Solar’s Disruptive Potential Discussed In McKinsey Report

April 10th, 2014 by Zachary Shahan

For a variety of reasons, solar companies have had a hard time profit-wise in recent years. However, that doesn’t mean their sales haven’t been growing. The solar market has grown in size year after year, and for the companies that squeezed through the toughest of financial times, the future looks very bright, disruptively bright.

Solar power, at approximately 0.85% of the electricity market in 2013, is likely to become the #1 source of energy (all energy, not just electricity) by the end of the century. That’s tremendous growth. McKinsey has more in an April 2014 publication:

The economics of solar power are improving. It is a far more cost-competitive power source today than it was in the mid-2000s, when installations and manufacturing were taking off, subsidies were generous, and investors were piling in. Consumption continued rising even as the MAC Global Solar Energy Index fell by 50 percent between 2011 and the end of 2013, a period when dozens of solar companies went bankrupt, shut down, or changed hands at fire-sale prices.

The bottom line: the financial crisis, cheap natural gas, subsidy cuts by cash-strapped governments, and a flood of imports from Chinese solar-panel manufacturers have profoundly challenged the industry’s short-term performance. But they haven’t undermined its potential; indeed, global installations have continued to rise—by over 50 percent a year, on average, since 2006. The industry is poised to assume a bigger role in global energy markets; as it evolves, its impact on businesses and consumers will be significant and widespread. Utilities will probably be the first, but far from the only, major sector to feel solar’s disruptive potential.

Ah, feel it they will.

There are a few obvious dynamics that will ensure solar is disruptive, world-changing. For one, solar technology will continue to see cost drops and efficiency improvements (as any young technology does). Resource-based energy options (i.e., fossil fuels), on the other hands, will see their costs increase as supplies continue to dwindle.

Furthermore, at just 0.85% of the market, solar has a lot of potential to cut “soft” costs as the market grows and economies of scale are obtained. In Germany and Australia, some of the more mature markets, soft costs are considerably lower than in less mature markets such as the US. The cost of solar in Germany is actually about half the cost of solar in the US. All markets, even Germany and Australia, will see notable cost reductions on the soft side of solar in the coming years. Don’t believe me? Well, pay some heed to McKinsey:

Sharply declining costs are the key to this potential. The price US residential consumers pay to install rooftop solar PV (photovoltaic) systems has plummeted from nearly $7 per watt peak of best-in-class system capacity in 2008 to $4 or less in 2013.1 Most of this decline has been the result of steep reductions in upstream (or “hard”) costs, chiefly equipment. Module costs, for example, fell by nearly 30 percent a year between 2008 and 2013, while cumulative installations soared from 1.7 gigawatts in 2009 to an estimated 11 gigawatts by the end of 2013, according to GTM Research.

While module costs should continue to fall, even bigger opportunities lurk in the downstream (or “soft”) costs associated with installation and service. Financing, customer acquisition, regulatory incentives, and approvals collectively represent about half the expense of installing residential systems in the United States. Our research suggests that as they become cheaper, the overall costs to consumers are poised to fall to $2.30 by 2015 and to $1.60 by 2020.

Yep, McKinsey is predicting a drop in the overall cost per watt of solar power capacity from $4 to $1.6 by 2020 (in the US).

Also, as I note every chance I get, it’s important to realize that residential solar power costs compete with retail electricity rather than wholesale electricity. That makes solar competitive for residential (and commercial) consumers sooner than many might realize. Actually, for tens of millions of Americans, the cost of solar power beats the cost of retail electricity over the life of a solar PV system, or even over a small fraction of the life of a solar PV system. For many homeowners, it even beats investing in the S&P 500.

Here’s a chart from McKinsey on “grid parity” in a number of countries and American states:

McKinsey also notes, as I have for years, that many in the developing world will actually benefit from jumping right from no electricity or unreliable electricity to solar electricity. As I said in a CNBC & Harvard Business Review interview a few years ago, people across the developing world will leapfrog (and are leapfrogging) large, centralized power plants just as they leapfrogged landlines and jumped right into the cell phone market.

Decentralization is a key trend in many sectors, not the least of which is the electricity sector.

McKinsey writes: “While these economic powerhouses represent the biggest prizes, they aren’t the only stories. Sun-drenched Saudi Arabia, for example, now considers solar sufficiently attractive to install substantial capacity by 2032,2 with an eye toward creating local jobs. And in Africa and India, where electric grids are patchy and unreliable, distributed generation is increasingly replacing diesel and electrifying areas previously without power. Economic fundamentals (and in some cases, such as Saudi Arabia, the desire to create local jobs) are creating a brighter future for solar.”

If you’re still skeptical about solar’s future (and present), consider this: some of the biggest corporations in the world are switching to rooftop solar power. “For example, Wal-Mart Stores has stated that it will switch to 100 percent renewable power by 2020, up from around 20 percent today. Mining and defense companies are looking to solar in remote and demanding environments. In the hospitality sector, Starwood Hotels and Resorts has partnered with NRG Solar to begin installing solar at its hotels. Verizon is spending $100 million on solar and fuel-cell technology to power its facilities and cell-network infrastructure. Why are companies doing such things? To diversify their energy supply, save money, and appeal to consumers.”

Definitely don’t discount the “save money” part of that. Walmart doesn’t need to sell itself as a green company. Walmart has one key selling point: our stuff is cheap. It’s infamous for that. Solar power is about cutting Walmart’s costs in order to keep prices low and profits high. It isn’t making token investments in solar. It has more solar power installed than any other company in the United States.

Furthermore, banked and investors have been warming up to solar, and better financing options have resulted. Solar is getting to play with the big boys now. And you know that when that happens, the big boys will also protect solar’s future growth.

For more on solar’s potential and the disruption — including utility disruption — that the solar sector is bringing, check out the full McKinsey article.









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