Wednesday, March 5, 2014

Solar Power: Small But Growing Problem for the Grid and Natural Gas

Solar has been such a small contributor to power generation in the U.S. that the growth rate has not been relevant heretofore.  Let's start with the statistics for 2013, published today by Green Tech Media:

This study estimates the installed base of solar on 12-31-2013 at about 13 GW.  This means that 37% of capacity was installed in 2013.  The study estimated 2014 installs at 6 GW, putting capacity at about 19 GW by end of year.  

This is not so very small anymore.  The solar industry is in booming but anxious chaos right now, due to the regulatory, competitive, and technological environment.  Still heavily dependent on subsidies and protection, the solar market varies wildly from state to state, because regs, insolation, and power prices vary so much.

The news is out that renewables have gutted the european power market and incumbent utilities.  The landscape is certainly very different over there, but people are wondering just how different.  

I like to look closely at California because it represents the prime market for solar.  It has all three variables aligned:  High power prices, incredible sunlight, and favorable regs and protections for solar (both utility scale and distributed generation).  It also has one other important thing:  declining demand for electricity.  That spells trouble for power producers and means that the market is probably destined for reform soon.  

On the technology frontier, there are three things that matter most:

  • Solar PV prices coming down down down
  • Solar PV efficiency rising (overlaps with #1 above)
  • Battery storage pairing with solar to achieve escape velocity (ie grid defection for consumers)

This revolution may happen faster than the market expects.  The private sector achieved a surprising rate of residential solar penetration in CA as competition, innovation, and financing drove installations 'through the roof' as it were, for rooftop solar.  So much so that the utilities have resorted to extreme stalling tactics to slow grid connection for net metering customers (its about 8 months or so in California now, and at a dead stop in Hawaii).  

The concern here is that continued improvement in a few of the price/efficiency variables could push solar beyond the need for subsidies, which could strand billions of dollars in legacy generation assets, force grid maintenance costs onto fewer customers, and basically break a stable, bond-financed industry.

But is this apocalyptic nonsense that is really promotional hype by the renewables industry?  At one level yes, because the old saw that 'what can't happen, won't happen' does apply.  The grid is necessary and so probably everyone will pay something, even those who don't use it.  And subsidies are still so important that removing them will 'level the playing field' for awhile.  

Of upstream interest though, is the impact if any on fossil fuel feedstock producers.  Both coal and natural gas.  So much of the cost of electricity is capital related (depreciation and cap-ex), not variable, that unless these costs go away through bankruptcy, they will continue to be borne by consumers somehow.  This would suggest that the retail price of energy isn't going to collapse (Though it did in Europe.  Forward power price is shockingly low through 2015).  But if perchance the U.S. has already achieved peak generation (unlikely) then usage declines could have a brutal impact on prices, so it is worth keeping one eye on that.

But how can we waste ink on a power source that averaged 25 GWhD in 2013, when total generation averaged 11,150 GWhD?  That's less than 1/4 of 1%!

Part of the issue is mathematical.  Average generation is a lagging indicator during such a high growth phase, and most of the 2013 capacity additions were installed in Q4.  On average, solar output is around 25%-30% of capacity (due to darkness).  If we assumed 30%, then 2014 would have an exit rate, at 19 GW capacity, of 136 GWhD, or 5x the average output in 2013 and over 1% of the annual national total.  That gets more interesting, especially in a market that isn't showing much aggregate demand growth right now.

It is hard to say what the growth rate beyond 2014 will be, since the regulatory environment is hard to predict, as is the rate of technological progress.  But several of the technical issues could reach a tipping point if they push the economics beyond the bounds of subsidies, and combine with other technologies (battery storage).  

This is less a thesis about renewables and the hope for a new world, than it is about just how much 1% market share really matters.  It matters a lot.  And solar has two great qualities:  It shines during a high load period, and it shines during a high seasonal demand period.  It is worth way more than wind.  And it has the potential to outperform wind in generation cost as well.  Solar may never actually get there, but wind cannot get much more efficient (I think).  Turbines can get cheaper, yes.  but not like solar can.  And solar can penetrate much faster because it can be distributed, unlike wind.

I look for big conflict between competing interests, and some big technology announcements, in 2014.  A primary energy topic to watch, and something that could have a big effect on the outlook for natural gas.