The global solar PV market is giving all the impressions of an industry in crisis – reduced incentives, a glut of panels, bankruptcies of manufacturers and installers, closures of plants and plunging share prices. But are these the death throes of solar, a classic boom/bust cycle, or just natural growing pains? Definitely the latter, says global consultancy group McKinsey & Co.
And when the solar PV industry does bounce back – and McKinsey expects it to do so in phenomenal fashion, and without subsidies in coming years, generating what it calls “economic demand” of one terawatt (1,000 gigawatts) by 2020 – then dramatic changes can be expected for the energy industry across the globe.
This website has already documented the threat posed by solar PV on the conventional generation sector – Why generators are terrified of solar – which gained a huge amount of interest in Australia and overseas.
The McKinsey report, “Solar Power, darkest before Dawn,” adds another interesting element because it says the rapid growth of distributed generation is likely to disrupt the regulated utility industry as well, particularly in OECD countries. In non-OECD countries, the combination of distributed generation and inexpensive storage solutions could bring electricity to millions of poor people living in rural areas, greatly improving their standard of living, as Bloomberg described earlier this month in this fascinating article.
The biggest winners in OECD countries such as Australia will be new players that are able to target the highest-value customers in the distributed-generation segment. These new players could be the providers of financial products such as SolarCity, SunRun and Sungevity, which offer zero-cost solar to customers and enter into their own power purchase agreements with the customer. (Interestingly, Sungevity, announced their entry into Australia on Friday, Pay-as-you-go solar PV arrives in Australia). Or they could be other players, such as home security companies, who offer solar PV as part of their package, or even cable or broadband operators.
The biggest losers are likely to be those who service those customers now – the energy retailers, in particular; and who deliver that energy, the network operators.
And while McKinsey does not look at Australia in particular, it is clear that the effect on Australia’s biggest energy utilities could be two-fold, because as vertically integrated companies they are both generators and retailers. Solar PV therefore threatens to attack their earnings all along the value chain.
But let’s step back a bit for the moment, and look at what McKinsey is forecasting and why. (And at this point it is possibly worth noting that McKinsey do have a keen interest in this area. The McKinsey cost curve of abatement options and costs is still considered the industry benchmark, and a McKinsey team that worked with BHP Billiton last year was highly influential in that company’s decision to keep its options open on providing energy sources for the proposed Olympic Dam expansion).
McKinsey notes that in just a decade, solar has been transformed from a cottage industry to one worth more than $100 billion, with more than 65GW installed around the world by the end of 2011. Within eight years, it expects more than 600GW will be installed, and by 2020 the annual installation rate will be 50 times its level of 2005, and will have become a trillion-dollar industry by then.
The consultancy arrives at this conclusion, firstly, by forecasting its cost curve (see separate story). It then breaks down the attraction of solar PV into five distinct customer markets. As the table below shows, four of these are likely to grow significantly in the next few years, because in these solar is already competitive with conventional fossil fuels (or soon will be), while the fifth (utility-scale solar), is likely to grow significantly from 2020 to 2030, which fits with predictions from what will be the three biggest energy markets in the word by then – the US, China and India.
The really big markets are in commercial and residential sectors (where solar PV is competitive now) – and this includes Australia – and in the peak power market (where it will competitive in a few years), which also includes Australia. In fact, Australia is impacted in all categories but 2b. Many would contend that McKinseys predictions for utility-scale solar PV are too pessimistic.
But are the retailers ready for a potential assault on their client base from the Sungevitys of this world, and from home security companies, cable and broadband operators – or even electric vehicle network operators?
One of the report’s lead authors, Krister Aanesen, told RenewEconomy in an interview from Oslo on Friday that utilities are becoming increasingly aware of the threat from solar, even though it has only really emerged in the last few years.
“This is happening very, very fast,” he said, echoing comments from David Crane, the head of US utility NRG in our story, Shock of the new energy models. “If you look at numbers two years ago, they were very different,” Aanesen said. ” They (the utilities) are talking about solar and how to integrate that into their traditional business, but solar is a very different business than a traditional utility.
“I haven’t seen a lot of them being clear as to where they want to go with this. The next two to three years will be extremely interesting.”
Given this, it is not surprising that Australian utilities have been keen to curtail the growth of solar PV in the domestic market. One – AGL Energy – has been arguing that feed-in tariffs are a regressive tax that disadvantage the less well off. That has been hotly debated, but even if it was true at a certain point in time, when FiTs were at their highest, it becomes redundant when customers are able to access unsubsidised solar at no up front cost. It is clear that the utilities have an even greater challenge ahead, and with numerous companies likely to roll out large rooftop solar systems at no cost to their customers, and delivering savings on their bills from the get-go, the challenge to the traditional business model will be significant.
Of course, a disruptive technology is as much of an opportunity as a threat. But so far, only Origin Energy has publicly recognised that challenge in any detail. It ranks as one of the top two solar installers in the country, and in this interview the company’s then head of retail, Phil Craig, acknowledged the hurdles that the retail industry faced to retain its customer base – not just in rooftop solar, but from other technologies.
But just to give an example of the potential impact of solar PV, Aanesen’s team cites the case of the US, which, like Australia, has many solar-rich states and rising electricity prices.
McKinsey says that in the US alone, the “economic potential” of unsubsidised solar PV could be 12GW by the end of 2012 (actual installations were 1.8GW in 2011) and by 2020, the economic potential could grow to a phenomenal 700GW. (Globally, it says it could be 1,000GW)
This is not a prediction for installation. It is the amount that McKinsey says could be installed at a profit, because it would be cheaper (even without subsidies) than alternative sources (including coal and gas-fired grid generation). It predicts a tipping point in 2014 or 2016, and says that solar PV could satisfy 50 per cent of total demand in some US states by 2020.
In the end, less will likely be installed. Regulation and the availability of finance may limit that deployment, and McKinsey says the utilities will try to fight back. One way could be to request to modify their rate structures to make switching to distributed generation less attractive for customers. (Or, in Australia, by not changing the rules, but given the reaction to Jeff Bye’s story, How to kiss the grid goodbye, and the declining costs of storage, that might not be a good long-term plan).
“The solar industry is undergoing a critical transition,” the McKinsey report concludes. “The rules of the game are changing, and many current players could face significant challenges as the industry restructures.
“But those who believe the solar industry has run its course may be surprised. Solar companies that reduce their costs, develop value propositions to target the needs of particular segments, and strategically navigate the evolving regulatory landscape can position themselves to reap significant rewards in the coming years.”