THE 10-YEAR HORIZON
Renewables are the proven zero-carbon technology where much of the capital funding the energy transition will be invested. Over the next 20 years, Wood Mackenzie expects more than 4 terawatts (TW) of wind and solar power to come on stream globally, taking renewables’ share of the world’s power capacity to 30% from 10% today. Of this new capacity, some 2.6 TW will be solar.1
Solar photovoltaic (PV) technology has come a long way over the past two decades. Once a niche technology, it is now one of the cheapest, most efficient and easily deployable means of generating electricity. As the world strives to recover from the economic slump caused by the Covid-19 pandemic and simultaneously meet the climate and environmental goals of the Paris Agreement, solar is uniquely placed to advance efforts towards a low-carbon, sustainable future.
While the scale-up of manufacturing and favourable policies have supported solar growth to date, the next decade will be marked by steady technological improvements along the entire solar value chain, both in terms of hardware and digitalisation. Inevitably, as the technology improves, it will become cheaper. The key question is, by how much?
Based solely on the technological improvements already in the early to mid-stage commercial pipeline and taking into account the likely phase-out of subsidies, Wood Mackenzie expects solar costs to fall another 15% to 25% over the next decade. Silicon-based modules will remain the dominant technology, but become more efficient and gain higher power ratings thanks to enhancements such as bifacial panels and larger wafer sizes. Trackers, too, will continue to evolve, with new configurations and lower prices enabling greater energy capture. What’s more, these upfront cost reductions will be accompanied by the automation of the lifetime operation and maintenance of solar assets.
Cost reductions have taken utility-scale solar to an important pivot point: though it is still evolving from a “subsidised” technology, it already gives traditional forms of power generation a run for their money when it comes to cost. In the US, for example, solar is now less expensive than all other forms of new power supply in 16 states. By 2030, we expect it to be the lowest-cost source of new generation in all US states.
What will this new level of cost competitiveness mean?
Competitive at wholesale power-market prices: In many regions, new solar plants can in theory be built based on wholesale power-market prices alone. Therefore, the level of new solar plants constructed will not necessarily be limited by the availability of power purchase agreements (PPAs) fuelled by renewable portfolio standards, voluntary utility procurement or corporate buyers seeking to decarbonise their business. Instead, investor willingness to take on merchant risk, available transmission capacity and the fact that solar only generates power during the day will become the limiting factors.
Storage mitigates devaluation risk: Some larger, well-capitalised players may begin to develop merchant solar plants. Significant risk remains, however, even if wholesale margins keep projects viable in the longer term, particularly as markets with high solar penetration will experience a decline in both energy prices and the value of solar assets as solar costs continue to fall. Some larger developers, anticipating this value destruction in the long run, have started to mitigate the risk by adding storage to their pipelines.
The technology of choice for corporate buyers: Solar’s cost competitiveness is making it the “technology of choice” for corporate buyers in regions with favourable irradiance profiles. And with continued cost reductions, renewable procurement for solar has increasingly morphed from just a decarbonisation strategy into a cost-saving business practice. It has ushered in a new set of investors, including Big Oil. Read More...