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Solar’s dramatic cost fall may herald energy price deflation

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We’ve seen and published many dramatic graphs about the fall in solar, such as this one tracing the fall over the past 30 years and this from Citigroup, but the following graph from investment bank Sanford Bernstein is quite stunning – not just for its simplicity but because it draws attention to the potential impact of solar to the $5 trillion global energy market.

As you can see, the cost of solar PV has come from – quite literally – off the charts less than a decade ago to a point where Bernstein says solar PV is now cheaper than oil and Asian LNG (liquefied natural gas). It does its calculations on an MMBTU basis. MMBTU is the standard unit of measure for liquid fuels, often referred to as one million British thermal units.

bernstein solar

“For these (developing Asian economies) solar is just cheap, clean, convenient, reliable energy. And since it is a technology, it will get even cheaper over time,” Bernstein writes in a newly released report.

“Fossil fuel extraction costs will keep rising. There is a massive global market for cheap energy and that market is oblivious to policy changes” in China, Japan, the EU or the US, it writes.

This has potentially massive impacts for the oil, gas and LNG markets, and therefor the massive investments in the LNG plants in Queensland, Australia, where tens of billions of dollars have been invested by Australian and international energy majors on the assumption that the demand, and the price, of LNG will rise ever upwards.

bernstein energy supplyAs Bernstein notes in its report, the share of solar PV in the global energy market is currently so small (see graph to the right) that “the idea that oil and gas is the “loser” in this formulation is laughable … in 2014.”

But that’s not the case a decade hence. Solar is already eating away at the margins of oil and gas demand.  Bernstein says the adoption of solar in off-grid areas in developing markets means less kerosene and diesel demand. The adoption of solar in the Middle East means less oil demand. The adoption of solar in China and developed Asia means less LNG demand. And distributed solar in the US, Europe and Australia means less natural gas demand.

And then Bernstein drops this bombshell – while solar has a fractional share of the market now,  within one decade, solar PV (plus battery storage) may have such a share of the market that it becomes a trigger for energy price deflation, with huge consequences for the massive fossil fuel industry that relies on continued growth.

“The behavior from here seems clear: the solar industry will expand. Retaliatory steps from distribution utilities will increase the market for cost-effective battery storage. This becomes – initially – a secondary market for battery technologies being developed for the auto sector. A failed battery technology in the auto sector (too hot, too heavy, too rigid a form factor) might well be perfect for the home energy storage market…. with an addressable end market of 2 billion backyards.

“And for some years, that will be the extent of the effect. We have previously calculated how large the solar sector would need to be in order to become a material share of incremental energy supply each year and therefore begin to displace high-cost oil and gas supply and start to depress prices.

“We estimate that the solar industry would need to be an order of magnitude larger than it is today to have this kind of impact. At the point where solar is displacing a material share of incremental oil and gas supply, global energy deflation would become inevitable: technology (with a falling cost structure) would be driving prices in the energy space. But even on an aggressive view, this could take the better part of a decade.”

But, the Bernstein analysts say, the risks are that they are being too conservative. The big oil and gas producers, and the investors that control the flow of capital, may not wait until energy prices do actually deflate, they will likely change their behaviour well before than in anticipation that it will happen.

“If the downward sloping forward curve is ever accepted as permanent, rational behavior from energy producers will guarantee it is so. Sitting on oil and gas reserves for the benefit of generations yet to come ceases to be a rational strategy if that reserve represents a depreciating rather than an appreciating asset.”

This, Bernstein says, is the hidden flaw with the idea that solar is “too small to matter”.  Ultimately, it says, what may kill the  energy market for equity investors is not the fact that renewable technology and battery storage will turn into behemoths, but the realisation of that future as inevitable.

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  • juxx0r

    “We estimate that the solar industry would need to be an order of magnitude larger than it is today to have this kind of impact.”

    At current growth rates that’s less than 7 years away.

    • Chris Fraser

      Yes , bring it on !

    • singingfish

      Yes, it’s very difficult to stop exponential growth once it starts.

      • Miles Harding

        Very easy to end it once the limits to growth are encountered!
        — a problem for Oil, not so much for solar… or is it?

        That graph of power production by energy source is very troubling:
        In spite of an obvious presence of wind and PV in the countryside and suburbs, it has made no substantial difference. Wind, even at 10 times the size (fat chance of that in Victoria) still falls far short of what is needed.
        It if difficult to imagine sufficient change occurring in the very limited time we have left before many world models indicate the terminal decline in resource availability and energy may become immutable.

        If Dennis Meadows is to be believed, this decline is likely to start by 2030, only 16 years away. Meanwhile in the lucky land of Aus, the donkeys in Canberra are charting a future in exactly the opposite direction, wasting several of those few years.

        The tightening of fiscal belts provides some evidence that the process has begun and we are circling the bowl now.

        • sean

          you miss the point. Cover an area of land the size of NSW in PV and you will harvest enough electricity to create enough synfuel to meet the world’s oil consumption twice over.

          Same oil habits – no effect on global warming. (due to recycling of carbon dioxide). If implemented we could have no change to our cars, ships, planes, power plants and still have the same effect as turning them all off.

          when will the pollies wake up and realise that their biggest asset is the land over the coal mines – not the coal.

        • peterreefman

          Not enough room for renewables in our countryside? Er – China by 2015 will install roughly the same amount of PV as Australia’s entire generation fleet – about 35GW. Even more so in wind – about 185GW.

          We look at a 10 acre solar farm and think “Wow – that’s enormous!” while it sits next to a typical beef cattle farm of 4,000 acres.

          By the way, I know you’re not against renewables. But the main problem is we as a country are just not thinking big enough, and as you say that’s coming from our very negative government (and media) repeating the lie that we can’t do it.

          • http://www.nosocialism.com/ NoSocialism.com

            You guys are looking at this all wrong. In 10 years, every new home built will have a Deep Cycle battery the size of a water heater in the garage and 4 to 8 panels on the roof providing all the electricity they need. Within 20 years, practically all homes will have been retrofitted to have the same thing. There will be no need for “The Electric Company” for what? At the speed the panels are shrinking even cars will mostly run off a panel molded into the roof of the car. A Gas engine to provide power during fowl weather, will probably disappear in another 20 years. The MASSIVE oil fields here, under the state of Florida and being reserved in the middle east for future generations, will never see the light of day, they’ll be unnecessary. Our biggest problem will be of what to do with all the Gasoline still being produced by the oil companies, because it’s a byproduct of Kerosene production (needed by the Airlines). The oil companies won’t be able to give it away.

          • http://fractalicious.ca/ Adam Grant

            Even on a sunny day, high efficiency solar panels installed on a car’s roof (and perhaps on the trunk and hood) would gather energy more slowly than a moving car would utilize it. The idea has merit for extending range, and for gradual recharging while parked, but an external energy source such as a larger array of panels on the carport roof will still be necessary.

  • BroSheffieldBrotherton

    Excellent pair of articles today Giles. The future is indeed hurtling towards us (possibly already passed on by?) way faster than seemed possible until the last years or two. Unfortunately too few of the powerful vested interests who have bet upon the never-ending of their Fossil Age or believe they can manage its smooth ending in a distant time, still Fergusonise that it can’t happen. Some are perhaps starting to realise that something very strange is afoot – perhaps even a delayed but accelerated movement of the market towards reality and the occasional Government that may be concerned about climate change even if they are unlikely to get the immediacy and scale of the threat – but they misunderstand the story of Canute and think they really can hold back the tide. We should not be enshrouded in these multiple predicaments ad our kids and grandkids don’t deserve the consequences, but alas

  • Alan

    Is this why governments around the world are hell-bent (!!) on extracting and selling everything they can now?? This is why it’s even more imperative that we put a price on carbon – and why governments must do it – for the good of everyone.

    “Sitting on oil and gas reserves for
    the benefit of generations yet to come ceases to be a rational strategy
    if that reserve represents a depreciating rather than an appreciating
    asset.”

  • Motorshack

    So, in biological terms, from the point of view of the fossil fools, solar is a malignant cancer that is about to metastasize.

    And, so far, their main reaction has been denial.

    • DoRightThing

      I’d reverse the metaphor – the fossil fools and tendrils are the cancer and solar is a highly specific therapy that’ll shrink the tumours and reduce their toxicity on the organism.

  • adam

    anyone have a link that describes the breakdown of this learning rate and why it’s projected to continue?

    I’ve seen a lot about how this is just inevitable but nobody saying why there are economies of scale, manufacturing efficiencies, commodity pricing etc shifting the supply curve further and further..

    • http://www.nosocialism.com/ NoSocialism.com

      Solar technology is based on the same exact technology that produces computer chips. Just like computers pretty much double in power every 2 to 3 years, you have the same exact effect going on with Solar.

  • DoRightThing

    The fossil fuel industry is about to become the fossilized fuel industry.
    No wonder they are panicking.

    • http://www.nosocialism.com/ NoSocialism.com

      Panicking? Who do you think are the biggest investors in Solar? Do you think they truly care where you get your energy? They win either way.

      • http://fractalicious.ca/ Adam Grant

        By slowing the transition to renewables, the energy industry defends the value of the cash they’ve sunk into wells, mines, pipelines, refineries and gas / coal / nuclear generating stations.
        Part of the reason energy news in the business section looks so business-as-usual on the oil and gas front is so the established players who have done the math can sell their assets to the ignorant.

  • Joe Clarkson

    Why in the world does this article have PV being priced by mmbtu rather that levelized cost of electricity? MMbtu might be appropriate for water heating, but not for electricity.

    The proper comparison would be between the cost of electricity from PV and the energy only component (excluding capacity) of cost of electricity from the various fossil sources. By this measure PV is still twice as expensive as gas fired combined cycle (per US EIA via Wikipedia) and has no dispatchability.

    I live off-grid on PV and love it, but charts like the one above are misleading at best.

    • A Real Libertarian

      If you’ve relying on the EIA’s projections, you’re in for bitch-slapping by reality.

      Those numbers are well known to be utterly wrong.

    • http://www.nosocialism.com/ NoSocialism.com

      Either way the price is dropping. I remember when Carter first talked about Solar Power. Back then it costs around 20 Million bucks to do an 9kW home grid, and it took the better part of 5 acres to do it. 10 years ago the price had dropped to around 80K, and now you can buy a 9kW grid from Lowes for 20K, taking up only half your roof. At that rate, it will be down to 5k in the next 10 years and halfway there, almost everyone will start to consider making the move. In a very short period of time, you’re going to see first most high end homes, then practically all new homes built going Solar, it’s just getting to that point where it makes sense from a financial perspective.

  • D.Allen

    Does anyone have a copy of the Bernstein report per chance?