The Solar Tsunami: it's starting in the sun belt and it will spread towards the poles

Solar will become so cheap that we should design the new energy system around the solar tsunami.

Nadim Chaudhry
May 2, 2016
5 min read
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In just over one year utility scale solar has halved in cost. It is worth stressing that this is an unprecedented reduction in the historical cost of electricity conversion. At the beginning of 2015, Paddy Padmanathan, CEO of developer ACWA Power hit the headlines with the $58 pMWhr (or $5.8 cents pKwhr) bid in the first tranche of the Dubai tender. Then recent auctions in Mexico saw solar bids that surprised everyone with the leap down to a new low solar price world record of just $35 pMWhr (albeit with some extra transmission incentives and tax breaks). Now just weeks later news has just reached us that surpasses this, of a bid of $29 pMWhr for a second tender in Dubai. So just how low can solar go? How about below $20 pMWhr?

Solar is the cheapest electricity on the planet
To put this into context gas is around $37 pMWhr and coal $41 pMWhr (thanks Matthew Silvester). How can this be done profitably? Last year Paddy was quoted as saying "The risk is pretty minimal. People don't get a 25% ROI in this investment. For a utility investment 10-12% is typical. In renewables there is no fuel cost, so the tariff in Dubai is 5.8 cents per kWh. The financing cost is about 35% of the total, nearly 2 cents. 86% of that is debt. Profit is about 0.4 cents." The return is around 7%.

Solar is now the cheapest electricity on the planet

How did developers in Mexico achieve $35 pMWhr?
First considerable questions have been asked whether $35 pMWhr is actually achievable? what return is achievable? For utility scale projects,  capex could soon arrive at around $1500 pKW for single axis trackers at 20% efficiency. The best capacity factors in good sunny locations are around 30%. If you use a weighted average cost of capital of say 6% (this varies per country and industry use the WACC calculator) then the Mexican auction record price is achievable (note it also benefitted from some additional subsidies). See below for the calculation (thanks to both Green Power Academy and David Keith of Harvard who came up with very similar numbers).
$1500 pKW x 0.06/(365x 24 x 0.3) = $34 pMWhr

How did developers in Dubai get down to $29 pMWhr?
Finance is the only way according to Moritz Borgmann at Apricum. With the Dubai bid including Masdar who would be able to access Abu Dhabi Sovereign Wealth Fund or other vehicles for cheap long term finance at say 5.1% (see formula below).
$1500 pKW x 0.051/(365x 24 x 0.3) = $29 pMWhr

How do we get developers get down below $20 pMWhr?
Over the past 20 years the solar technology has consistently delivered 24% cost reductions every time the installed base of global solar doubles. With global installations of circa 230GW and forecasters predicting 66GW to be installed in 2016, rising to an annual installation rate of 100GW by 2017/2018 then by 2019 costs the installed base will have doubled again. This should therefore see capex costs falling 24% from $1500 pKW to $1100 pKW and by 2020 they should arrive at circa $1000 pKW.

Using an especially good solar spot with 34% capacity like the Sonora desert in Mexico and we arrive at the amazing figure of $20 pMWhr. After 2020 the market will double again and the capex could fall again as the scale of the industry truly grows exponentially. At a truly global, mass produced scale solar could reach $15 pMWhr?
$1000 pKW x 0.06/(365 x 24 x 0.34) = $20 pMWhr

What will that mean? and what will we do with the solar flood?
Some people will say yes solar is cheap now, but solar is intermittent, the sun doesnt shine at night, the grids cannot cope, we should curtail and stop solar. I say that solar will become so cheap that we should design the new energy system around this, around the solar tsunami. The more solar, the cheaper it gets, this virtuous cycle is now unstoppable.

A Solar Tsunami = free daytime electricity?
With solar this cheap, there is plenty of margin to compensate for the intermittency with storage, to encourage as much onsite solar as possible, to reduce transmission and distribution costs and design the least cost energy system possible. Solar will start from the sunbelt (California, Mexico, Morocco, Jordan, UAE, Pakistan, Australia) taking 20% of the energy mix and then start spreading towards the poles as costs fall (to compensate for the lower sunshine).

the Solar Tsunami is starting in the sunbelt and then spreads to the poles

Could electrons follow data? We used to pay a large sum for a copper wire based, low data, voice call across the globe, today we have free global video calls. Could electricity become "free"? Could solar lead to unmetered "pay for your pipe" subscriptions like data?

The First Big Step in the Clean Energy Transition

Certainly having a flood of cheap, clean daytime electricity for 8 hours is a great first big step but there is still lots and lots more work to be done in how you turn that into a continual reliable new clean energy system that is built profitably at lower cost?

Storage, solar, microgrids, wind, hydro, geothermal and the clean energy transition will all be discussed in detail down in Mexico in just a few weeks time at MIREC Week.

I hope to see you there. This are indeed exciting times all around the globe.

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