The traditionally conservative International Energy Agency (IEA) predicts the cost of solar energy will fall to around 4c/kWh in coming decades as the sun becomes the largest source of power generation across the world. The latest “Solar Roadmap” published by the IEA on Monday shows that the speed with which solar is reaching “socket parity” has taken the world by surprise, writes Giles Parkinson of Reneweconomy.com.au.



The Technology Roadmap: Solar PV 2014 shows that the IEA now expects solar to become the biggest single source of energy by 2050. The IEA has doubled its forecast capacity for solar PV compared to previous forecasts.

Rooftop solar, it says, will account for one half of the world’s solar PV installations, because as a distributed energy source the technology is “unbeatable”.

The Roadmap says all solar technologies will fall dramatically in costs in coming decades, with solar PV falling to as low as 4c/kWh, utility-scale solar to around the same level, and solar thermal with storage will to as low as 6.4c/kWh, assuming capital costs of 8%.

IEA executive director Maria van der Hoeven said capital costs were a key element in bringing down the cost of solar technologies. To do this, she said, it was critical to have stable and long-term policies.

The graph below illustrates how financing costs have a critical bearing on the overall cost of solar.

Van der Hoeven said policymakers needed to give clear, credible and consistent signals, which can lower deployment risks to investors and inspire confidence. “Where there is a record of policy incoherence, confusing signals or stop-and-go policy cycles, investors end up paying more for their investment, consumers pays more for their energy, and some projects that are needed simply will not go ahead.”

History of underestimating

The forecasts from the IEA are not the most dramatic that can be found, but they are significant because the IEA is essentially a conservative organisation that was created in the 1970s to defend developed countries’ access to fossil fuels.

It has a history of underestimating the impact of new technologies such as solar, as we pointed out in this article – even though it has doubled its forecast for solar PV deployment in just the last few years. Other agencies, such as IRENA (the International Renewable Energy Agency), have a much more bullish forecast for solar.

The IEA insists that its figures are not forecasts, but what the world should be aiming for. The deployment of solar could be much higher – assuming costs come down faster than thought. The IEA’s base model still relies heavily on “baseload” generation.

If the IEA figures are right, solar PV’s share of global electricity will reach 16 per cent by 2050, a significant increase from the 11 per cent goal in the 2010 roadmap.

This will require 4,600 GW of installed PV capacity by 2050 – more than half of it in China and India. It will require the installation rate to nearly quadruple to 124 GW year. The IEA notes solar PV will be a highly effective abatement tool, avoiding up to 4 gigatonnes (Gt) of carbon dioxide (CO2) annually on its figures.

The IEA says variability is an issue, but it can be overcome with interconnections, demand-side response, flexible generation, and storage. The overall cost will require an increased investment of $44 trillion – but this will generate savings of $115 trillion in fuel costs.

The IEA notes the dramatic cost falls in solar PV means that the sector is around five years ahead of where it thought it would be.

Lagging

The report also notes that solar thermal (STE) with storage was lagging because its “dispatchability” was not being fully valued. That would change, however, because solar thermal with storage would play a critical role in the energy systems of the future and would be a match for solar PV because of its ability to store energy for use at night or times of peak demand. In some countries, solar thermal deployment is expected to be greater than solar PV. In others, the opposite will be true.

Paulo Frankl, the IEA’s solar expert, says half the large PV deployment considered in this roadmap would take place on buildings or nearby (such as over parking lots). More than half of this would be on commercial buildings rather than residential.

The forecast rest, in part, on the concept of grid parity – when the cost of distributed PV generation is equal or below the per-kWh component of retail electricity prices – and on self-consumption. “At the utility level, solar PV has many competitors. At the distributed level, solar PV has a competitive advantage and is unbeatable”, said Frankl.

One graph in the Roadmap highlights how the dramatic cost reductions in rooftop solar PV haves caught the world by surprise – and caused the likes of the IEA to revisit their forecasts, and for incumbent industries to review their business models.

Four years ago, when the IEA did its last major Solar Roadmap report, socket parity (where the cost of rooftop solar is competitive with electricity from the grid) was just a distant dream – or so it seemed.

As this chart below shows, in 2010 the LCOE of rooftop solar (indicated in blue) was far above the variable rates of grid-based electricity. But in just three years, the LCOE (now in green) had caught up.

It is for this reason that the IEA has had to double its forecast installation of solar PV over coming decades.

Feel the pinch

Some analysts think that the IEA is still being conservative, and may have to raise its forecasts again. But the stationary energy industry is not the only one to feel the pinch from the plunging price of solar PV, which has fallen around 60 per cent in the last three years.

The graph below, which its authors, the US investment firm Alliance Bernstein, dubbed the “terror dome,” shows the comparative trajectories of solar PV and liquid fuels, previously considered untouchable by solar.

The realisation that solar PV is now in a position to displace diesel fuel in some countries, oil in others, LNG in Asia, and gas in many developed countries, raises the prospect of energy deflation some time down the track. It may come in a decade, when investors realise that the money invested in more expensive oil and gas extraction might become stranded. That will precipitate a massive shift in capital – a long time before the deflation actually occurs.

The IEA’s Roadmap is especially threatening news for the global thermal coal industry. It challenges the notion that centralised coal-fired generation is the best solution to energy poverty. Some 1.3 billion people in Asia and Africa still go without power.

Over the last year, the coal industry has argued that coal is the only technology that could deliver cheap electricity for those that go without it. It’s been a key line from Peabody Coal, the world’s biggest miner, whose “Advanced Energy for Life” advertising campaign describes energy poverty as “the world’s No 1 human and environmental crisis”. Rio Tinto has used the same argument, and it has been echoed by conservative commentators. Even the Australian government has bought into it, with environment minister Greg Hunt accusing environmentalists of being “against electricity” because they did not support the use of coal to address energy poverty.

But, according to the IEA, coal is not the best option anymore. If coal was to be used, it would have to include carbon capture and storage, which apart from not being commercially available in power stations, would be very expensive. The best alternative, it says, is solar.

“By 2050, although population growth will concentrate in cities, hundreds of millions of people will still live in sparsely -populated rural areas where off-grid solar systems would likely be the most suitable solution for minimum electrification,” says the IEA.

Upfront costs

India, one of the countries most affected by energy poverty, has around 400 million people without direct access to electricity. New Prime Minister Narendra Modi has announced a goal of delivering some form of power to all its citizens by 2020, but he has said he will do so using solar, not coal. The Solar Roadmap backs up this ambition.

The IEA assumes grid extension for all urban zones around the world and around 30 per cent of rural areas, and for the remainder, mini-grids and stand-alone solutions. But in both on-grid and off-grid situations, it says solar PV has “considerable merits”.

It notes that people who earn between $1 and $2 a day can spend as much as 40c of those earnings on dry batteries, kerosene and other energy products. PV – provided that finance is available to help with upfront costs – could prove competitive.

The IEA thinks that by 2030, around 500 million people with no access to electricity could enjoy the equivalent of 200W of solar PV capacity. This would be equivalent to 100GW, not far short of the total solar PV deployment to date, and would be entirely in mini-grid and off-grid situations.

“Solar electricity is actually competitive, but up-front costs, ranging from $US30 for very small PV systems to $US75,000 for village mini-grids, are usually too high, even if off-grid systems of several MW are now economically and technically feasible”, notes the report.

The main problem is financing risk. But once this risk is alleviated, equity funds and debt financers from commercial banks and private funds can be tapped in decentralised rural electrification projects.

Some organisations, such as the Australian-led Pollinate Energy, have been doing just that. Bigger commercial players have also been entering the market, with US-based Sun Edison recently announcing it would install solar PV micro-grids in 54 remote Indian villages. Each installation would involve 241kW of solar PV with battery storage.

IEA executive director Maria Van der Hoeven says even in large cities, many people would not have an on-grid solution. Van der Hoeven says there will be an opportunity for all kinds of fuels, but if the world was to move ahead in the fight against climate change, then carbon capture and storage needed to be priced in. This would make coal even more expensive.