Do you remember when Dr. Evil was going to hold the world ransom for $1,000,000?

This is what we are facing today in Solar – the Dr. Evil ultimatum. The cost to get Solar to coal parity is going to be laughably tiny.

The cost sounds like a lot of money to old people, or to people who haven’t thought it through, or to people who do not know how large world GDP is today and how much we spend on energy already.

But the cost is tiny, and China laughed when they found out the cost.

I’ve been in a twitter argument with Michael Shellenberger. Michael Shellenberger is a sharp guy, so please read what he has to say on Solar. But I think he is missing the big picture about solar. He is:

arguing for innovation driven approach to driving solar costs lower arguing for a market driven approach to implementing solar

This is a great approach for something like the a handheld computer like the iPhone, as Steve Jobs found out the hard way with the Newton. But with solar, he’s missing the biggest driver and reason solar is happening today and not 25 years in the future.

Solar is happening right now because China needs Solar to be cheaper than coal in China. Pollution is terrible in China.

We’ve all see the pictures of China’s pollution problem, but here is one just as a fresh reminder of how bad it is there.

China decided back in 2000 they wanted needed to go green due to what was obviously going to be a massive environmental problem. I had friends tell me pollution was a terrible problem for China in the early 2000’s. Everyone in China knew this was a problem that had to get worse because they needed the electricity and energy.

China needed a solution to provide huge amounts of cheap electricity and not cause pollution. There are not many ways to do this. Solar was one possible path to clean and cheap energy way back in 2000, but it was very expensive then, and could not supply much capacity because there were few Solar production facilities.

So the Chinese leadership asked a question:

“How much will it cost to make Solar Cheaper than Coal?

This question has an answer. It turned out to be a dollar value China was willing to pay.

The dollar answer to this question requires knowing a few stylized facts about solar:

Solar gets 20% cheaper for every doubling of worldwide installed capacity. This is called Swanson’s Law and has held for at least 40 years. The amount of installed solar is tiny today and was much smaller in the early 2000’s. This means Doubling capacity would cost very little in absolute dollar values in the early days. Even today is quite low. Testing Swanson’s law is “cheap”. Solar plants are extremely quick to develop compared to coal plants, which means the planning and possible cancellation time is very low. The market is willing to pay more for solar than it is for coal. Some increasing portion of the current year cost to test Swanson’s law will be willingly funded by the market because the market will pay more for Solar than it will for coal power. Installation capacity has a high but real upper limit to how much it can grow each year. Solar plants have almost 100% of their costs up front, so the financing is an important cost factor. Solar cells last about 30 years, which is longer than the financing term, so the last 10 years are free electricity even if Solar turns out to be a boondoggle during the time you are paying for it. Electrical energy storage costs have their own Swanson’s law.

Analysts at places like McKinsey make models based on observations like this all the time. Industries are given estimated growth rates, and end up with some level of market penetration, with some mitigating factors and limits.

Swanson’s law predicted 20% price declines for every doubling of installed capacity. Since capacity was so low in the early 2000’s, doubling total world capacity a few times would cost just a few billion dollars.

The Chinese leadership turned the model on its head, and asked how much it would cost to get them to get Solar cheaper than coal.

I can imagine the conversation between the Chinese leadership and the engineers who were asking for funding.

“We have a looming environmental problem due to wanting much more electricity.”

“What are some possible solutions?”

“Solar could one day be cheaper and solve both the cost and pollution problems.”

“How much money do you need to find out?”

“A lot, about $10 billion”

At this point the leadership fall on the floor laughing. China is a country where they build entire ghost cities with nobody in them. They build massive public transportation systems in 15 yearsbecause they can. Spending $10bn to find out if they can solve both energy and pollution was completely worth it to them.

China found out something even more interesting when they asked this question about the total cost to get Solar to coal parity. The initial, upfront costs to investigating solar would be comically trivial, and they could stop at any time. Finding out if Solar was a possible solution to the energy/pollution problem would be relatively cheap.

I suspect China decided to test Swanson’s law in the 10th plan from 2001-2005. When Swanson’s law held up, they decided to dramatically up production during the 11th plan. This production build out caused the huge price drop in 2008, when the factories built in 2006-2007 began shipping in 2008. Today in the 12th guideline from 2011-2015, China is pushing production to see if they can get cheaper than coal sooner rather than later because pollution is so bad.

Environmentalism is a guiding principle in the 12th guideline – mentioned on page three! The environment is clearly an important part of the Chinese plan – not many ideas are mentioned in the guiding principles, and China takes these principles seriously. Look at how many times sustainable growth is mentioned in the guiding principles.

It turns out Solar will be cheaper than coal for China very, very soon. SunTech estimates Solar will be cost competitive with coal power in China by 2016 and 2017 at the latest. This is in line with what people expect for Solar parity in the United States, given the cost of coal based power.

Still, let’s assume SunTech exaggerating, and the time for Solar/coal parity is really 2018.

Both parts of this assumption are reasonable. Suntech is probably exaggerating the time for Solar to get cost competitive with coal. But it can’t be more than a year or two, because electricity is so much more expensive in China than it is in the United States.

(Aside: Swanson’s law probably needs to be modified a bit. Swanson’s law uses installed capacity as the driver for prices. The driver for solar prices is probably “total potential manufacturing capacity of current solar PV manufacturers”. I am certain someone important in China noticed this by 2008 at the latest.)

Coal power is expensive in China, simply because they need to import coal from Australia. China can’t make the cost of coal lower with cheap wages.

Industrial users in China should pay about 80% more for electricity as similar users do here in the United States. So if unsubsidized Solar is about double the cost of coal here – which we know was true a lifetime year ago – then Solar must be close to coal parity in China today.

It’s important to note electricity prices for China are massively subsidized by the Chinese government even if companies are not paying the cost. Here is a Bloomberg article on this important topic:

“Support to industry totaled about 10 percent of gross domestic product, according to a 2010 study led by Huang Yiping, vice president of the National School of Development at Peking University and former chief Asia economist at Citigroup Inc. That equals about $593 billion.”

So how much was the total cost to China to make Solar Cheaper than their cost for coal power in 2018? It’s going to cost China a total of about a trillion dollars. It will cost China about 2 years of their existing subsidies to make their energy costs cheaper than dirty coal.

China is and was willing to pay this amount to get cheaper, cleaner energy.

Again, remember this $1 trillion was not an all up front cost. China was able to invest about $10 billion over the years 2001-2005 to find out if this could possibly work. China then invested another $100bn to completely dominate the world solar panel market and bring prices close to coal parity in 2006-2010. When Swanson’s law held during this expansion, they decided to go all in, make true parity an explicit goal, and so will spend another $900 billion, for a total of around a trillion dollars.

The total cost to the world is roughly $10 trillion USD. It’s going to take longer to get to coal parity everywhere, so the total amount is going to be high for the entire world. Still, this is a tiny amount of money. That’s right, over the 10 years Solar is getting cheaper than coal, it will cost about 1% of total GDP.

The total cost to the world to get cheaper, clean energy is about 12% of 1 year of GDP. World GDP in 2012 was 84 trillion. During that time, the world will spend about 8-10% of GDP on energy. This ends up being roughly $100 trillion on energy over the same time span.

Here is a link to the spreadsheet I used to get these numbers, called Solar Growth. Note I’ve overestimated China’s investment according to recent figures. Recent figures put it at 20% of the world investment, but I used 40% in this spreadsheet. Lowering the investment to 20% vastly reduces China’s cost calculation.

I don’t have the numbers yet, but it’s pretty clear we’re going to save giant portions of GDP every year by 2030. We’re talking saving 3%+ a year, and growing! This could raise our long term growth rate to 5% or more. (Take that Piketty! That’s for another post.)

Much of the decline in price was driven by China’s decision, even if the costs are shared globally. You might see a few important things missing in the spreadsheet, which would make the cost actually paid by China far, far lower than $1 trillion.

Does not account for foreign income purchasing Chinese Solar panels which would lower the cost to China The sheet assumes the market does not pay anything for Solar power, when the world seems willing to pay a premium for clean energy (Cough, Germany, Cough) Assumed China paid 40% of the world investment in Solar when it is only paying 20% Solar panels last longer than the financing duration, so at some point, solar provides zero cost electricity.

All of these points would reduce China’s paid out cost to get them to cheap, clean energy.

The next 5 year guideline spans from 2016-2020. This is the time frame in which SunTech expects solar to be cheaper than coal in China. I expect another massive build-out for China Solar which greatly exceeds expectations as Solar is economically cheaper than coal for China. Then in 2021-2025, the build will be vast – think Shanghai skyline over 1995-2000

Many people are calling for thousands of coal plants to be built in China in the years from 2020 to 2030. However, if you think about it from the perspective of how China has acted in the past, this does not make much sense. China has shown again and again it is willing to make what appears to be insane levels of investment to achieve goals.

I contend given the current levels of pollution in China, paying a modest premium for energy is completely worth it to them. If Solar ends up being the same cost as coal in just a few years, China will shift over to Solar power in an astonishing way. They will just stop building coal plants, and build an incredible amount of Solar plants instead.

Look at what China did in Shanghai. The city was entirely transformed in 20 years. China put up the equivalent of Chicago in 20 years.

Why would their response to cheap, clean energy be different? It won’t. China had a Dr. Evil moment with Solar, where it was shocked at how little it would cost to get clean energy. They tested Solar and it worked as expected. China is now laughing as they almost certainly preparing to roll out a truly huge amount of solar in the next 10 years.

This is going to drive down Solar prices far more rapidly than anyone expects. They are beginning to put together the information for the next 5 year guideline today and it looks great for Solar. The capacity China will add beginning in 2016 is likely to exceed even the highest estimates, simply because the combination of lower cost and pollution-free energy will be so compelling to China.