Call it what you will: a watershed moment, a tipping or inflexion point. However you care to describe it, solar energy may be on the verge of achieving enough momentum to carry us into a new energy era. Solar technology is developing at a frantic pace, the political momentum appears to be unstoppable and most importantly, the cost per unit of energy for roof-top solar is approaching parity with coal-generated power.
Evidence that the tipping point is on the horizon comes from two pieces of research: one from Wood Mackenzie, an energy consultancy with long established roots in the oil industry which reckons that solar power is approaching its "shale" moment. In other words, saturation of electricity grids at periods of peak demand with solar power will have a disruptive influence – lowering prices and forcing the retirement of older, base-load coal power generation.
Solar is now a serious investment opportunity, reckons Deutsche Bank in a report to its fund clients, asserting that in 14 U.S. states, solar is now competitive without government subsidy. With increasing investment and falling costs, the levelized cost of solar energy (the price at which it breaks even over a project lifetime including cost of capital) will be at grid parity in 47 U.S. states, says the bank. In coal-dominated power regions across the world, the cost ratio between coal and solar has fallen over the past four years from 7:1 to 2:1 and the bank predicts it will fall to parity within 12 to 18 months.
If Deutsche Bank is right and the falling cost of photovoltaic panels seems to support its arguments, the consequences for the coal, oil and gas sectors could be dramatic. There is already talk in the insurance industry of "stranded carbon assets", and last week, the Bank of England warned the impact on fossil fuel investments could be huge.
A vast amount of pension money is invested in hydrocarbons including a great deal in Canada – funds that could be at risk in a scramble to disinvest. Yet, there is little sign that the scale of the potential disruption caused by a shift to solar is fully understood in Ottawa. The government only recently took steps to impose tariffs on the import of cheap Chinese solar panels. In the context of the extraordinary speed at which costs are falling in this industry, such measures are likely to have trivial impact.
But why are we hearing this now? Why are fund managers suddenly getting excited about solar energy? After decades of skeptical debate about climate science, the public policy arguments, and the political and commercial vested interests on both sides, you might be tempted to dismiss the solar revolution as more pot-boiling. That would be wrong because if the big funds reckon that solar's day might be about to dawn, it is not because Greenpeace or the Intergovernment Panel on Climate Change has told them it should be so. They don't just see a glimmer at the end of the tunnel, they can hear the commercial train rumbling.
Think about shale gas and oil. Three factors made that revolution possible and transformed a well-known technology (hydraulic fracturing of shales) into a game-changer that upended oil markets. These were entrepreneurial behaviour and innovation, market demand (high oil prices) and human aspiration.
Energy self-sufficiency has been U.S. public policy for decades but it was the coincidence of $100-plus oil and the carrot of big-dollar payouts for local U.S. landowners that drove the shale bandwagon. The same analysis can be applied to solar power at a global level. The 2008 financial collapse forced makers of PV modules to achieve lower costs or go out of business. Solar system costs have been falling at a compound 15 per cent per annum for the past eight years and Deutsche Bank reckons costs will fall by 40 per cent over the next four years in a drive that continues to stimulate new technologies and efficiencies. Meanwhile, the financial incentive for households and communities to invest in solar is becoming apparent. As costs fall, the economic rationale for distributed grids will increase. Just as landowners in the Eagle Ford shale play profited from the oil dividend, homeowners in southern and western U.S. states will discover the solar dividend a useful cushion to the household budget. Homes will become generators, selling their excess power to the grid and storing power in the family car battery.
Human incentives, fears and aspirations are powerful and can drive economic change in a way that high-level policy does not. If there really is a solar dawn approaching and a corresponding financial threat from stranded carbon assets, it is because China has finally changed its mind – not about the climate but about air quality. After years of resistance to the global climate change lobby, the world's biggest coal consumer last year suddenly made a commitment to end its ever-increasing CO2 output and begin to reduce it from 2030.
The political signal was accompanied by a much more important commodity fact: China's coal consumption fell in 2014 for the first time in 14 years. The world's biggest importer of seaborne coal is sated and is now beginning to cut back. China has pledged that it will reduce its coal consumption by 160 million tonnes per annum over the next five years and source 15 per cent of its energy from renewables by 2020 and it is investing about $100-billion a year to achieve this goal.
The villain is coal; if Chinese President Xi Jinping agreed to bow before President Obama's green flag in November, it had little or nothing to do with IPCC forecasts of doom. It was all to do with clean air and the catastrophic consequence of ignoring the sulphurous coal-fired miasma that is enveloping China's major cities. Without action now, smog will make Beijing almost uninhabitable long before the changing global climate is even noticed by the Communist Party.
Coal has peaked and is on the way out, to be replaced first by natural gas and increasingly by solar energy. If there is a threat just over the horizon, it is more likely to be the financial impact of a hydrocarbon eclipse than rising sea levels from a changing climate.
The solar dawn can happen, not because of public policy but because of private need – the pursuit of personal profit and the good life. If there is any reason to believe in distributed, local, home-generated solar power, it is because of the latter. It is the human capacity under pressure to find solutions and to seek gratification that will bring about the solar revolution.
Carl Mortished is a Canadian financial journalist based in London.
Carl Mortished