Solar power's mobile telephony moment?

Evangelists claim that we are at the cusp of a solar power boom, with the potential to disrupt and transform the power sector. Recent developments in India lend more credence to such claims. In India, in the latest round of solar auctions, US renewables major SunEdison bid a very low tariff of ₹4.63 a kWhr (or 7 cents) for 500 MW in an NTPC developed solar park in Kurnool, Andhra Pradesh. This tariff is way below Tamil Nadu's 15 year contract last year to purchase thermal power from four developers at ₹4.91 per kWhr.  Since the solar plant is in a fully developed park with transmission lines and involves PPA with NTPC, the promoter's risks are significantly hedged.

At the upstream side, the spectacular declines in the prices of solar panels (Swanson's law - everytime cumulative solar panel production doubles, its cost declines 20%) and the resultant 'grid-parity' with conventional sources mean that solar has the potential to radically alter the energy mix, though it comes with attendant grid management challenges. Downstream, solar's flexibility in scale allows for decentralized generation, raising the possibility of leapfrogging legacy networks and threatening the current distribution business models. 

The FT has this article about the solar power disruption, 

For decades the electricity industry has been a cautious and conservative business, but the plunging prices of solar panels, down by about two-thirds in the past six years, have woken it up with a bang. Dynamic rooftop solar power companies have entered the market, in the most radical change to electricity supplies since the industry was born in the 19th century. It has been described as the equivalent of the mobile revolution in telephony, or the PC in computing.

And about what drives the disruption, it writes,

The price of the panels has fallen so far that it is now less than a quarter of the cost of an installed system. It is the other costs, including sales and installation, that have become critical, and the companies have been working hard to make the process smoother and faster... Three years ago a typical installation would have taken two or three days; now it can generally be done in a day and, if straightforward, a crew can do one in the morning and another in the afternoon.

The other crucial innovation is in financing... The system is worth $31,000 fully installed, which would have been a prohibitive expense. Solar power works for households because they had to pay nothing up front. Promoters like SolarCity still owns the system, and the households pay a monthly bill for the solar power they generate, at a lower rate than they are paying for the remainder of their electricity, which still comes from the utility. The contract is for 20 years but after five they will have the option to buy the system for its depreciated value or just continue their contract. SolarCity, meanwhile, packages up the revenue streams from installed systems in structured finance funds, which companies including Google, Bank of America and Credit Suisse invest in...

And then China. China’s solar-cell production rocketed from just 50 megawatts of generation capacity in 2004 to 23,000 megawatts in 2012, by which time it was supplying more than 70 per cent of the world market... China’s soaring exports, helped by its lower labour and environmental costs, pushed many manufacturers in other countries out of business. Those who were left pressured their governments to launch anti-dumping investigations, and in 2012 the US imposed duties on Chinese solar imports, followed by the EU in 2013. 

Currently, the solar boom in US is underwritten by the federal Investment Tax Credit (ITC), which is 30% of the cost of a residential system, and the state rules on 'net metering', whereby the utility bills consumers based on their net consumption (usage minus the production by panels) without charging any grid management or capacity charges and by paying the same tariff for the power sold by the consumers. Both these run into problems when the scale increases. In a country like India, where recent solar additions have been coming without investment subsidy, it is the latter that poses concern.

Until they plug-off completely from the grid, households are critically reliant on the grid for stabilizing the unstable solar supply and meet their remaining requirement. But if they are allowed to sell power to the grid at the same price as their purchase price, it would not include the cost of both establishing and maintaining the grid as well as stabilizing it with base-load and peaking plants. The battle between utilities and residential solar companies is already making news in places like Nevada, offering a portend of things to come,

NV Energy (a residential solar company) points out that although they may be using less power from the utility’s grid, solar homes are still connected to it. It argues that under the present system, customers with net metering are not paying their fair share of the costs of the grid, including all the wires and transformers and gas and coal-fired power plants that lie behind them, ready to be called on if needed... There will be a great future for rooftop solar but it has to be done in such a way that makes sure the company and the investors investing in that fixed grid are rewarded appropriately... As their market share grows, however, so will the pain for the traditional utilities, and the battles are likely to become more intense.

Another disruptive force in the sector will come from storage sources, which in turn is most likely to be driven by the ambitions of many electric car companies like Tesla. Though currently constrained by technology and cost factors, it may not be prudent to discount the possibility that storage market may be about to enter a very fast growth trajectory, 

Lux Research estimates the installed base of grid storage in October 2015 to include 841 projects worldwide, with a total of 1,788MW in power — equivalent to a large nuclear station — and 3,460MWh in stored energy. Annual growth rates since 2011 have been 33 per cent in power and 20 per cent in energy... Complementary research by Frost & Sullivan values the global market for utility-scale, grid-connected storage at $460m in 2014 and estimates that it will reach $8.3bn in 2024... The home storage market is growing particularly fast, says Lux Research, with nearly 14,000 battery units installed in the first nine months of 2015 — more than double the annual number of residential units deployed in 2014. Tesla will begin to ship its Powerwall before the end of this year, and Lux expects Tesla to overtake all other residential storage suppliers, with 29,000 home units to be installed during 2016.

This is all the more so given the state of research in newer technologies like flow-batteries which store energy in chemical fluids contained in external tanks (instead of the battery as in case of solid-electrode batteries) and thereby decouple the two main components - the electrochemical conversion hardware through which the fluids are flowed (which sets the peak power capacity) and the chemical storage tanks (which set the energy capacity). This in turn means that the amount of energy storable is limited only by the size of the tanks, which can be large and kept in the basement or roof of a house. 

So what does this mean for India's ambitious solar power targets? It is critically dependent on catalyzing an eco-system of solar providers (already present), storage suppliers (currently absent), aggregators like SolarCity (absent), and financiers (absent). While the last two will emerge in response to market signals, currently the storage market is the constraint, and may well continue to be so for the foreseeable future. This also means that solar becoming a disrupter by leap-frogging like mobile telephony will have to wait.

An even bigger immediate obstacle in the solar ambitions will be the grid management challenges. The intermittent nature of renewables necessitates the availability of adequate variable capacity, which will keep rising as the renewables capacity itself increases. Such variable capacity is typically provided by hydel, gas, and nuclear plants, all of which form just a quarter of the country's capacity and widely scattered across a country beset with transmission capacity bottlenecks. In the circumstances, the country's nearly 60% thermal plants have to be retrofitted to serve as peaking plants. This will have to be complemented with upstream investments in strengthening and expanding the transmission capacity. 

Finally, even without storage, the extremely poor quality of existing supply coupled with the declining solar prices will encourage some of the high-value consumers (malls, hospitals, gated communities etc) to install solar panels. This could very adversely affect the distribution companies, who are dependent on precisely the same consumers for their fiscal balancing. In fact, this may even have the potential to set in motion dynamics that can discipline distribution companies and force cost-recovery based tariffs. But it also raises regulatory concerns, where discoms will start demanding higher fixed capacity charges for providing the balancing load to consumers who rely on off-grid solar.