Analysts at Citi have produced a detailed report which suggests another 900 gigawatts of solar installations, and another 1,500GW of wind farms could be installed around the world with little added cost to electricity grids. This amounts to an investment opportunity of $US5.7 trillion – and it only relates to those investments that can be achieved without much added expense to existing infrastructure.
The estimate is based on Citi’s assessment that most electricity markets could – on average – integrate 20 per cent of wind generation with little problem, and around 10 per cent of solar – although some generation assets are likely to find themselves stranded because they are being priced out of the market.
The wind penetration assessment, by Citi’s own admission, is conservative, because many studies say 30 per cent is possible and countries such as Denmark have already gone well above that. But Citi says it is a global average based on the fact that many developing countries may struggle to integrate more without added expense.
It cites coal and nuclear as being victims of increased wind generation, because it tends to eat into baseload demand. It says solar is most likely to sideline peaking gas generators because it is the most cost-effective way to address peak demand. Gas is either already too expensive in many countries, and even in the areas like the US where gas is now cheap, utilities are investing in solar anyway because they are wary of the risk of future gas price rises, and coal and nuclear cannot meet that demand.
To put Citi’s forecast is some context, there is currently just more than 100GW of solar installed in the world, and around 282GW of wind energy. Bloomberg New Energy Finance today issued a new forecast saying it expects about 37MW of solar to be installed this year, and about 36GW of wind.
It also comes as a new report from the National Energy Renewable Laboratory in the US releases a study that says 33 per cent wind and solar penetration in the western grid of the US would save $7.5 billion in fuel costs, but would add little in added costs of “spinning reserve” or “cycling – dismissing one of the major objections of wind energy opponents, and lending some support to Citi’s contention that this amount of variable renewables can be installed with little added cost. You can read Eric Wesoff’s excellent report on that analysis here.
Citi notes that its 30 per cent assessment is not a blanket rule for all markets, because of different geographies and weather conditions. For instance, it notes that solar could account easily for 10 per cent of output for countries closer to the equator with better solar resources, but just 5 per cent for countries where solar produces little in winter. (Many analysts would content that solar could do a lot more, and will).
Citi cites Germany as an example of a country that might have gone “too far” too quickly, noting that it will likely have to change the structure of its markets to ensure that some form of “capacity” payments are made to ensure that enough fossil fuel generators remain in production.
The biggest markets for solar and wind energy investment are China and the US, which is natural considering they have the biggest economies and biggest electricity grids, with greater capacity to absorb variable renewables.
Using 2013 $ prices, Citi sees a near $1 trillion market in the US (consisting of $US366bn solar and $US560bn wind) and a $US1.5 trillion market in China ($US542bn solar and $US906bn wind).
But it suggests the most interesting regions for growth are areas such as Latin America, Japan and India, which all have “decent sized” electricity demand, a small installation base of renewables and a sizeable opportunity to grow significantly.
Japan in particular is an extremely attractive location for renewables after the country closed most of its nuclear fleet and now is scrambling for affordable energy while it burns imported gas at $16/mmbtu (vs. $3.5 in the US). The country has shown its support for renewables and in particular solar through the implementation of generous feed-in tariffs for renewables generators.
On solar, Citi says Japan and Latin America are the only markets where utility-scale solar is clearly competitive at a wholesale level.
In areas with strong solar resources, such as western US. the region studies by NREL – it says utility-scale solar will compete with peaking gas – even though gas prices are low in the US. Uilities want to hedge themselves against the risk of volatile fuel prices.
The real game changer is being felt at residential level, where solar is already at socket parity in many nations – meaning it is cheaper than retail prices. It notes that in Australia, households are facing the choice between (a) buying electricity from the socket at a rate of $30ct/kWh or (b) producing solar electricity at a cost of $18.5ct/kWh. “By installing solar panels a household would save $11.5ct for every kWh consumed from solar,” it notes. (We have more on the Australia story here, and see also Warwick Johnston’s latest market update).
As for wind, Citi says onshore wind cost is only attractive as an investment on an unsubsidised basis in Latin America (Brazil), the UK and Canada, although Argentina and Italy will follow suit by 2020.
However, there are secondary reasons why utilities might prefer wind over baseload fuels such as coal and nuclear: “Coal is environmentally questionable, and similar concerns combined with uncertainty over costs and remuneration make nuclear hard to build in many markets.” Citi writes.
“In a meaningful comparison between coal and wind CO2 costs should arguably be included in the analysis. Unfortunately, the economic costs are not captured by current carbon markets and hence these carbon prices do not provide a good indicator for the true economic cost of carbon emissions on the environment.
It says nuclear reactors do not emit any CO2, but pose an investment risk because the cost of generation is very sensitive to discount rates due to the scale of back-end liabilities and the cost of capital, which is pricing in the low visibility of what future costs nuclear might impose on society.
Citi says onshore/offshore wind shows limited seasonal variability and its generation profile is much more similar to baseload generation than solar. “For these reasons we do not consider wind as a peak shaving resource but rather as a substitute to baseload capacity such as coal and nuclear.”