I have never given much credence to the idea that an international agreement on climate change capable of establishing a global carbon price was likely to be reached – either in Paris this December or anywhere else – anytime soon.
If Europe, which is way ahead of the rest of the world when it comes to climate policy, can’t set its own carbon price, what hope is there that the US, India and all the others will?
As a result I’ve never taken seriously the view that a vast amount of energy investment by the oil and gas companies will be left stranded as carbon-generating fuels are priced out of the market. The argument has always felt like wishful thinking. If everyone obeyed the Ten Commandments there would be no prisons and the police forces of the world would be redundant.
But, and it is a very important qualification, change doesn’t come just through legislation and international treaties. Technology is arguably much more important and there is growing evidence that some fundamental changes are coming that will over time put a question mark over investments in the old energy systems.
Wood Mackenzie, a consulting firm with an impressive track record, recently published a report that said that within 5 years solar would be fully competitive with traditional sources of energy in 19 states in the US. Within a decade the number of states will double. “Fully competitive” means without subsidies. The detail matters – the US is a low cost energy market compared with most of the rest of the world. To be competitive there against coal and gas – without subsidies and without any carbon price – is quite something.
If this forecast is correct (and WoodMac does not tend to exaggerate or hype up its analysis), this is advance notice of a revolutionary development. The revolution might start in the US but if grid parity (the jargon term for competitiveness) can be achieved there, the impact will spread: first across the US because the low-cost solar will enter the grid, then internationally as others take up the technology. As the author of the report Prajit Ghosh, says, the collapse of solar module prices has enabled solar to move from being a niche supplier to being a major regional competitor to both conventional and other renewable technologies and a potential disruptor of the whole power industry.
Solar power that doesn’t require subsidies will be very attractive for many countries, not least those concerned with the dangers of dependence on foreign supplies and those with problems on the balance of payments. Not every country can generate significant amounts of solar power, but many can and will have every incentive to do so. One of the most remarkable features of globalisation is the speed at which technology moves internationally once it is developed. No one struggling 15 or 20 years ago with the early brick-sized mobile phones would have believed that within two decades mobiles with enormous capabilities to carry data, pictures and messages would have penetrated the mass markets of India and Africa.
Falling module prices are very important but they are not the whole story. The next issue is the efficiency of the modules, which is going through a process of continuous improvement. And beyond that come the development and use of new materials such as perovskite and the application of photovoltaics to building materials, glass and paint. Those steps are in general not yet commercial but the direction of change is clear.
Rapidly spreading solar technology could change everything. Solar can be used off the grid and through simple devices that do not require large-scale capital investment. It will be fascinating to see how the business models of solar develop.
Equally interesting will be to see how the existing energy suppliers react. Both existing assets (oil and gas fields for instance, or coal mines) as well as some infrastructure could be redundant. The smartest companies (which probably include some of the oil majors) will transform themselves. They may not be solar pioneers but they have the financial capacity and organisational reach to take second-mover advantage. Others will be left behind – but then that is what happens in a market economy.
The judgment for long-term investors now is about the quality and flexibility of management. In the energy business, the time horizon is typically 40 years – often even longer – which means that judgments being made now will determine how companies are positioned in 2030 and beyond.
Of course, solar remains an intermittent source of supply, as the WoodMac report makes very clear. The sun does not always shine. Until advances in storage can provide a commercial means of capturing the power solar produces, there will be a need for supplies that can fill the gaps. Those supplies will have to be flexible – they have to be capable of being turned on and off, which is a major challenge to the traditional economic model that says power stations are only viable when they operate at something close to maximum capacity at all times.
That is another revolutionary change, but I don’t believe the challenge is insurmountable and the economics of the generating sector will be assisted by the inevitable fall in fossil fuel prices if solar starts to take a growing share of the market.
I spoke last week to two groups of students – one the Energy Society at University College London, the other the graduating Masters class in Energy and Environmental Studies at Bocconi University in Milan. It was striking that in contrast to the general attitude in some parts of the energy industry, which is deeply conservative about potential advances and about anything that might transform the status quo, the students who have grown up surrounded by ever advancing communications technology expect and welcome continuous change on every dimension.
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