By Michal Bacia, Founder & CEO of Hi Energy People
As of mid-2016, the total solar capacity installed and operating globally amounts to some 320 GWp (320 gigawatts peak, or gigawatt DC). This is over 1 billion solar panels. The solar PV industry employs about 2.5 million people globally. This includes all parts of the PV value chain — from manufacturing all the way through to O&M.
Historically, PV installations were driven mainly by government subsidies offered by well developed countries as part of their environmental strategies. They wanted to “be green” and reduce emissions, so solar PV was part of the solution as one of the available renewable energy technologies.
The initial costs of energy generated by solar PV were much higher than electricity from conventional sources like coal, oil, or nuclear. The biggest part of the cost of solar energy is the capital needed to finance the PV assets, mainly the PV panels. O&M costs are negligible compared to the capex costs and there are no fuel costs involved (so far, the sun shines for free).
Solar PV needed a lot of public support to be profitable. But public incentives in countries like Germany, Italy, and Spain created substantial demand for PV technology. This demand created a high volume of production, and the costs of equipment (mainly panels and inverters) began to drop in price. Solar panel manufacturing is similar to semiconductor or electronics manufacturing: with volume and time, efficiencies increase and costs drop.
In the period between 2014–2015, solar PV became cost competitive with grid electricity in several world markets — places with a lot of sunshine and high electricity prices (like California, Hawaii, Australia, etc.). From this point, “grid parity” onward, PV technology does not need government subsidies. Solar will be the first-choice technology cost wise. The new lower prices created even greater demand for solar and opened new markets in developing countries. More demand allowed for even further decreases in cost, making solar even more competitive, and so on.
The Next 4 Years
This positive reinforcement creates a situation in which the cumulative solar PV capacity doubles every 24 months. Since the inception of solar, there has been a total of 320 GWp built. Within the next two years, this total capacity will be doubled. In the next 4 years there will be 4 times as many solar installations.
Therefore, in 2018, there will be ~640 GW of PV installed and the industry will need to employ up to 5 million people. By 2020, there will be ~1,280 GW installed and possibly 10 million people employed.
At the same time, costs of PV panels will continue to drop, so PV electricity will be cost competitive in more and more local markets.
Most of the solar that will be operating in 2020 has yet to be built. Companies that are market leaders right now might not be leaders in 4 years.
In the past, solar PV was subsidy driven. Project development and deployment was very similar to a conventional energy business: no market risk, long-term contracts, big projects, big budget. Key competitive advantages included access to capital and access to (subsidized) projects.
However, going forward, solar PV will be mostly market driven. Key skills will be in sales/marketing and cost-efficient construction. The goal will be to deliver solar energy at the lowest cost possible. Panels will no longer be the single most expensive part of a system. Racking, cables, and the installation itself will become a significant part of the total cost.
As solar PV becomes a recognized class of assets, capital will also become more available and financing will no longer be a competitive advantage. This will increase competition, as more companies will enter solar development and EPC (Engineering Procurement Construction) market segments. The number of solar projects will increase, but the average size of projects will be smaller. Project development and EPC margins will go down.
Upstream value chains of the industry, mainly the manufacturing of the components, will remain a global market. Downstream elements, like project development and construction, will become localized. Clients will have to be acquired on a local level due to different regulations, energy prices, and grid access. The specialized labour required to build solar will be active locally or regionally, as good installers will be too busy to look for work in other countries/ continents.
High-quality, low-cost, efficient construction will be the key to success. Companies capable of building quality at a lower cost will be more competitive and will, therefore, be able to sell more.
With falling margins, solar developers will look for cheaper capital. This capital could be easily available in a world of negative interest rates. Specialized, institutional investors already recognize solar PV as an attractive class of assets with stable returns and low risk. Now, private investors will have the opportunity to invest directly into solar through emerging crowdfunding platforms. In a situation where there is no real investment alternative on the market for stable, low-risk instruments, yield expectations will be very reasonable.
Sooner or (probably) later, banks will follow. Given the risk profile of solar — especially rooftop solar — banks will have to price solar loans similarly to mortgages (and not like credit card debt, like in the past).
Solar financing, especially for rooftop solar, will transform from specialized to retail. Solar financing will have to offer blanket solutions suitable for many similar cases — not specialized, one-off products. These blanket solutions will have to be localized and country specific, eliminating currency and political risk. IKEA already offers solar PV systems in several markets. It also offers in-store financing of its furniture. An offer of low-cost PV financing is only a matter of time.
Lower costs will result in a shorter payback time of projects. PPAs (power purchase agreements) will be offered for shorter terms — under 10 years vs. 20–30 years as in the past. The BOT (Build Operate Transfer) model will become more and more common — where, after the PV project is paid in full, the assets are transferred for free.
In general, solar PV financing will transform from energy assets project finance into something more similar to financing the development of retail outlets or restaurant chains (i.e., smaller value per project and shorter payback time).
In 2020, O&M (Operations and Maintenance) bills will be a much bigger market than today, and not only because the installed capacity will quadruple. There will be many more exciting things to do!
Historically, operation of a PV project involves taking a reading off a meter, calculating the amount of electricity generated, and issuing an invoice. Prices or tariffs are already fixed and generation depends on sunshine. Not much to do. But, with solar PV operating on a competitive energy market, a lot will change.
First of all, with the increase of solar energy generated, there will be a significant impact on the electricity grid itself. The historical, centralized, top-to-bottom grid management system where baseload was king will not work anymore. The entire grid will be a bottom-up mesh network of small generators and consumers, who will interact and intelligently react to variations in supply and demand.
Next, solar PV deployed on a massive scale in developing markets will have no conventional grid to be connected to. There will be a need to develop isolated microgrids or portfolios of stand-alone systems in order to offer solar. This requires a new approach to billing, managing payments, credit risk, etc.
Additionally, over the next 4 years, electricity storage will become common, with millions of electric car batteries plugging in and out of the grid constantly. Dropping battery costs will facilitate the emergence of local grid regulatory services like: demand /supply shift, frequency response, reserve capacity, etc.
Finally, operating in a free market means that solar PV companies will start actively trading. The questions of who will buy my energy and where and when to deliver it will become very important.
Interestingly, there will be an increased number of PV companies that operate assets belonging to someone else. Historically, the owner operated the assets, but, with capital getting cheaper, solar PV becomes more popular. There will be owners of PV assets (like factories or housing communities with rooftop solar) who will own the PV assets but will want to hire a PV operator to maximize the benefits.
Maintenance, together with monitoring, will also be a big market. Over 4 billion panels in 2020 will generate a lot of work. Monitoring, which can be done remotely online, will become a global service. Because PV operators will have a lot of different systems under their management — built by many different EPC and installers all using different types of equipment — data integration will be paramount. It will be absolutely necessary to integrate monitored data in a consistent way in order to cross reference to weather data, historic data, etc. Monitoring will generate a lot of crucial information for the operators, especially those involved in energy trading activities.
Maintenance services, with an emphasis on preventative maintenance, will need skilled local companies. As with installation, the key competence once again is delivering quality at the lowest cost possible. This will be achieved by the introduction of automated tools like thermal-imaging drones or panel-cleaning robots.
Zero Marginal Cost
The most significant aspect of solar PV is the fact that it is an energy generation technology with almost zero marginal costs. There are no fuel costs and compared to the initial installation costs, O&M costs are negligible. Whether a system operates at full or zero capacity, the cost is the same. Therefore, over the system’s lifetime, only the initial capital costs have to be recouped.
Historically, PV projects made money by selling electricity units — kWh (kilowatt-hour) — generated over its lifetime. Almost all of the solar power system’s costs were related to the initial capital expenditure. Revenues were used to repay capital + interest. With constantly dropping initial capital costs, the price per electricity generated will drop as well. As solar PV systems have almost no variable costs, it is possible for systems to deliver part of their electricity for free after the capital is fully paid off.
The revenue model will have to change. Fixed flat fees for a certain service level will increase and prices per electricity units delivered will decrease. Think of mobile operators or internet providers who offer “all you can eat” data and minutes.
The future of solar is … bright. PV + storage will dominate the energy supply in most locations in the world. The question is not “if,” but “when.” It may not be by 2020, but not long after, as the growth is exponential. The energy industry itself will look a lot different. It will be more similar to the IT industry: smarter, more efficient, and scalable. And solar PV will be the driving force transforming it.
About the Author: Michal Bacia runs Hi Energy People, a team of solar PV construction experts who have built over 170 MWp of solar PV projects for the top European EPCs. In addition to PV construction management services, Hi Energy People offers bespoke software solutions for solar construction. Michal is also one of just a handful of cleantech experts who have come all the way to Wrocław, Poland, to chat with CleanTechnica director & chief editor Zachary Shahan.
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