Solar power has always offered up the promise of three tremendous benefits.
It's renewable, it's great for the environment, and it can be produced right here at home - safely insulated from the ups and downs of global politics and market bottlenecks.
But there has always been one big problem with solar - the price.
For years now, its high cost has always been the biggest weapon in every critic's arsenal. "It's just too expensive," they claim.
However, a study released last week by investment bank Sanford Bernstein suggests this objection is about to fall by the wayside for good.
It was brought to my attention in an article last week by Giles Parkinson of RenewEconomy. To say its findings are rather dramatic is an understatement.
In fact, I can promise you this study will definitely turn some heads...
You Can't Turn Your Back on Research Like This
Now I must admit, not all analysts (myself included) would accept the study's premise without some discussion, but its overall conclusion is impossible to ignore.
According to Bernstein, solar PV (photovoltaic systems that generate electricity directly from sunlight) is now cheaper than oil and Asian liquefied natural gas (LNG). The investment bank bases its conclusion on calculations made on a million British thermal unit (MMbtu) basis. This is the standard way analysts equate and compare the energy output for various liquid fuels.
"For these [developing Asian economies], solar is just cheap, clean, convenient, reliable energy. And since it is a technology, it will get even cheaper over time," Bernstein writes in the report, adding, "Fossil fuel extraction costs will keep rising. There is a massive global market for cheap energy, and that market is oblivious to policy changes" in China, Japan, the European Union, or the United States.
Of course, the bank does provide a needed dose of realism when it acknowledges that the current market share of solar PV in the global energy mix is so small that "the idea that oil and gas is the 'loser' in this formulation is laughable... in 2014."
To the point: The latest BP Energy Survey estimates solar PV accounts for only 0.17% of the global market. That's the smallest component of any major source. By comparison, oil accounts for 33%, coal comes in at 30%, and natural gas provides 24%. On the lower end of the scale, there's hydro power at 7% and nuclear at 4%. Even wind and geothermal power (if you've ever been to Iceland, volcanoes provide the power) top solar PV, rounding off the list at just about 1% each.
The Long Chase for Solar Power Might Finally Be Over
The "Holy Grail" for solar enthusiasts has always been what the industry refers to as "grid parity."
Here's why grid parity is so important.
Grid parity refers to the cost of the source used as being equivalent to that of the primary manner in which electricity is generated. And until recently, most of the solar input could not be sustained in market terms, unless it was the recipient of significant government subsidies.
However, as locations were weaned from dependence upon public sector support, some of them showed signs they could become self-sufficient. Above all else, these projects required two things: lots of sunshine and infrastructure networks that were already in place.
Of course, these developments by themselves were hardly enough to change the global energy landscape. Local changes in the energy pattern have a minimal impact on worldwide energy flows and pricing projections.
But the Bernstein report takes a different view, positing that's not likely to be the case a decade from now. According to the report, solar is already eating away at the margins of oil and gas demand. Bernstein says the adoption of solar in off-grid areas in developing markets will translate into less demand for kerosene and diesel. Even oil demand in the Middle East will feel the effects.
Meanwhile, the increased use of solar power in China, developed Asia, the United States, Europe, and Australia will likely serve to reduce natural gas demand as well.
But Parkinson's article goes on to reveal something much bigger. The kicker in the report is what he refers to a veritable "bombshell."
As he writes, "While solar has a fractional share of the market now, within one decade, solar PV (plus battery storage) may have such a share of the market that it becomes a trigger for energy price deflation, with huge consequences for the massive fossil fuel industry that relies on continued growth."
A Market as Big as Two Billion Backyards
According to the report, "The behavior from here seems clear: the solar industry will expand. Retaliatory steps from distribution utilities will increase the market for cost-effective battery storage."
Bernstein maintains, "This becomes - initially - a secondary market for battery technologies being developed for the auto sector. A failed battery technology in the auto sector (too hot, too heavy, too rigid a form factor) might well be perfect for the home energy storage market... with an addressable end market of 2 billion backyards.
"And for some years, that will be the extent of the effect. We have previously calculated how large the solar sector would need to be in order to become a material share of incremental energy supply each year and therefore begin to displace high-cost oil and gas supply and start to depress prices.
"We estimate that the solar industry would need to be an order of magnitude larger than it is today to have this kind of impact. At the point where solar is displacing a material share of incremental oil and gas supply, global energy deflation would become inevitable: technology (with a falling cost structure) would be driving prices in the energy space. But even on an aggressive view, this could take the better part of a decade."
Giles adds that, according to the Bernstein analysts, "The chief risk is that they are being too conservative. The big oil and gas producers, and the investors that control the flow of capital, may not wait until energy prices do actually deflate; they will likely change their behavior well before that in anticipation that it will happen."
The report speculates that, "If the downward sloping forward curve is ever accepted as permanent, rational behavior from energy producers will guarantee it is so. Sitting on oil and gas reserves for the benefit of generations yet to come ceases to be a rational strategy if that reserve represents a depreciating rather than an appreciating asset."
This, Bernstein says, is the hidden flaw with the idea that solar power is "too small to matter."
Ultimately, it says, what may kill the energy market for equity investors is not the fact that renewable technology and battery storage will turn into behemoths, but the realization of that future as inevitable.
With that in mind, there are two things to remember as we move into what the bank claims is going to be a significant change in energy production cycles worldwide.
First, as veteran Oil & Energy Investor readers well know, my position remains that it is all about the energy balance, not simply just the pushy new kid in town. It's the ability to maintain the balance of multiple available and interchangeable energy sources that will bring overall end-user costs down and improve efficiency.
Second, the envelope in this area is really going to get pushed by the nation rapidly accumulating the lead in net generation solar power systems...
China. More on that as it develops.
More from Dr. Kent Moors: Gas prices are rising in the United States, up 2.4% over the past week alone. And you can bet that as we move into the summer season, the worst is yet to come. The climb means gains for this sector - and for investors...
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.