As the sun sets on 2016 and 2017 pokes its head over the horizon, the fossil fuel industry approaches a pivotal juncture. Plummeting oil prices have led to a shrinking oil industry and the natural gas and coal sectors are marching to the same drumbeat. Over the last two years the renewable energy industry has received unparalleled investment and is on the cusp of staging a coup of monumental proportions to challenge the dominance of oil and natural gas.
For the first time in history solar power has become the cheapest form of energy in almost 60 developing countries, including vast emerging markets like China, India and Brazil. The falling costs of solar energy have allowed renewables to compete with established fossil fuel companies for the first time and provide a reliable, carbon-free alternative, attracting huge investment in the process. Renewables are forging the way into a new era where they will eventually be able to undercut fossil fuel prices and end our reliance on carbon-emitting energy sources once and for all.
A Low-Cost Alternative.
The Fourth Industrial revolution has led to a vast reduction in the cost of technology and the renewable energy industry has been perfectly placed to capitalize on these falling technological costs. The cost of solar power is 1/150th of the cost it was in the 1970s and since 2009 the price of solar energy has dropped by a staggering 80%. Wind energy is not far behind with a price reduction of 30%, making the renewable energy sector a more lucrative industry with serious potential for prospective investors.
In 2016, technological developments led by the U.S. Department of Energy´s National Renewable Energy Laboratory and Washington State University, along with the University of Tennessee were able to improve the maximum voltage available from each individual cadmium telluride solar cell. Solar panels in production now have a model efficiency exceeding 22% for the first time ever. The production of more efficient solar panels has underpinned the falling prices of solar energy production and have played a vital role in the repositioning of solar energy as the lowest-cost source of energy.
It isn´t just improved efficiency that is driving the solar revolution. Cheaper lithium batteries mean the energy collected can now be stored more cheaply than ever before. As the electric car industry was anticipated to boom, large companies like Samsung, Tesla, Panasonic and LG Chem began constructing large lithium-ion batteries on an unprecedented scale. This electric car boom has not yet materialized, leaving the market flooded with lithium-ion batteries. This has resulted in drastically cheaper batteries for storing energy. From 2014 to 2016 prices for lithium-ion batteries fell by 70%, allowing new international markets to open due to cheaper pricing. This trend looks set to continue into 2017. Australian energy retailer, AGL, are predicting costs to fall by over 60% over the next five years as transition to solar energy is adopted on a global scale and material performances improve. Lower battery production costs will cement the position of solar power as the cheapest energy source on the planet, especially at a time when fossil fuel extraction costs are rising.
Since 2006 oilfield discoveries have been becoming smaller than those discovered before and frequently require even more complex drilling methods such as horizontal or deepwater drilling. Jeremy Gilbert, former Chief Petroleum Engineer for BP summed it up when he said “The current fields we are chasing we´ve known about for a long time in many cases, but they were too complex, too fractured, too difficult to chase”. The oil and natural gas industries simply will not be able to compete with the plummeting costs of solar and as a result investment in the sector has already started drying up. There are now less active oil rigs in the United States than at any time since the 1940s and small and medium sized producers are going out of business at an unprecedented rate. The situation is going to get ugly as more and more fossil fuel companies enter insolvency and are unable to pay their debts.
Government subsidies for wind and solar energy in recent years has helped renewables enter national grids and get a footing in national energy markets, but ultimately the market itself will be what kills the fossil fuel industry. The fact of the matter is that solar and wind energies are technologies not fuels. As technology improves the costs will only continue to tumble. Fossil fuel prices can only increase as the abundance of the fuel dries up and extraction methods remain expensive. As new solutions and technologies emerge, more markets will open. Even countries with limited sun will soon see themselves able to enter the solar market as panel efficiency improves over time and costs continue to tumble. Research and development investment is on the rise in this up and coming technology and the future looks reassuring.
What does cheap, renewable energy mean?
The implications of solar and wind energy becoming cheaper than fossil fuels are far-reaching. As 2017 dawns, the renewable industry is undoubtedly entering what will be its most prosperous year to date. Solar is embedding itself in the global energy psyche and by 2050 the International Energy Agency expects the sun to become the planets biggest energy provider. The maturity of the solar industry and established success have been a colossal draw to investors and coupled with economical production costs the industry is set to receive an injection of investment.
The U.S solar industry just reached record breaking levels of growth. Between July and September, 4,143 megawatts of solar capacity were added representing a 99% increase over the previous quarter. Despite residential solar levels actually falling across the country, utility scale projects are booming as investors seek to cash in on renewable energy. This is particularly prominent as the president elect, Donald Trump, has filled several top cabinet positions with fossil fuel insiders and he has promised to end government spending on renewable energy research. The profitability of the market will have to be the driver behind renewable investment in the U.S. and with renewables entering a world where they undercut fossil fuel prices, the investment looks poised to continue.
Unlike many industries, the developing world represent the majority of investment in renewable energy sources. The Chinese government have already announced a pledge to spend more than 2.5 trillion yuan (US$360 billion) on renewable energy installation between now and 2020, which will be a 39% increase on what was invested between 2011-2015. Immense renewable energy projects are under construction across the developing world, like the El Romero solar plant in Chile and Kenya´s Olkaria geo-thermal project. This could lead to the big energy providers of tomorrow being developing countries, creating prosperity and jobs in regions that have been struggling energy importers under the reign of fossil fuels.
Nowhere is the tumbling prices of solar technology more welcome and life-changing than the developing world. Cheaper prices put solar technology and electricity within reach of millions without access to a grid but often with high levels of sunshine, completely changing the way the developing world is powered. Affordable solar energy provides an off-grid solution to the 1.3 billion people in the world who lack electricity. Projects like Walking Christmas Tree in Rwanda are looking to bring solar energy capabilities to rural villages, allowing children to study after dark, lighting huts to keep domestic animals safe from predators and allowing businesses to stay open later. Low-cost solar energy represents a way for communities to create microgrids of their own simply by harnessing the sun´s energy, strikingly raising the standard of living for millions of people across the world. The competitive ability of solar technology could signify improved access to education and information in rural societies on a scale we have never seen before.
Consumer- Provider Relationships
Making the switch to renewable energy sources has the potential to completely change the relationship between energy providers and consumers. As personal rooftop solar panels become more economically accessible, bill payers can emancipate themselves from big multinational energy companies by harnessing and storing their own energy. The consumer can remove themselves from the cycle of rising energy prices and nationally the country will have far less reliance on foreign energy and become more self-sufficient.
Germany has already begun to see these changes. In 2014, 29 new energy cooperatives were established in Germany as small communities wanted to lower their energy costs and reclaim ownership and control over their energy consumption. These community initiatives install the solar panels on rooftops to power the community and sell any excess energy back to the grid. While the German government certainly helps by giving clean, renewable energy priority access to the grid and guarantees a fixed price for the energy, another effect of the falling price of solar technology will mean these cooperatives could be set up all over the world. The energy industry would begin to work for the consumer as the community takes back full control of their energy consumption, instead of being at the mercy of large multi-national energy giants and their tariffs. It also allows consumers to make decisions which affect them locally, and create local jobs. In 2014 it is estimated that 400,000 new jobs were created in Germany through the creation of local solar energy cooperatives. Transitioning to renewable energy goes hand in hand with public ownership and as prices fall, more individuals can afford to become self-sufficient with their energy, completely changing the way the industry functions and the nature of the relationship between consumer and provider.
Potential Barriers to Continued Growth
While the markets may be ready for an energy industry sourced from renewables, there are barriers which need to be removed for the renewable energy industry to realize its full potential. The global political and financial institutions are still fossil-fuel centric and are hopelessly inefficient or deliberately dragging their feet at the prospect of transitioning to renewables.
Fossil fuel companies still receive heavy government subsidy in many countries, for example in Australia fossil fuels are subsidized to the tune of $10 billion a year, while in the U.S the figure is around $20.5 billion annually. The IMF estimates that $5.3 trillion dollars are awarded to the fossil fuel industry each year in the form of tax breaks and subsidies.
The issue is that governments around the world are hoping to protect their investments in fossil fuel industries and need the industries to succeed to avoid losing public money. While it´s true that renewable initiatives also often receive government funding, in many places these subsidies and funds are being removed as the solar industry gains momentum, for example in the U.K government subsidies for renewable projects were abolished in early 2016.
In places where subsidies remain, governments have often imposed strict requirements and standards which the fossil fuel companies have never been subject to.
Governments in countries such as the USA, Franca, Canada, China and Russia have imposed local content requirements on solar and wind energy companies. These usually require the company to source the materials and equipment required nationally in order to be eligible to receive financial support. While these policies help local industries, they prevent the renewable energy industries from sourcing cheaper equipment from overseas and therefore prevent many energy suppliers from acquiring the materials needed at the lowest prices, as the fossil fuel industries are able to do.
The investment procedure for investing in renewable energy also needs streamlining to maintain increased levels of investment. Contracts are not internationally standardized and therefore investment regulation varies drastically across international borders. There is also a problem with the classification of the renewable energy industry. It is not yet classified as a stand-alone asset class for investment. As a result, there is not an abundance of information available to potential investors on the performance and returns of the sector and this is often off-putting to long term private investors.
Those who do opt to invest in renewable markets often find themselves subject to higher financial rates for their loans. Financial institutions are usually not up-to-date with the new technologies of the renewable energy sector will therefore often categorize them as “risky” investments. This often leads to them lending money to investors in renewable energy with higher interest rates than to those investing in traditional fossil fuel sources. This has been particularly felt in the wind energy industry, which hasn´t attracted the same investment as solar. For wind energy, most of the costs are in the initial construction of the plant, not in maintenance which has meant a larger initial outlay and initial investment. These barriers to private investment explain why the bulk of renewable investment is undertaken with public funds, as financial institutions will not give private institutions low enough rates for renewable investment.
Another of the reasons wind energy has not enjoyed the same success and growth as solar is due to the extensive obstacles imposed on site placement. Local residents often oppose the construction of wind turbines on aesthetic grounds, noise levels, the blocking of natural light and the proximity to heritage sites. These barriers are often bypassed by constructing wind farms offshore, which are more expensive to construct and maintain due to their inaccessibility. As a consequence, wind energy costs have not reached the same level of affordability as solar power and it is often forgone for alternative energy sources, both renewable and non-renewable.
Despite the potential obstacles to increased solar investment and the lack of efficiency and streamlining in the industry, ultimately prices determine investment. 2016 has been a year of milestones but none more significant than solar energy becoming the cheapest form of energy around the world. By 2050 solar energy is predicted to account for 16% of the total global energy supply, evenly sourced from rooftop sources and commercial scale solar energy parks. The fossil fuel´s days at the top are numbered and 2016´s legacy may well be that it was the turning point in the evolution of the energy industry. Falling prices lead to increased international investment and technological developments which will ensure the unseating of fossil fuels from the throne of the energy industry and lead to the crowning of solar energy as the new go-to international source of energy.
Cheaper renewable energy will completely change the way the energy industry operates. Giving the consumers more power than ever and bringing electricity and improved standards of living to those who have previously been disconnected. It has the power to connect communities to the world and bring jobs and prosperity to developing regions. The victories of 2016 will need to be improved upon, but with the dawning of 2017 comes the dawning of a new era, with a new, cleaner and more inclusive energy champion.