How the jaw-dropping fall in solar prices will change energy markets

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The jaw-dropping bids for a massive solar plant in Abu Dhabi will help change the thinking about the future of energy markets. The price offered is one third the cost of local gas generation, and one fifth of the cost of the proposed new nuclear plant in the UK.

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Solar panels of local mining company CAP are seen in the Atacama Desert June 5, 2014. CAP inaugurated the largest solar plant in Latin America with an area equivalent to 200 football fields and to generate enough power to meet almost all the electrical needs of an iron ore mine. The arid northern part of Chile and the southern Patagonia are ideal to generate, solar, wind or geothermal power. Picture taken June 5, 2014. REUTERS/Fabian Andres Cambero (CHILE - Tags: ENERGY ENVIRONMENT) - RTR3UJ4J
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dubai solar 2More information is emerging about the jaw-dropping solar prices bid into a major tender being held by the Abu Dhabi electricity authority, and it underlines just how the stunning fall in prices will change the conversation, and a lot of business and policy planning, about energy markets.

As we reported on Tuesday, the world’s biggest solar module manufacturer JinkoSolar and Japanese industrial giant Marubeni set a new record low solar price with a bid of $US24.20/MWh ($A32.11/MWh) for a solar plant of more than 350MW in Abu Dhabi.

But it was not the only bid to slash the previous record low price of $US29/MWh in Chile, set just last month, and a previous sub $US30/MWh bid in the United States Emeritus. According to PV Magazine, two other consortium, one led by French nuclear giant EdF, also beat the previous record mark.

And the prices could fall even further, with JinkoSolar and Marubeni reportedly offering to push the price even lower – to $US23/MWh – if they can gain further scale and be allowed to build a solar plant of more than 1.1 gigawatt, which would be the biggest solar farm outside of China.

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This table above – first published by PV Magazine – illustrates the bidding range in the tender for a new solar farm to help power a major new township being built in the north of the emirate. It also shows that each bidder is anticipating making an annual return of 7 per cent, despite the low prices.

That suggests the projects are financially viable, which is important because each time solar prices have been bid lower the offers have been met with howls of derision by less cost-competitive rivals.

There are several factors that allow these low bids. One is the low cost of finance in the UAE, and the low cost of labour. The other factor is the anticipated surplus in solar module production expected next year, and which is tipped to bring the price of modules down by as much as 50 per cent in the next 18 months.

Interestingly, JinkoSolar is one of those companies adding significant amounts of production in the next 12 months. It has not commented publicly on the Abu Dhabi bid, but its bid could be seen as an effort to ensure a market for its excess production.

Not that anyone thinks that this will be a temporary fall. Frank Wouters, the former head of Abu Dhabi based renewable energy firm Masdar, said this week that prices would not rebound.

“We’re still learning how to further reduce the cost of solar cells and other components as well as operation and maintenance cost …  So there’s no reason why the cost of solar will ever increase again.”

And there are some more fascinating points around the solar prices bid in this auction.

It means that the cost of solar PV in the UAE is around one third of the price of gas generation, which makes up the overwhelming majority of current electricity supply. That underpins why UAE is keen to build as much solar as it can, and keep the gas for the profitable export market.

The solar bids must also be causing some soul-searching at EdF. Its offer of $US25.33/MWh for the Abu Dhabi solar plant is just over one fifth of the price  (£92.50, or $US120/MWh) it demanded for the new nuclear power plant Hinkley Point C in the UK.

And that nuclear price is over and above the huge loan guarantees, insurance backing from the government and other subsidies piled on to the proposed nuclear plant.

(And before all the nuclear boosters get on line to talk about back-up for renewables and the qualities of nuclear “baseload”, remember that the UK grid operator said the cost of back up for Hinkley would total around $12 billion over the life of the project).

That cost differential is perhaps one reason why EdF is expressing a lot of enthusiasm about solar, storage technologies, and wind energy, which recent bids have also shown is significantly cheaper than the nuclear option. Indeed, Hinkley Point is already being branded as the biggest “white elephant” in UK history.

EdF recently won a contract for 49MW of battery storage with National Grid in the UK, is building the biggest wind farm in France and the first three offshore wind farms in that country.

As we noted on Tuesday, the slump in the cost of solar PV is being accompanied by record low prices for offshore wind, onshore wind and solar towers and storage, along with the continuing dramatic falls in the cost of battery storage.

Yet policy makers are still being presented with “expert advice” that include ridiculously high cost estimates for renewable energy, and they continue to make dumb policy decisions based on that advice. The Climate Change Authority’s report was a case in point.
These assumptions apply equally to the blind faith in business-as-usual scenarios and incumbent fossil fuel technologies, and the reluctance to change energy market rules that protect fossil fuel incumbents from cheaper renewable energy alternatives.
The German-based Carbon Tracker think tank this week released a new report that showed that renewable power generation costs are already lower on average worldwide than those of fossil fuels and will become even more cost-competitive by 2020.

“This analysis explains why renewables are already the cheapest option in a number of markets. This trend is only likely to spread as the growth of renewables undermines the economics of fossil fuels,” said Paul Dowling co-author of the report.

“Policy-makers and investors really need to question out dated assumptions on technology costs that do not factor in the direction of travel post-Paris,” added Carbon Tracker’s head of research James Leaton.

“Planning for business-as-usual load factors and lifetimes for new coal and gas plants is a recipe for stranded assets.”

 

 

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23 Comments
  1. A1 3 years ago

    wowsers.

    any idea of the difference between weighted and unweighted?

    • john 3 years ago

      If you mean weighted and unweighted toward outcome yes i do.
      Nuclear has a huge problem because some person as in the society has to clean up the horrible mess they leave, coal has immediate long lasting near term weighted and long term.
      Wind it does not have any near term or long term.
      Which particular aspect are you looking at ?

  2. Steve 3 years ago

    Hmm, Great for places with space and sun/wind BUT where in pom land does the sun shine for more than a few hours a week? Wind – well that may exist ok – but where to put the turbines? Nuclear is an obvious low carbon power generator for these islands.

    • Pete 3 years ago

      Scotland already produces more than half of its electricity needs from wind farms. By the time you can build and commission a nuclear plant renewables will have made it obsolete.

    • Mark 3 years ago

      In April this year solar contributed more energy to Britain than coal over one 24hour period, so no, obviously solar power will never work in the UK.

    • john 3 years ago

      yes well considering you are going to get Nuclear at an ever increasing price each year go with it.
      Meanwhile wind now is lower in cost you do realize and with those increasing costs built into Nuclear with no provision for clean up just how much do you think you are going to be paying be realistic old mate.

      In the over all scheme of things Nuclear is going to cost you way more that 13c per Kilo Watt Hour more like 17

  3. Kenshō 3 years ago

    “Planning for business-as-usual load factors and lifetimes for new coal and gas plants is a recipe for stranded assets.”

    Serious question: who in practice will share the cost of paying for those stranded assets?

    • hydrophilia 3 years ago

      Typically, the rate payers will shoulder it. In some cases governments bail out the companies. Sometimes (very rarely) the companies themselves have been forced to take the costs themselves through lawsuits on the basis that they should have known better…

      The article, however, is arguing that the companies and others need to use realistic numbers so they do not end up with stranded assets. I think we can all agree that making decisions based on sound numbers is best….

      • Kenshō 3 years ago

        Realistically, is there any motivation for companies to upgrade their generators or networks? If not, is there any way to make regulators or companies responsible for their bad decisions?

        • hydrophilia 3 years ago

          Motivation varies…but power and networks are typically regulated monopolies. The regulators (and companies and consumers) can work together to modify existing incentive structures to give the companies better incentives. One of these incentives might look like making the companies at least somewhat responsible for their poor decisions rather than having regulators OK capital spending decisions and that spending then being laid upon the consumer.

          • Kenshō 3 years ago

            Do regulators get independent advice about the capital spending needed on networks or do networks make these recommendations?

          • hydrophilia 3 years ago

            Doesn’t matter. What is important is that the network and generation owners have potential to lose money if they make bad decisions, that they have incentives to be correct. Most now have no such incentive.

          • Kenshō 3 years ago

            Well generators and networks won’t be motivated to give themselves incentives, so that appears to rest responsibility with regulators to create incentives. From the perspective of human development, that creates a potential problem, as lower levels of cognition are more likely to be occupied with the “content” of network proposals, rather than looking at the overall “process” of creating incentives. It’s a higher level of responsibility to address the “process” rather than the “content”. Bias and corruption could also be an issue. Who are the regulators and how do they get there? Do the regulators have incentives to act in the public interest?

  4. Malcolm M 3 years ago

    Is Hinkley C the nuclear industry winning a battle but losing a war ? The high price for power goes against the free market principles of the Torys. They have dug so far that they can’t dig themselves out this time, but it will be a salutary lesson for them and many other governments, making it difficult for any more nuclear power plants to get up. In the overall scheme of things it’s a relatively small cost to pay and relatively invisible to consumers because it’s only about 10% of the UK electricity market (3.2 GW of a 33 GW market), so the costs would be spread across a large market.

    “Hinkley Point C is a power station that the UK government no longer wants to pay for, the French company building it doesn’t want to build, the Chinese partners are only supporting in order to build their own power plants in the future, and which may never get built if the technological and engineering problems can’t be solved. But the UK government doesn’t want to offend the French with Brexit negotiations imminent, nor does it want to annoy the Chinese when trade deals might be needed in the future.”
    http://www.spiked-online.com/newsite/article/hinkley-point-c-how-not-to-go-nuclear/18781

    • Mike Dill 3 years ago

      My bet is that it will get built, turned on, and put into standby soon afterwards, as the operating costs will be higher than predicted. The ‘backup’ for Hinkley will be cheaper to run than the plant itself, so there will be no urgency in getting the plant running again after a shutdown.

      By 2025 nearly everything will be cheaper to run than a nuclear plant. I expect onshore wind and possibly solar will be cheaper to install and operate than just paying the operating costs at Hinkley.

  5. John Steven 3 years ago

    Good article. Best I have read on this news so far. People are missing a few points. 1) The Project is Big 350+ MW’s; (2) The Big guys can play in this space, as diversified over many projects, (3) Jinko is pretty desperate to get back to its former glory days. Is there a downward trend, Yes of course. The norm? Time will tell. High Probability for large projects.

    • Neo Lib Yes 3 years ago

      When you hear something that seems to good to be true, usually there is more to the story and in this case the successful bidder only gets to own 40% of the SPV, 60% is owned by the government. The ADWEA also acquires 100% of production and you then have to join the dots, as the tariff rate for locals is a similar jaw dropping 5.5 fils or 1.5 US cents per kWh and the expat price is 31.8 fils or 8.7 US cents. Even for industrial over 1MW the price is only 8.17 US cents per kWh. I gather the land is provided and ADWEA connects the generator to the grid, which would cut the cost significantly. Under Sharia law interest is also prohibited, so who knows how it is funded, however what appears clear is that these jaw dropping solar prices are not apples to apples.

      • Giles 3 years ago

        Ah, a Muslim conspiracy! Funny how sharia law didn’t lower the price of gas as well, and left it three times the cost of solar. Never mind though, do tell us how this conspiracy theory applies to the prices obtained in Chile and the US, where PPAs have been struck nearly as low, and at half the level that were deemed “impossible” just 12 months ago.

        • Neo Lib Yes 3 years ago

          Yes Giles conspiracies everywhere! Is the gas price because they export most of it? Don’t know not analysed. What I would say is that, you bang on about fossil fuel subsidies, however there are also renewable subsidies. How can ADWEA charge a residential tariff of 1.5 US cents per kWh but supposedly pay wholesale 2.94 cents for this solar projects output? The whole system in Abu Dhabi is heavily controlled by the government and my suggestion to you is that you are not comparing actual costs on the same basis. Chile and USA, together with the tenders in India needs a robust critical analysis of how they achieved those figures rather than just inferring that this is the new norm. How about asking some Australian based proponents why they are having difficulty getting down to $80 MWh when the rest of the world can apparently easily beat them?

          • Giles 3 years ago

            The answer for Australia is pretty obvious. Higher cost of finance in Australia, higher cost of Labour, a policy mess in Australia and no long term contracts, (US and Chile offer long term PPAs) and a less developed supply chain. Australia has only built a fraction of the large scale solar than chile and US has. But already, costs in Australia coming down fast and will continue to do so.

          • jeffhre 3 years ago

            “Chile and USA, together with the tenders in India needs a robust critical analysis of how they achieved those figures rather than just inferring that this is the new norm.”

            How they achieved them? Random factoids?

            UAE – .024 kWh
            Chile – .029 kWh.
            US – .039 kWh.

            They achieved them by submitting bids at near 380% lower than the Hinkley C bids…before the next 11 years of inflation, cost overruns and changes affect the Somerset project. Ten years of power generation while the EDF nuclear projects costs rise before commissioning. Grist for the mill?

      • George Michaelson 3 years ago

        Islamic finance models a ROI and then capitalizes it up front, bleeding the money out over the life of the project. You don’t charge interest, you calculate a fixed cost for the engagement, as a cost of capital, and then you pay it.

        A lot of companies would kill their offspring for financial certainty like that. It takes a huge amount of trust between lender and borrower, and has due-diligence which is socially very appropriate: Nobody with money to lend wants to lend to lose. So you investigate the client well enough to be confident (within the limits) of the lifetime of the relationship.

        You know what? For a power utility play, it feels like a good model. It looks remarkably like the kind of model we should think about.

        For the rest of the nut jobs, crawl back under a rock. This is a forum to discuss renewables, not islamophobia. (ps I’m an athiest)

      • A1 3 years ago

        Perhaps. It is harder to negotiate complicated benefits like that in a competitive tender. In fact it undermines the entire process unless there is a level playing field as part of the RFT terms – which might be publicly available. E.g., they instruct bidders to adopt assumptions similar to what you’ve stated.

        However, like you I’d like to see more details. A model wouldn’t be too hard to build to see what input assumptions are required for those prices – perhaps someone has already done it.

        edit- land is cheap relative to other costs. how does ADWEA pay for connection? i.e., what’s left for the project.

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