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From black gold to sun power

I was recently amused by a photo which depicted a solar powered house in Malta surrounded by high-rise buildings. It is a pity really, since these situations only serve to deter investment in future proof energy.

Solar power is now estimated to be cheaper than coal in some parts of the world. In less than a decade, it's likely to be the lowest-cost option even in Malta.

In 2016, countries from Chile to the UAE broke records with deals to generate electricity from sunshine for less than 3 cents a kilowatt-hour (source: Bloomberg), half the average global cost of coal power.

Now, Saudi Arabia, Jordan and Mexico are planning auctions and tenders for this year, aiming to drop prices even further.

What is immediately clear is that oil-dependent economies are at the forefront of this energy revolution. The roller coaster ride in oil prices has permanently scarred both producers and consumers of energy.

On the consumption side, oil prices that often hovered over $100 per barrel in the past decade provided the spark that incentivised research into alternative energy. For the first time in history electric cars, renewable energy and the solar cell became feasible.

As the price of oil crumbled towards $20, this incentive disappeared and many feared that the technological gains that had been acquired would no longer make economic sense. However, low oil prices also left many oil producers out of breath.

Also, all of a sudden oil supply became finite. The idea that some day, in the not too distant future, renewable energy would replace dirty energy had caught hold. Oil producing countries realised that it was time to start preparing for that day.

Demand meant that prices came down. Since 2009, solar prices are down 62 per cent, with every part of the supply chain trimming costs. That helps cut risk premiums on bank loans, and pushed manufacturing capacity to record levels.

“These are game-changing numbers, and it’s becoming normal in more and more markets," said Adnan Amin, International Renewable Energy Agency ’s director general, an Abu Dhabi-based intergovernmental group. "Every time you double capacity, you reduce the price by 20 percent.” (source: Bloomberg)

Forecasts for the future are encouraging:

  • The average 1 megawatt-plus ground mounted solar system will cost 73 cents a watt by 2025 compared with $1.14 now, a 36 per cent drop, according to New Energy Finance.
  • GTM Research expects some parts of the U.S. Southwest approaching $1 a watt today, and may drop as low as 75 cents in 2021.
  • The U.S. Energy Department’s National Renewable Energy Lab expects costs of about $1.20 a watt now declining to $1 by 2020. By 2030, current technology will squeeze out most potential savings.
  • The International Energy Agency expects utility-scale generation costs to fall by another 25 percent on average in the next five years. 
  • The International Renewable Energy Agency anticipates a further drop of 43 percent to 65 percent for solar costs by 2025. That would bring to 84 percent the cumulative decline since 2009.

Solar energy appears to be winning the low cost energy crown. Which may well mean that in few years the cheapest energy source will truly be the panels on our roof

Disclaimer:

This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

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