Solar Power – A Disruptive Innovation

The solar power economy continues to grow even though the industry faced a serious crisis between 2011 and 2013, due to a global financial downturn, government subsidy cuts, and Chinese PV manufacturers’ flood of imports. According to McKinsey Quarterly, solar is now a far more cost-competitive power source than it was in the mid-2000s. A study by the Earth Policy Institute in Washington, DC found that global installations have, in fact, gone up to over 50% since 2006. With the rapid evolution of solar technology and the growing widespread impact of renewable energy on businesses and consumers, this industry truly has a disruptive potential. It is now poised to assume a bigger role in global energy markets and according to Zachary Shahan, director of CleanTechnica, utilities will probably be the first major sector to feel solar power’s disruptive potential.

Dropping Prices & Improvements

Solar technology is continuously improving and with it the costs are also dropping and it is these dynamics that will ensure that solar power remain disruptive and world-changing, points out Mr. Shahan. On the other hand, energy dependence on perishable resources like fossil fuels cannot be renewed and hence their prices will increase as the supplies slowly diminish.

Cutting Soft Costs

The findings of McKinsey Quarterly show that with the ongoing decline of module costs, there is a good chance for soft costs associated with installation and service to reduce. Their research reveals that the expenses of customer acquisition, financing, regulatory incentives and approvals have become cheaper. These expenses collectively represent half the expense of installing residential systems in USA and the overall costs to consumers are poised to fall to $2.30 by 2015 and to $1.60 by 2020.  The soft costs are lower in Germany and Australia which are more mature markets and McKinsey Quarterly predicts a further reduction of costs in the coming years.

The potential for disruptive innovation lies in sharply declining costs. GTM research findings show a steep decline in the costs for rooftop solar PV installations – from nearly $7 per watt peak of best-in-class system capacity in 2008 to $4 or less in 2013. Steep reductions in upstream costs are one of the reasons for this. The same research shows how module costs reduced by nearly 30 % a year between 2008 and 2013, while installations rose from 1.7 gigawatts in 2009 to an estimated 11 gigawatts by the end of 2013.

This striking reduction in costs makes solar a better option for residential and commercial consumers when compared to retail electricity. Even for industrial and wholesale markets, setting up solar power is more cost competitive in many areas compared to constructing traditional power-generated technologies like coal, gas and nuclear energy, the McKinsey Quarterly’s study finds out. China and Japan are examples of two markets investing seriously in renewable energy. Following the Fukishima nuclear incident, Japan is focusing on replacing its nuclear capacity with solar. Across USA and Europe the adoption of solar power has quadrupled since 2009.

Moving Straight to Solar Energy

Many regions across the globe with limited communications infrastructure have leapfrogged landlines and have entered the mobile phone market.  Similarly, many parts of the developing world will actually benefit from jumping from no electricity or unreliable electricity, to solar electricity, says Mr. Shahan. Countries like Africa and India have many remote localities with either no power or limited, unreliable electric grids. Now distributed generation is gaining momentum in these regions and electrifying areas which previously did not have power. Saudi Arabia is another country that is planning to install solar power with an aim to create local jobs as well.

Big Corporations switching to Solar Power

The pricing and environmental advantages of solar power are also a stimulus to business consumption and investment. The McKinsey Quarterly notes how some of the biggest corporations are switching over to rooftop solar power. Companies with high power costs and large physical footprints are able to setup commercial-scale solar power systems at low prices.

Mr. Shahan points out the example of Wal-Mart Stores which plans to switch to 100% renewable power by 2020. He also gives the example of Verizon which has invested $100 million on solar and fuel-cell technology to power its facilities and cell-network infrastructure. The famous Starwood Hotels and Resorts too have plans to make its hotels completely solar-powered.

More Investments in Solar

Solar Power’s long-term contracts and relative protection from fuel-price fluctuations are reasons why more people are investing in it. With falling cost of capital, insurance companies, banks and institutional investors are becoming more at ease with the risks associated with long-term ownership of solar assets, states McKinsey Quarterly. Weather uncertainty and the reliability of components are some of the risks associated with solar installations. The study found that some investors are even willing to underwrite long-term debt positions for solar.

Some of the innovative players in this field also are creating advanced financial products to meet solar power’s investment profile. NRG Yield, a company that acquires, owns, and operates contracted renewable and conventional generation and thermal infrastructure assets in the US through its subsidiaries is one of the classic examples. McKinsey Quarterly also gives the example of Google which has been an active tax-equity investor in renewable projects, deploying more than $1 billion since 2010. Many solar projects such as Solar Mosaic are emerging with the help of online financing via crowdsourcing. As this approach grows, it will widen the pool of investors as well as reduce the cost of capital for smaller installations.

New Demand for Solar

Even though only less than half a percent of US electricity generation is through solar power, it still has the potential to disrupt the utility sector, says Mr. Shahan. He points out to the fact that the growth of solar power could threaten utilities reliance on the installation of new capacity. In Europe, the demand for power has fallen while there is an increasing supply of renewable energy resulting in lower power prices and less penetration of conventional power sources.

New Business Opportunities

As solar becomes more economic, it will create new arenas for businesses and new opportunities for consumers. A wide range of partnerships can be built on the customer relationships that solar companies can develop.  Mr. Shahan believes that in the future, many complementary players may partner to bring out innovative products, business models and play an important role in the evolution of the solar sector.