Today, we are still mostly looking to the government to tell us which way the energy market is going. This will change in the future. The government will no longer drive the market. It just needs to enable it.
As soon as solar and wind can stand on their own feet in terms of generation cost (grid and socket parity) in most countries, we reach a tipping point. The ease, speed and flexibility of setting up especially solar plants will make them a preferred investment choice in an increasingly competitive and dynamic energy market.
A second tipping point will be reached, when electricity storage will also be widely affordable.
From then on, there is really no stopping a renewable energy transformation. Distributed and centralised solar and wind plants will emerge at breathtaking speed. The main grid power market will be opened up to a large array of producers and investors.
Large niche markets, such as India’s 90 GW diesel genset market, the telecom tower market, rural electrification and irrigation pumps will become solarized.
Renewables will then take up a large share of the power generation in many rapidly developing countries, not 10% but 50% or more. This could become a reality by 2030 already.
The power market will be heavily disrupted. Many traditional power plants will be stranded investments. They will no longer be needed and they won’t be competitive any more. The recent radical strategy shift of Germany’s largest utility, E.On – dumping its traditional plants to focus entirely on renewables – is a sign of things to come.
Today, we think of solar or wind as an infrastructure asset with a liquidity challenge: almost all the cost is in the equipment. Fuel, however, is free. Thus financing becomes a major challenge. A coal-fired plant, on the other hand, costs about a fifth to build, but needs constant fuel. The same is true, at the distributed level, for a diesel genset, where the economics are even more “back loaded”.
In fast developing economies with often limited contractual security and high capital costs, this puts solar and wind at a disadvantage.
In future, however, renewables will be viewed very differently. On one side of the spectrum, they will develop into standardised consumer products (off the shelf, with simple financing options), much like a fridge or a TV set. On the end of the spectrum, once large solar and wind portfolios exist and storage is available, it will be all about energy solutions: buying and selling power and providing supply security to consumers and to the grid (capacity markets).
The asset base will become independent of the power revenue models. Electricity can then be thought of as a currency with “electricity banks” (intermediaries and aggregators), “savers” (asset owners) and a wide variety of “financial products”.
The core of this market will be the electricity grid. The costs of building and maintaining the grid need to be borne by all those who use it. Rules have to be clear, fair and reliable. Access to the grid for buyers and sellers should be as unrestricted as technically possible.
Traditional utilities should embrace the changing structure of the market and seize sophisticated grid management as a new business opportunity.
Politicians should focus their efforts on ensuring that there are no hindrances to the development of a dynamic, new electricity market place, they should encourage excellence in related research (storage, smart grid) and help create a vibrant venture capital scene to get new energy businesses up and running.
A solar energy transition for rapidly developing countries is not a utopia or even a political project. It will come about by itself, driven by a commercial logic that needs little encouragement.
Ironically, it is to the developing countries’ benefit that it they have not yet fully built their energy system (as opposed to the industrialised nations and even China). They can leapfrog easily, use the best available technology and will have less sunk costs.