Powerful evidence continues to emerge on the global energy economy’s transition to renewables.
Witness this week the release of a new study by the Fraunhofer Institute for Solar Energy Systems, a think tank based in Freiberg, Germany, that sees solar energy on track in many countries to become cheaper than coal- or natural-gas fired electricity by 2025.
These aren’t just developing countries Fraunhofer is talking about, although developing economies are huge players in this unfolding change.
A few telling excerpts from the report:
- By 2025, the solar-power production costs in central and southern Europe will have dropped to from 4 to 6 cents per kilowatt hour, and to as low as 2 to 4 cents by 2050.
- In Dubai, a long-term solar power-purchase contract was signed recently for 5 cents per kilowatt hour.
- In Germany, large solar plants already deliver power for less than 9 cents per kilowatt hour, while electricity from new fossil fuel plants is 5 and 10 cents per kilowatt hour and as much as 11 cents per hour from nuclear-powered plants.
The Fraunhofer report, commissioned by Agora Energiewende, a German energy research group, adds to work we’ve done recently here at IEEFA, where we see solar playing a critical role in energy markets in the short, medium and long term.
As we noted earlier this year in a report titled “Global Energy Markets in Transition,” 2014 was a step-change year in which the renewable-energy industry became a global juggernaut. The rate of change around the cost of renewable generation and innovation is astounding but certainly not unexpected.. Efficiency improvements, greater economies of scale, and learning by doing will continue to drive the price of solar power generation to new lows.
The boom in renewables is being driven as well by their deflationary nature, which mimics the transition that drove adoption of cell phones, computers, and the Internet. Plummeting costs and new technology will dramatically push down the installed cost of solar energy. The impact of this on the electricity market cannot be overstated.
The trend is clear, and the Fraunhofer study shows it in detail, finding, for example, that installs of solar capacity last year rose by more than 20 percent to a record 46-48 gigawatts — enough energy to power 16 million homes. New global wind installs grew by 40 percent to 46 gigawatts, led by China and the U.S.
With the notable exception of Australia, where policy uncertainty has served as an effective hand-brake, the trend is the same around the world— in China, India, Europe, Japan, South Africa, Brazil, and the U.S.
Importantly, the Fraunhofer study highlights how financial and regulatory policy are crucial to the renewable energy sector. There’s a trend here, too, as seen in signals out of key markets that include India, China and Brazil. Leaders of these huge emerging economies have grasped the role policy can play and are working to deliver new frameworks.
Solar energy, in particular, has a couple of other factors in its favor:
- As the Fraunhofer notes, as solar-module efficiencies double over the next two decades, the number of panels required per unit of electricity will halve, thereby halving installation costs, regardless any other economies of scale or technological gains.
- Government bond interest rates are still near historic lows—between 2 to 3 percent per annum in both Europe and the U.S.—rates that have drastically lowered the cost of servicing the higher upfront capital costs of solar. This is a key improvement in cost per unit of electricity relative to thermal plants.
The effects of renewable growth are currently felt most keenly in the global coal sector, particularly in the structural decline of seaborne thermal coal. IEEFA anticipates that this trend will hasten, rather than abate, into 2016.
Tim Buckley is IEEFA’s director of energy finance studies, Australasia.
