After being the poor cousin to wind for many years, the growth rate of solar generation is accelerating rapidly with global annual growth rates currently around 100 GW/annum to deliver an installed global solar generating fleet of just under 500 GW today. The International Renewable Energy Agency (IRENA) forecast these rates to increase markedly through to 2050 with annual growth rates increasing four fold to nearly 400 GW/annum to deliver an installed fleet nearly 20 times the size of today and deliver some 25% of global power generation.
As expected, this accelerating growth rate in solar is driving an eyewatering levelized cost of energy (LCOE) learning rate of around 37% between 2010 – 2020; the highest learning rate of any renewal energy source. LCOE has reduced from around US$370/MWh in 2010 to a forecast US$50/MWh in 20120. Surely this must be great news for both the renewable sector and global carbon emissions.
However, as we know in business – cost is only one side of the story! What does the growth in on-grid solar mean for power prices – particularly on-grid power pricing in the National Energy Market (NEM) in Australia?
Naturally, Solar is generating when the sun is shining which is during daytime hours – particularly during the middle of the day. However, the middle of the day is generally the lowest period of energy demand – sitting between the morning and evening demand peaks. So what happens when supply exceeds demand – prices go down. In the 3rd Qtr 2019, in the National Energy Market (NEM) time periods of zero or negative power pricing increased to record levels in Qld and SA increasing year-on-year from 0.1% to 4.5% and 3.4% to 8.4% respectively. The impact of such low pricing for on-grid solar economics is clearly negative and likely to get even worse the more solar generation enters the grid over time. On-grid solar is in the grip of a negative networking effect – the more solar generation is added to the grid the more negative solar economics become.
So what does this mean for the outlook of solar generation? There are two natural pathways to get out of the pincer of lower NEM prices chasing down lower solar generating costs.
Firstly, is a strong preference to stay off-grid. This is the underlying driver to the 10%+ compounding growth rates (from the 8GW installed capacity today) in ‘behind-the-meter’ rooftop solar generating capacity. The consumer gets the full economic benefit of the solar generation and the grid is required to pick up the balance – and in particular the daily peaks. This is increasing the spread between the min/max demand on the grid – further adding to the challenge of grid stability and the economics of baseload (coal) generation. The second approach to solar’s off-grid strategy is to associate directly with large industrial demands, again leaving the incremental unmet demand to come from alternative generating sources or off the grid. This is driving the rise of co-generation off-grid solutions that mix wind/solar/gas generation systems.
Secondly, is an acute focus on energy storage solutions. Solar generators are the most logical drivers of innovating energy storage solutions as the prize of increased utilization rates (currently sitting globally at an 18% average) is highest for solar relative to other renewables. Solar generation and energy storage packages will be integral to promoting the ongoing penetration of solar. This is where the LCOE of solar generation only can be a misleading guide to economic attractiveness and thus forecast penetration rates. Energy storage is happening in a range of forms whether in the form of batteries, pumped hyrdo, or what is the latest rage – green hydrogen, ammonia, methane.
At the COAG meeting in Perth last Friday, a range of early exploratory reports were presented on the National Hydrogen Strategy to explore how Australia could harness its immense solar potential in the form of a new hydrogen export market that could surpass that of carbon fuels of coal or LNG. The CSIRO are also in on the hydrogen game with heavy work in progress on developing a blueprint for a national hydrogen strategy.
So the old saying that necessity (deteriorating on-grid solar economics) is the mother of invention (range of energy storage alternatives) seems to be playing out in the solar industry and has deep implications for companies playing in the solar markets.