In recent months, the burgeoning global solar market has faced a wave of setbacks, including an oversupply of modules, low profit margins, reduced government support and competition from cheap shale gas. But amid the litany of bad news, a new report from McKinsey & Company suggests that the future of solar is bright.
Annual solar photovoltaic (PV) installations could increase fifty-fold by 2020 compared with 2005 levels, “achieving installation rates that could rival those of gas, wind, and hydro, and could outpace nuclear,” the report says.
Currently, global installed solar capacity exceeds 65 gigawatts (GW), compared with 4.5 GW in 2005.
The surging demand is expected from five key customer segments around the globe, including: places without access to the electrical grid; residential and commercial retail customers where sun is moderate or plentiful but electricity prices are steep during peak demand periods; areas served by isolated grids largely fueled by diesel generators with high electricity prices; countries building substantial new electric-power infrastructure that may find it economically attractive to have solar power supply the grid during peak usage times; and new, large-scale power plants.
The optimistic forecast comes at a time when the industry has been beset by negative press resulting from a few high-profile bankruptcies of solar firms here and abroad. More such liquidations are expected, the report warns.
The shakeout follows seven years of record growth for solar, partly driven by the entrance into the marketplace of low-cost, large-scale Chinese manufacturers who contributed to a boom in solar modules. Superabundant supply fueled a drop in prices, and also lowered margins for producers. Although demand has not kept pace, several new large-scale technology manufacturers have announced plans to enter the solar supply chain and will continue to broaden global manufacturing capacity in coming years.
“But these are natural growing pains, not death throes,” the report says. “The industry is reaching a period of maturation that is likely to set the conditions for more stable and expansive growth after 2015.”
Plummeting Costs
Aiding that growth will be a continued reduction in costs. The report forecasts the price of solar modules will slide by as much as 40 percent by 2015, and another 30 percent by 2020. That adds to the already precipitous price decline in recent years, from $4 per Watt peak (Wp) in 2008 to under $1 per Wp in January 2012. (The output of a solar generator operating under standard conditions is defined in terms of its peak output, and referred to as “watt peak.”)
Falling prices are expected despite diminishing subsidies, because manufacturing capacity is projected to double over the next three-to-five years and underlying costs to drop ten percent per year.
By 2020, the total global potential of installed solar PV – meaning, the quantity of PV that could be operated at a lower levelized cost of energy compared with competing sources of power — could exceed one terawatt, equal to 1,000 GW — depending on regulatory factors and access to sufficient financing, the report says. The levelized cost of energy refers to an economic assessment of all the costs of an energy-generating system over its lifetime.
Investments in solar could total $1.2 trillion over the next decade, the report adds.
A U.S. Tipping Point?
In the U.S., the amount of “unsubsidized economic potential” for residential and commercial solar –that is, not the amount that will be installed, but the amount that producers could sell at a profit because it is competitive with other options, such as purchasing regular power from the grid – is likely to reach 10 to 12 GW by the end of this year, the report says.
Growth could pass a “tipping point” in 2014 or 2016, which could enable unsubsidized demand for solar to climb as high as 700 GW by 2020, with demand concentrated in 10 states, primarily from the Northeast and the West Coast along with Texas.
“Indeed, 50 percent of the available power delivered to the residential and commercial segments in some of these states may be generated by solar PV in 2020,” the report says.
The projections soar when factoring the effects of assistance from the federal investment tax credit (ITC), which could boost U.S. installed solar capacity to 70 GW by 2013 alone. The ITC is in effect until December 31, 2016.
A May 1 analysis from the Baker Center for Public Policy at the University of Tennessee explains that the federal ITC could play a critical role in making solar a significant source of energy production by nudging the technology beyond the pool of early-adopter industries and into the mainstream.
The analysis credits federal support for solar’s rapid growth thus far, which has averaged 77 percent during the last five years. Annual solar installed capacity nearly doubled from 2009 to 2010 and doubled again in 2011. The long-term annual cumulative growth rate could reach as high as 25 percent, with industry-related jobs totaling up to 430,000 by 2020. Solar has historically produced more jobs per megawatt-hour than any other energy industry, the Baker Center study adds.
The pair of bullish reports on solar’s potential contrast with growing skepticism in a number of state capitols about the value of clean-energy mandates. Some lawmakers are rethinking state supports for solar and other renewable sources given current rock-bottom natural gas prices, made possible by a controversial drilling technique called hydraulic fracturing that has flooded the market with abundant supplies of shale gas.
That debate was on display during a March hearing in Delaware on legislation to freeze the state’s Renewable Portfolio Standard, which requires electricity suppliers in the state to obtain 25 percent of their power from renewable sources by 2025.
“There is nothing that anyone in this room can do to prevent natural gas from bankrupting every solar company that exists,” said Rich Collins of the Positive Growth Alliance, a local nonprofit, testifying before the Delaware House Energy Committee. The bill, which would have frozen the mandate at its current level of 8.5 percent, failed to make it out of committee. Efforts to freeze or repeal clean-energy mandates have also been launched in Colorado, Florida, Maine, New Mexico, North Carolina and Washington State.
Going forward, the McKinsey report cautioned that much of the solar industry’s future growth will hinge on manufacturers’ ability to achieve scale. Competition among manufacturers will intensify, and to capture cost advantages, the report recommends that companies develop proprietary technology and reduce costs throughout every step of their operations. That includes developing specialist solar products, like direct-current water pumps and mobile-charging units, securing reliable local distribution channels and partnering with other organizations to gain access to low-cost financing.
“The rules of the game are changing, and many current players could face significant challenges as the industry restructures. But those who believe the solar industry has run its course may be surprised,” the report says.
— By Rona Cohen
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