And the Prices Keep Falling

And the Prices Keep Falling (part I)

The news is good.

On July 30, the Government of Portugal announced that a large auction for solar energy set yet another new world record low for utility-scale solar: $0.0165/kilowatt-hour (16.5 US cents, or 14.76 Euro cents at today’s exchange rate). This breaks the previous world record of $0.0189/KwH set in Mexico in late 2017. Or, depending on how one classifies it, the $0.0173/KwH bid two weeks earlier this July for a project in Ceara, Brazil.

Any way you look at it, this is a stupendously low price for electricity. Depending where you live, you probably pay between 10 and 15 cents ($0.10-0.15) per kilowatt-hour. And this stupendously low price is not unique. Even the record bid had company just in Portugal: 24 licenses were awarded (representing more than double the total installed solar capacity to date in the country), with one another below 2 cents, and a handful more below 2.5 cents. The highest of all the winning bids (which were for size and location-specific opportunities) was all of $0.0349/KwH. France’s Akuo delivered the winning bid, for a 370MW. Only eight years ago, in 2011, the world record low bid for providing solar power was for 34 cents, $0.34, per kilowatt-hour – twenty (!) times the new Portuguese world record. And these are not just aspirational bids that may or may not materialize. Earlier in July, the world’s largest solar PV plant – Noor Abu Dhabi — became operational, all 1.78 Gigawatts of it, on time and on budget, supplying electricity at $0.024/KwH (once upon a time also a world record, way back in 2017 when it was bid out). Close to the Emirates, Saudi Arabia, Egypt and Jordan have also seen auction prices under $0.03/KwH. This Spring both Nevada and Arizona in the US secured supply contracts at under $0.025/KwH.

PV solar also has company with plunging prices. In fact, the much-publicized world records for solar power – like that in Portugal – aren’t even world records for renewable energy. In the US, average wind power purchase agreements had already fallen to under $0.020/KwH by 2016. A late 2017 bid in Colorado received median bids of $0.018/KwH for wind, and $0.021 for wind plus storage. In 2018, Nebraska received a bid for wind at $0.011/KwH – just over one cent. The story in wind is the same as in power: the relentless adoption of better technology – bigger and more efficient turbines in the case of wind – driving costs down.

Even concentrated solar power, or CSP as it is generally known, is joining the bandwagon. CSP had become the stepchild of wind and solar in recent years, accounting for only about 1% of the global capacity of PV solar, as its costs were far higher than for PV and wind. But times are changing here too: in July 2017, Dubai attracted a CSP-record low bid of $0.095/KwH. The International Renewable Energy Agency (IRENA) stated that CSP fell more steeply in cost last year than any other renewable technology: 26%. IRENA predicts CSP costs as low as $0.06/KwH by 2020. While this sounds high relative to wind and PV solar world records, factor in that CSP projects generally provide several hours of electricity storage. In effect, even CSP prices now can beat those of new-build coal-fired generation plants, and are becoming competitive with gas-fired generation. At the rate at which costs are falling, even CSP will shortly begin to outcompete thermal power for new generation.

So what does this good news mean? Well, many things. Let’s recap some of the most positive ones.

1. It means that on economics – let alone policy preferences – more and more renewable energy capacity will come on line, and less and less thermal energy. Industry analysts Wood Mackenzie project 2019 as first year that the amount new solar installations cracks 100 GW worldwide. This is even in the US, with the strong anti-renewables and pro-coal and oil stance of the Trump administration. In June, Reuters reported that the US solar energy industry lifted its installation outlook for this year and beyond thanks to demand from utilities buying the clean energy source for its low cost. In 2019, installations are expected to be up 25% from 2018. This compares to 2018, when installations fell 2% after President Trump slapped tariffs on overseas-made panels. Bloomberg New Energy Finance’s 2019 Market Outlook states that wind and solar are now cheapest across more than 2/3 of the world, and that by 2030 they will undercut coal and gas everywhere. All this is good for efforts to reduce emissions and mitigate climate change – at least relative to where the world has been in the last decade.

2. It’s great news for energy consumers, as it means that the costs of electricity are falling. At least, the cost of building new power capacity is falling, though it may take a while for average generation costs to fall enough to be noticeable. How electricity costs play out in the medium term globally is a bit more uncertain: if climate change indications are on track, it is highly likely that some kind of tax or price increase for existing thermal power plants will raise the costs associated with that part of utility companies’ generation fleets. But that’s a complicated story, for another column. It is especially good news for consumers in low-income countries with major electricity shortfalls, as it means that both more electricity and lower-cost electricity are coming within reach – with less high-cost thermal power to balance against.

3. It’s very good news for the energy storage industry. More and more intermittent renewable electricity generation creates more demand for ways to store that electricity around-the-clock, or at least until peak power usage times. Infrastructure Ideas will soon provide an update on the state of energy storage – where costs are falling even faster than they are for solar power.

4. And it will be very good news for an industry segment that does not yet exist – or at least which is still embryonic: the “generation take-out” business. “Generation take-out” is where existing plants in the electricity generation fleet are retired (irrespective of technical life) and replaced by new ones – as opposed to plants which add new generation capacity. Created by the combination of falling prices and climate concerns, this business has the potential to be one of the largest infrastructure businesses in the world in the coming decades. Infrastructure Ideas will outline what this business might look like in a forthcoming post.

A lot of good news. Yet… the news is not good for everyone. Obviously it’s not good for coal and oil companies (or the politicians who support them). It’s also likely to be bad news for natural gas companies, though this will take longer to play out. But oddly, it’s also not good news for a group you wouldn’t expect: wind and solar producers, and their financiers. We’ll cover this non-intuitively obvious implication in Part II of this column.

Next up, the downside…