2017 was, again, a record-setting year in renewable energy. Nowhere more so than on prices, with bids for new solar generation capacity in some places dropping below three cents a kilowatt/hour. For those who don’t walk around with electricity cost numbers at your fingertips, a price $0.03/KwH is a third of what the cheapest solar power could be bought for only six years ago, half of what it would cost to source power from a new-build coal-fired plant, or about what the cost of getting hydropower from what has for decades been touted as the cheapest potential power source in Africa, the famous Inga dam in the DRC.
What are we likely to see in 2018? More change. More widespread and cheap availability of wind and solar power (even in the USA, in spite of the “best” efforts of the current administration). That much is straightforward. We’ll also see change accelerating in areas affected by, or related to, wind and solar – energy storage, and transmission and distribution. This is increasingly where the big story will be.
The costs of wind and solar generation has been coming down for years, as well-chronicled, at a rate of 15-20% a year. You do that long enough, and it’s now been a decade-plus, and the cost numbers start getting very low. The last three years have each seen successive record-breaking price announcements, from the South African auctions of 2015 to the auctions in Mexico, Dubai and Saudi Arabia in the latter part of 2017. At conferences, one now hears the question “is the bottom here?” It’s a good question. It is getting increasingly difficult to see how providers make money at some of the rates being offered. And it is clear that fewer and fewer players can effectively compete at the lowest price points, and that both large scale, industrial-type processes and squeezing the last drops out of financing costs are required to make it work. At the same time, one can see the continued progress of technology itself, with larger and more efficient turbines, more efficient solar panels, and the application of big data to site selection and panel or turbine positioning, still pushing costs downwards. Auctions for delivery sufficiently in the future, such as the 2017 Chilean auctions, have seen bidders bet on being able to make those cost reductions before having to deliver the power they’re now committing to. Let’s guess that there will be a bit more cost reduction, but more slowly than the one to two cent a kilowatt hour reductions a year we’ve been seeing. A bigger part of the story will be the geographical broadening of these low-price points, from a small handful of headline-grabbing auctions, to much more the routine in more and more countries and across more and more capacity. Maybe less attention-grabbing, but continuing to shift capacity from thermal to renewables.
One challenge for power buyers will come more and more to the fore in 2018, and in the coming years. That challenge will be how to take better advantage of the low cost of renewable energy. For many jurisdictions, the initial issue has been creating a means to procure wind or solar, generally developing demand auctions for the first time. Everywhere those auctions have been rewarded by unexpectedly low prices. So far so good, assuming the projects which have been bid at auction are implemented – and so far the track record on execution of bids is excellent across geographies. Then from a policy or strategy standpoint, what buyers now face is the question of how to get more of what is cheaper. The first part of this involves being able to use wind and solar during more of the day, or during more days, when the sun is not shining or the wind is not blowing. It’s the obvious issue. Energy storage is beginning to make a material impact on this issue, as battery prices continue to follow similar cost curves to what turbines and solar panels have been following, dropping 15-20% a year. In the US, 2018 will for the first time see over one gigawatt, 1 000 MW, of new capacity deployment, according to Greentech media projections, and incremental costs – while varying widely depending on application and other factors – are in some cases coming below $0.05/KwH. Continued price declines and deployment milestones will be in the headlines in 2018 and for the coming years.
The second part of this same challenge, how to take better advantage of the low cost of renewable energy – so as to offer consumers and the economy the benefit of lower power costs – has been less discussed, but will be equally important: modernizing transmission and distribution networks. The intermittency of wind and solar power generation creates technical challenges for a transmission grid. While the principle is well-known, and many utilities have now extensive experience with the short-term aspects of this, the planning and wider aspects of this have received much less attention.
Most systems can absorb relatively small amounts of intermittent power without facing major disruptions, as we have seen in most geographies that begun to bring initial wind and solar sources onto a grid. It is also well known that this “easier” phase has limits, and that beyond those significant changes are needed if more intermittent resources are to be absorbed. It is much less well-understood that these limits vary significantly, and that modernized, highly efficient grids – like, say, the grid in Denmark, can absorb three to five times the amount of intermittent generation as older, less efficient and less well-managed grids. In a Denmark, or a UK or a Germany, it has to date been “green” constituencies that have advocated for increasing the amount of renewables, and created pressure on utilities to make the changes needed to absorb these. In Emerging Markets, what we can expect instead is that cost pressures, not “green constituencies” will be the drivers. With electricity from wind and solar available at a fraction of that from other sources, economics will create pressure for governments and utilities to use more and more of it. This pressure will be on a collision course with the technical and managerial limits of the transmission networks in many countries. So expect, in 2018 and beyond, much more widespread concern around “why isn’t our grid better? Why can’t we have more cheap power like other countries?”
Not many emerging markets are ready for this new phase.
One aspect of this growing issue surfaced this past week in the state of Virginia. The Virginia state legislature passed a new bill on March 8 concerning the power sector. Unlike the discussion on similar bills in recent years, which focused on the potential to rebate costs from utilities to consumers as generation costs declined, this new bill instead focuses on how larger margins should be used by utilities (mainly Dominion Power in Virginia) to invest in new technologies to modernize the transmission grid. The past week also saw the release of an “alternative infrastructure plan” from democrats in the US congress, with funding to modernize the power grid.
So looking for opportunities for medium-term infrastructure investment, beyond wind and solar generation? Look to transmission and distribution grids.
One thing not to look for, as a post-script, is common sense from the current Department of Energy leadership in the US. Early March saw a completely useless proposal from the DoE – widespread deployment of modular coal plants. Sounds like it might be appealing on the surface, as a way to fight unemployment in coal country? Forget it. Small modular coal plants are unheard of, inflexible (meaning they cannot easily be used to complement intermittent generation sources, like low-cost solar and wind, which modular gas-fired plants can do), and highly unlikely to be cost competitive. This is why you don’t want ideologues involved in infrastructure – you get stupid ideas instead of solutions.
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