The Rapidly Falling Cost of Solar Energy Visualized

posted by Jason Kottke   Dec 02, 2020

Check out this graph from Our World in Data of the price of electricity from new power plants. In 2009, solar was the most expensive energy source and in 2019 it’s the cheapest.

graph showing the plunging cost of solar energy

Electricity from utility-scale solar photovoltaics cost $359 per MWh in 2009. Within just one decade the price declined by 89% and the relative price flipped: the electricity price that you need to charge to break even with the new average coal plant is now much higher than what you can offer your customers when you build a wind or solar plant.

It’s hard to overstate what a rare achievement these rapid price changes represent. Imagine if some other good had fallen in price as rapidly as renewable electricity: Imagine you’d found a great place to live back in 2009 and at the time you thought it’d be worth paying $3590 in rent for it. If housing had then seen the price decline that we’ve seen for solar it would have meant that by 2019 you’d pay just $400 for the same place.

The rest of the page is worth a read as well. One reason why the cost of solar is falling so quickly is that the technology is following a similar exponential curve to computer chips, which provide more speed and power every year for less money, an observation called Wright’s Law:

If you want to know what the future looks like one of the most useful questions to ask is which technologies follow Wright’s Law and which do not.

Most technologies obviously do not follow Wright’s Law — the prices of bicycles, fridges, or coal power plants do not decline exponentially as we produce more of them. But those which do follow Wright’s Law — like computers, solar PV, and batteries — are the ones to look out for. They might initially only be found in very niche applications, but a few decades later they are everywhere.

If you are unaware that technology follows Wright’s Law you can get your predictions very wrong. At the dawn of the computer age in 1943 IBM president Thomas Watson famously said “I think there is a world market for maybe five computers.” At the price point of computers at the time that was perhaps perfectly true, but what he didn’t foresee was how rapidly the price of computers would fall. From its initial niche when there was perhaps truly only demand for five computers they expanded to more and more applications and the virtuous cycle meant that the price of computers declined further and further. The exponential progress of computers expanded their use from a tiny niche to the defining technology of our time.

Solar modules are on the same trajectory, as we’ve seen before. At the price of solar modules in the 1950s it would have sounded quite reasonable to say, “I think there is a world market for maybe five solar modules.” But as a prediction for the future this statement too would have been ridiculously wrong.

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Replies to This Discussion

A big question with solar, regardless of the installation cost, is availability when it is needed, not just when the sun is shining. When large scale battery storage is more cost effective, that will be the real game changer. I also think we have to consider the source of some of these cost numbers. There is likely an agenda behind this.

Bud, I think the agenda is science.  And for a number of years now R&D investment (private and public) has been shifting to renewables.  Those are financial decisions made by professionals, not partisans.  I vet all the sources that link to my news feed and do not hesitate to look more closely when some assertion looks iffy.  There are a number of storage technologies in addition to batteries that are seeing significant investment.  Yes, there is always some "agenda" to be factored in but all the major renewable energy media sites that I look at rate highly on media bias fact check.  All are somewhere between the "center" and "center left" on the bias slider but more importantly they score "high" or "very high" on the Factual Reporting scale.   Here is one example.

https://mediabiasfactcheck.com/ars-technica/

Shale oil slump burns private equity interest

Published date: 07 December 2020 argusmedia.com  By Thomas Lee

Private equity (PE) investors are accelerating a shift away from the US shale oil sector amid diminishing returns caused by the Covid-19 pandemic.

Over the past decade, private equity firms have poured tens of billions of dollars into the US oil and gas industry, especially as the shale revolution gained full steam. Their funding helped spur the shale oil boom that followed the last market slump in 2015-16. But the lustre was already wearing off shale oil before this year's slump as returns diminished, with PE capital invested in oil and gas firms falling by 45pc between 2017 and 2019, from $118bn to just over $64bn, Pitchbook data show.

And PE is unlikely to underpin an investment revival this time. To get PE dollars, "the industry is going to have be consistently profitable for the first time", US bank Stephens' managing partner Jim Wicklund, says.

PE firm Warburg Pincus recently told investors it is pulling back from investments in the oil and gas sector. Earlier this year, PE giant Carlyle Group sold its nearly 8pc stake in Chesapeake Energy, just before the producer filed for bankruptcy protection with nearly $12bn of debt. In total, 90pc of the combined debt — or $46bn — from producers filing for bankruptcy this year belonged to PE-backed firms, US law firm Haynes and Boone says. The average debt held by bankrupt PE-backed producers was more than four times that of their non-PE-backed peers.

Some observers argue that PE's exit from oil and gas is only temporary, and that investors will return once the industry recovers. But others say the situation has permanently shifted. Institutional investors have been exiting the oil sector in favour of technology firms with higher growth potential, fewer regulatory burdens and lower costs. Covid-19-related oil price volatility and the growing environmental, social and governance (ESG) stigma of fossil fuel firms have scared off investors already tiring of shale's dismal record on shareholder returns.

Effectively, "the equity market is closed to E&P companies", law firm Sidley's energy partner Jim Ricesays. As a result, energy initial public offerings have largely disappeared, depriving PE firms of the exits they need to recoup investment and earn returns. This is one reason US independents will need to consolidate to survive, Pioneer Natural Resources chief executive Scott Sheffield told the Reuters Future of Oil and Gas conference on 1 December. Pioneer recently agreed to acquire fellow Permian producer Parsley Energy for $4.5bn. "There was a lot of capital that went in, but most of them had very poor returns," Sheffield says. "They have to have an exit mechanism. They were built to flip. Those days are gone."

Hard bargain

There are still some quality assets for PE firms to pick off for the right price. For example, Kimmeridge Energy recently paid $140mn for a 2pc share of revenue interests for Callon Petroleum's operated oil and natural gas leases, a transaction known as an overriding royalty interest. But producers that need to raise cash will find that PE investment terms have become a lot tighter. Patrick Gimlett, managing director of AllianceBernstein Private Credit Investors, says he will only lend to companies at loan-to-value ratios of 55-60pc, which means a borrower would have to offer a down payment of 40-45pc of the loan to secure it.

Given the pressing issue of climate change, companies will also find themselves under growing environmental scrutiny. "We require best of class in ESG," Kimmeridge Energy managing partner Henry Makansi says. "Otherwise, they can't get our capital." And PE has moved away from the traditional "equity line of credit" investment model in which it backs an outside team to find drilling opportunities. Instead, firms only want proven wells that already produce energy. Overall, "there is a permanent increase in the cost of capital", Rice says. "It feels pretty dire."

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