Solar Energy: This is What a Disruptive Technology Looks Like
May 28, 2013
I’ve said it before, I’ll keep saying it. No matter what you think about the need to decarbonize – the revolution is coming, because the technology is so compelling it simply is going to have its way.
A picture is worth a thousand words. The graph above compares the price history of solar energy to conventional energy sources. This is what a disruptive technology looks like. While conventional energy prices remained pretty flat in inflation adjusted terms, the cost of solar is dropping,fast, and is likely to continue doing so as technology and manufacturing processes improve.
While solar currently accounts for less than 1% of the energy supply, it is an exponentially improving technology, both in terms of price (14%/year) and pace of construction (60%/year). Already it is approaching parity with other energy sources in the Western US. Assuming this trend continues for another 10 to 20 years, and there’s no reason not to, solar power will become 5 to 10 times more cost effective than it is today. This raises an interesting question. What happens if solar becomes an order of magnitude cheaper than other sources of power?
This is the nature of disruptive technology. It represents such an improvement that it renders existing industries obsolete. We saw waves of disruption take place as the Internet upended entire industries. Expect to see a lot of this in the coming years.
You can see where this is going, can’t you. As network prices surge, rooftop solar PV prices are falling even more dramatically in the other direction. As the Edison Electric Institute and leading US utilities have pointed out this year, customers now have the option of sourcing electricity from their own resources at a cheaper cost, and will be tempted to use the grid only as a backup. This, of course, is a major threat to their business model. It’s what AGL Energy, and Hawaii’s network operator have both described as the “death spiral.”
For the moment, the likes of SP Ausnet are protected by regulatory pricing. But it’s not clear how long that will last, or offer them the same degree of comfort. SP Ausnet, in its own outlook, states its biggest challenges are dealing with the “changing energy environment” and changing “customer behaviour”, and making sure its voice is heard in regulatory decisions.
Meanwhile, it is vigorously pursuing opportunities in the “non regulated” market – such as high voltage lines for the state’s desalination plant, and connections to Macarthur wind farm, the state’s largest. And it will also be busily figuring out how it fits into the new “distributed” model of electricity delivery, which in the future will rely as much or even more on rooftop solar, battery storage, fuel cells and electric vehicles than it does on its 49,512km of poles and wires.
But while the EEI in the US noted that investors had been largely ignoring these trends, despite their grave implications for the industry, market analysts in Australia are starting to get cautious.
Deutsche Bank this week slapped a sell recommendation on SP Ausnet, noting that the market had not understood the risks to the business – principally the likelihood that regulatory returns from its transmission networks were likely to fall significantly in the next regulatory reset, and that it faces funding pressure from its ability to use cash flow to support its dividend payments and re-invest in capital expenditure. “We do not believe these risks are adequately captured in the current share price,” the analysts noted.
It’s not quite a revolution, but the trend is clear: The energy game is changing and running an electricity network will not be the licence to print money that it once was.