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Never Let A Good Crisis Go to Waste

October 11, 2021

Gabriela Herculano

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The Transition is Inevitable. Can it be Orderly?

Let’s be clear, the current energy crisis is fundamentally a fossil fuel crisis; in no way is it directly caused by renewable energy. Coal and natural gas are proving once again to be an expensive and unreliable source of energy, which exacerbates the dependence of consumer countries onto few fossil fuel producers. Since the 1970s the world has experienced many severe crises like this, with devastating economic impact on consumer countries and that has created continuing geopolitical tension and wars.

The immediate causes of the current energy crisis are clear. A combination of strong demand for natural gas as a transition fuel from countries like China; colder than normal temperatures at the end of last winter; and Russia withholding natural gas flows to Europe due to a dispute on Nord Stream 2 project. These have resulted in soaring natural gas and coal prices - the UK NBP Gas touched £4/therm in the first week of October, up from less than £0.5/therm just a couple of months earlier. This increase in prices is causing industrial productions shutdowns, a potential rise in unemployment and a surge in government spending (to subsidize energy costs and bail out some energy companies).

This spike in fossil fuel prices and the risk of future commodity cost increases should be dealt with by accelerating the shift towards renewable solutions

At least three lessons can be learned from this crisis. Firstly, the economic fabric of consumer countries cannot continue to be exposed to the whims of a few unreliable and politically motivated countries like Russia or OPEC members. Secondly, natural gas to be used as a transition fuel gives rise to the same limitations as any other fossil fuel. Thirdly, renewables can be the strongest line of defence for energy security as wind and solar are abundantly available to any consumer country.

Jeff Currie from Goldman Sachs refers to the current energy crisis as the "revenge of the old economy", making the point that in the past several years, not enough capital has been deployed in the exploration and production of natural gas and oil. We would like to shift this narrative and make a diametrically opposing case. This current energy crisis makes clear, yet again, that fossil fuels are hardly a reliable source of energy. What has actually happened in the past several years was not enough investment into renewables and clean energy storage.

Renewables can produce superior security of supply. Availability of power generation could be maximized if electricity is produced without imported commodities with historically volatile prices. Combined with this fact is the powerful argument that solar PV has become the most price competitive energy source (and is becoming increasingly cheaper as production scales up) and it is game over for the unstable, expensive, and carbon emitting fossil fuel sources.

The Solution is Local, Very Local

As Chris Goodall said in his prescient book The Switch, “PV makes straightforward and hard-headed financial sense”.  That is why we expect to see an increase in the speed of development of utility scale solar projects. Moreover, that is why we believe that an even faster increase in installed capacity will take place behind the meter. As residential, industrial, and commercial users become increasingly eager to avoid future electricity price increases, embracing the already price competitive solar rooftop and associated battery storage solutions is the logical, rational decision for consumers to make.

According to the Solar Futures Study by the US DoE, 200 GW of rooftop PV will be deployed in the US by 2050 (with a more aggressive, breakthrough scenario of distributed PV capacity reaching 250 GW in 2050). However, DoE acknowledges that the potential for rooftop PV in the US is much greater, at 1,100 GW of installed capacity. If assuming a constant total amount of PV deployment, increasing the ratio of rooftop solar to ground based solar implies a reduction in the amount of land required for PV installations. Space is not a constraint for solar growth, as some critics have said.

Surface area required for solar development in the US by 2050 equates to ca. 0.5% of all US surface area

The strong case for solar is predicated on the constant reduction in production costs of the solar panels. Richard Swanson, the founder of SunPower Corporation, observed that the price of solar PV modules goes down ca. 20% for every doubling of cumulative manufactured volume.  The DoE study assumes costs to fall 50% of their 2020 levels of ca. $1,000/kW, with capacity factors to jump from ca. 28% in 2020 to ca. 32% by 2030.

The combination of higher energy yield (due to reduced degradation, bifacial panels becoming mainstream, better tracking) and lower costs will translate into a levelized cost of energy (LCOE) for utility scale PV of US$20/MWh in 2030. Commercial and residential PV systems LCOE are to be reduced to US$40/MWh and US$50/MWh, respectively, also by 2030 (soft costs such as higher installation, permitting costs, customer acquisition and interconnection make the LCOE for residential users 2.5 x higher than the cost for utility scale PV). In a more aggressive prediction, Tony Seba and his team at RethinkX forecast that the combined capital cost of solar PV, wind power, and batteries will decline a further 75% by 2030. This means that the total installed costs of utility-scale solar PV could reach US$ 221/kW by 2030.

Swanson's Law - Source: Our World in Data
A residential consumer in California currently pays ~$198/MWh for electricity, while LCOE (and battery storage, with investment tax credit) is at ~$124/MWh
That residential user is likely to pay $50/MWh in 2030

A resilient supply chain is in place to deliver the panels needed to power the energy transition. According to the same DoE study, in 2020 ca. 140 GW of solar PV modules were shipped globally, more than half of such volume being produced in China. Increasing module longevity and reducing material intensity by recycling silicon, glass and silver are additional longer-term developments that solar energy will benefit from.

This Time it IS Different

I have lived in England long enough now that I often quote Winston Churchill. “Never let a good crisis go to waste”, he said when working to form the United Nations after WWII. This will not be the last time that fossil fuels pose a threat to an orderly global economy. However, this time, one month away from COP26, we have the chance to better plan for a more orderly transition away from fossil fuel dependence. The best way to minimize the frequency and negative externalities of future disruptions is to accelerate renewable energy adoption, solar in particular. It is time to focus national policies towards the further adoption of decentralized renewable energy, streamlining the permitting process for solar and wind energy (in front and behind the meter), supporting net metering legislation and further developing clean energy storage solutions. The future is bright and sunny not because progressive politicians and GenY want to solve climate change, but because it makes economic sense to do so.