar cells will be the general focus of this article.
There are two areas where solar power generation could significantly reduce energy scarcity during the coming years: Motor vehicles and prices on the electricity grid. Fundamentally, solar power can be used to drive down the cost of energy for households and the marginal cost of power on the grid – while the rising availability of electric cars makes these falling costs relevant for the transport industry.
Capital outlay: the cost of solar panels
During the 2008-2010 period, a number of researchers tried to figure out whether solar panels were economical. At the time, most reports found that solar was the most expensive way of generating energy.
The Economist2 recently discussed how sharply the cost of solar cells has declined over the past 40 years. From US$76.67/watt in 1977, the US dollar cost of a solar cell has declined to $0.74/watt. This excludes the fixed costs associated with setting up the plant, which The Economist suggested work out at about $4/watt. However, at this price total generation costs are still above most other forms of generation.
The latest estimates from the US Energy Information Administration3 show that solar total levelized costs remain well in excess of more standard forms of electricity generation, including other renewable sources (namely hydro and wind). If carbon emissions were going to be taxed or priced on international markets, solar would become relatively more attractive, but would still be far from the most cost-effective option.
Furthermore, we have to be careful interpreting the current drops in the cost of solar power. There are two underlying drivers of falling costs for solar cells.
· Improving technology
· Subsidisation of solar cells by the US, European, Japanese, and especially the Chinese governments
Although the first factor is expected to continue driving down the capital cost of solar cells, the outlook for subsidisation is much murkier. As we mentioned in Chinese rebalancing revisited 4 last year, and as has been more recently confirmed by Chinese government actions, China is pulling away from subsidisation of the solar industry.
The “sun king” and founder of Suntech, Shi Zhengrong, was the poster boy for the Chinese solar industry. However, even with lavish subsidies and loans, Suntech had to default on debt in March, and is now bankrupt.
Furthermore, the high-profile failure of Solyndra in the US during 2011, a firm that received significant Federal government aid, has made the US government more wary about subsidising solar technology, especially in the near term.
Instead, the US and Europe have focused on “anti-dumping” legislation against China and Chinese solar panels.
The combination of tariffs, a reduction in financing for solar manufacturing following the Suntech scandal, and the lack of an international carbon price agreement to follow Kyoto (which would have made solar generation relatively more attractive) are all factors that will undermine solar in the near term.
Capital cost and payback periods for households and firms
Although solar power has begun to look more attractive at current prices, it is still important to consider the sort of payback period for household or firm investment in solar power.
Given the large number of sunlight hours in Nelson, the region’s council is one of the more enthusiastic about the idea of solar power. Even so, discussion on the design of council incentives for investment in the region is still ongoing5. As a result, it is important to simply focus on the private incentives available to households and firms for the decision to set up solar power.
Rooftop installations that are used to power hot-water cylinders have been around for some time. However, there is now a concerted push towards solar systems that are fully integrated into the house’s electrical circuits, and the electricity network more generally.
As Powersmart points out on its site,6 the benefit of a solar power installation varies significantly depending on location. As a result, Powersmart only offers to give quotes, rather than provide a direct price and return on their website.
Given the current cost of solar panels and batteries, the maintenance cost of batteries, and the relatively low price received for selling power back to the grid, at the moment it only makes sense to invest significantly in solar power capacity if you expect to use most of the power directly.
In a “best-case scenario”, the payback period on an investment in solar capacity could be as low as five years for a system which will last for 25 years.7 However, if we look outside Kaitaia, the east coast of the North Island, and Nelson, and take into account the volatility of supply and low price for selling back to the grid, the current return looks much more marginal across most of the country.
The big unknown – leasing
The large upfront costs and uncertain return make solar power marginal at best in the current environment. However, Vector has introduced a new introductory programme8 in Auckland where it leases out solar panels and the related equipment to put them on the grid.
It is not clear whether Vector will take up this programme on a larger scale, but if it does, it would undeniably increase the uptake of solar power by households. By leasing out the equipment, Vector lowers the upfront cost for households and takes on the risk associated with the price of solar equipment.
If this type of leasing programme does pick up pace, then solar power uptake in New Zealand would be likely to pick up more quickly than we have currently allowed for.
Battery capacity – the big unknown
One of the main concerns around solar power is the variability of supply. Solar radiation varies during the day, and when the sun goes down, solar panels by themselves are not going to provide much in the way of power. As a result, the idea of energy storage is incredibly important.
Capacity and cars
Hybrid and electric cars are becoming increasingly cost effective. However, for solar power to act as a competitor to petrol and diesel power cars, battery capacity matters.
Battery capacity has already increased to a reasonable level for motor vehicles. The Telsa Model S signature performance model holds an 85/kWh lithium-ion battery. As a 416-horsepower sports-sedan, the battery life offered is equivalent to around 300 miles (480 kms) per charge. Of course, this giant battery can only fit in a sports-sedan or other larger models – and it doesn’t come cheap. The standard sedan model comes with a battery that lasts 160 miles (257 kms)
However, it isn’t just a question of how long the battery will run for, but also how quickly it charges. The advantage with petrol and diesel is that when you are close to running out, it only takes a couple of minutes to fill the vehicle back up. Here is where the Telsa Model S can run into issues, with charge times of between four and hours depending on the type of charge station being used.
There are three ways around this problem. The two that are being tried with the Telsa are rapid recharge stations – which have the capacity to recharge batteries much more quickly (between 20 minutes and one hour using “super recharge equipment”) and for free. The second is “battery swaps” available at recharge stations, where the battery can be swapped in about 90 seconds.
Researchers at the University of Wollongong in Australia have been working on a third way – making the default recharge time on batteries quicker. In May researchers stated that they could make a standard EV battery (available for small car types) that would last for 240 miles (386 kms), but only take a few minutes to charge. At the moment the battery is only in its prototype stage, but there is work on commercialising it.
Ultimately, as charge time is further cut down, electric cars will become more widely used. However, the importance of solar power for these vehicles is more likely to come through the impact of solar power on electricity costs – not through vehicles being directly solar powered.
Although there is potential for solar cells to provide an auxiliary power source for cars, given the current weight of vehicles, standard solar cells are not likely to replace the need to charge the vehicle, even in perfectly sunny conditions, any time soon.
Capacity and the grid
At present, the marginal cost of solar power isn’t low enough to undercut many of the cheap power sources New Zealand has (such as hydro power). However, solar power is now becoming a viable option relative to many of the power stations that come online during peak demand.
Unfortunately, peak power demand occurs during periods when there is less inherent solar power available – late in the day and during winter. As a result, peak demand takes place when actually producing solar power is close to impossible! As a result, solar power could only replace these more expensive forms of power if storage became cheaper. This fact helps to reinforce how important storage is, even if solar power is only going to be utilised to help with peak demand.
General solar power is known as “non-dispatchable” generation, as once the capacity is in place there is no real ability to adjust production to meet variation in demand. Providing storage makes the solar model closer to a “dispatchable” form of energy, which would reduce variability in energy prices and the availability of power. The non-dispatchable nature of solar power generation illustrates two pitfalls around relying on solar energy provision too highly.
· Solar power production can be extremely variable given the availability of sunlight.
· Solar power output is also uncontrollable, and so cannot be explicitly varied to meet changes in demand.
These factors make significant reliance on solar power a fairly risky proposition for a national energy grid.
One form of solar generation that does allow storage is solar generation with thermal storage. Although this option does allow energy generation from solar sources to be managed more easily, it is a very expensive form of storage. At current prices, especially in countries with small scale such as New Zealand, it is largely out of the question.
However, even if individual household and business storage remains an issue, there is a way solar power could proliferate and may in turn put downward pressure on energy prices. There is the potential for households and firms to sell “excess” power onto the grid, increasing the overall generation capacity of the energy system.
For individual households and firms, the ability to tie solar power to the grid will cut down both initial capital costs and maintenance, as there is less need for batteries and excess generation capacity to deal with fluctuations in the household-specific supply of power.
But the main issue with this solution is that households will have limited ability to store power, with battery storage being very expensive. As a result, higher solar capacity among households without storage is unlikely to have much of an effect on prices during “peak demand” on the grid.
Even so, sales back to the grid are becoming more prevalent. Meridian Energy has been especially active in this area over the past year. At first they were allowing households to sell energy back onto the grid at the same price they would buy from the grid – in order to get households to invest in capacity. However, such a generous buy-back scheme was not going to be sustainable, and Meridian has now set a new, lower, price for buying capacity off households.9
Conclusion: a solar future?
It is undeniable that the cost of solar power has come down considerably over recent years, and it offers an increasingly attractive addition to buildings, the generation of fuel for vehicles, and the overall generation of energy on the national grid.
At current prices, solar power is worth investigating for households and firms that are willing to accept a payback period of ten years or more on the initial upfront cost of installing the solar generation.
Five years ago the idea that solar power, and battery capacity, would be anywhere near as cost-effective as they are now was a pipedream. Further investment in technology in these two areas offers the potential to significantly reduce energy costs. If solar technology continues to improve at the rate we’ve experienced during the past five years, then it will put downward pressure on energy costs – leading to stronger economic growth, and lower input prices for firms, going forward.
However, our five-year forecasts assume that this investment does not take place, and that energy scarcity continues to bite. The key reason for this view is the binding constraint imposed by storage and battery capacity. Storage of solar power is still extremely expensive, and given the fluctuations in the supply of solar power, storage is an essential cost. As a result, fuel and energy costs are forecast to remain very high.