The next frontiers in solar energy

As we stand at the cusp of a new year, for many in the solar industry looking back (or forward) there would be good reason to be pleased.

It was a stellar year — prices continued to fall and actual and planned capacity increased. In many parts of the world solar power is now cheaper than coal, the cheapest traditional source of energy. The change has been so rapid that it is forcing changes in policy that were instituted just a few years ago.

Nowhere is this trend more obvious than in India, the world’s fifth largest PV market by installed capacity of around 74GW in October 2018 (India ranks 4th in installed wind capacity, a fact often overlooked). India will rise in these ranks, as planned capacity increases far outpace all but the USA and China, and the country has some of the world’s lowest solar energy tariffs and has attracted global players to its auctions.

With prices now so low, is the path forward for solar a straight line, with innovation in the solar industry driven out by China’s continuing drive for lower panel prices?

The truth, and the path forward, is likely more complex — with increasing options that will challenge not only other energy sources, but the current solar PV manufacturing industry itself. Indeed, we are just at the beginning of a burst of innovation and growth in solar.

In the past, fall in solar PV panels was driven largely by economies of scale and improvements in the production process. Much of these savings have already been realized, with very little room for more scale economies or improvements in module assembly (which accounts for 40% of module cost). Nor does the traditional wafer manufacturing process, which accounts for a further 40% of cost, have much potential for cost reduction.

Further savings will, therefore, come from entirely new materials such as perovskite, new manufacturing processes for (e.g.) wafer production, and new architectures for solar cells and panels that are unrecognizable to today’s industry. Many of these innovations are not new — indeed, companies in Europe and the US have been working on these for years. However, they are now either approaching maturity or expected to emerge from labs in the next 1–2 years, just as sufficiently large markets become available to them.

A parallel growth is likely in thin-film solar, which is finally emerging to occupy niches that rigid solar panels cannot. As pointed out by a recent report by the NREL in the US, substantial growth for such technologies is on the horizon, driven by large new markets maturing, just as the technologies themselves enter commercialization. We have been evaluating several companies in this space over the past two years, and even as many have been marked by false starts, it is clear that the underlying technologies are gearing up for large scale production.

Finally, changes will also happen in the mix of energy generation. While today growth is largely in utility-scale projects, this will shift towards residential and other types of installations. Chief amongst these is floating solar. As larger PV projects hit constraints on land availability, the World Bank sees substantial growth in floating solar, which offers substantial benefits to hydroelectric dams or is the only option for space constrained cities and countries (like Singapore).

Floating solar is also not a new idea, but the technology has matured and the market seems to have reached an inflection point in 2018 with several projects of over 100MW going online for the first time. India also issued its first large-scale floating project (50MW) a few weeks ago, with more in the pipeline. Further price drops and capacity additions are to be expected.

Conventional wisdom holds that it is a fool’s errand for manufacturing firms to compete with Chinese companies in module production and that developers should focus on utility-scale solar. However, no industry dynamic is permanent and this dynamic will change.

China’s cost advantage will erode as automation permeates every aspect of manufacturing, and as energy costs (a key input to manufacturing) fall globally. With innovation accelerating, those companies with new technologies that substantially move the cost curve will be able to open up new revenue sources and gain protection against margin compression. Simultaneously, for energy service companies, other markets will also offer newer revenue sources often with better economics than utility-scale solar where falling power prices mean lower, less attractive margins. And, as assets age, opportunity will also shift from selling to making the most of those assets.

The next year should be even more interesting for solar, than this one.