Why & How Solar Production Will Accelerate Over The Next Few Years

I’ve been wanting to write this article for a while, but this post on X from Chamath Palihapitiya prompted me to action:

Look at the explosive growth and falling costs of batteries, solar and wind in the chart below…the numbers are really impressive.

This is why I think we will have a near zero marginal cost of energy by 2030. The incremental cost of generating power will approach ~$0.005/kWh in… pic.twitter.com/NBNsL3AWCV

— Chamath Palihapitiya (@chamath) October 5, 2023

Chamath is pointing out that solar and battery storage are going down in cost at an astounding 18% and 19% annual rate (respectively), and this is significantly faster than two historically famous events, the ramp of the Ford Model T and production of US aircraft during World War 2. He doesn’t show it here, but I’ve looked into the cost of fossil fuels and they dropped in price dramatically when each entered the scene — coal centuries ago, oil a century ago, and natural gas via horizontal drilling (fracking) most recently.

Those fossil fuel learning curves have run their course for the most part, and the costs of fossil fuels is rising both because of general inflation (which affects renewables too) and more importantly because the easy-to-find-and-extract locations have mostly been exhausted. There is plenty of coal, oil, and natural gas left, but it is increasingly expensive to produce and also expensive to burn, especially as countries around the world pass laws regulating their usage as they learn about air pollution’s bad effects and the effect of burning fossil fuels on our climate. People realized these problems many years ago, but before renewables were affordable, the choice was burn them or live a simpler, less energy intensive life. While there is nothing wrong with that lifestyle, climate activists weren’t able to convince many people to adopt it or convince governments to mandate it. I also oppose mandating a low-energy life, but many of my readers may disagree.

Chamath is also assuming these trends will continue until we get to a cost of energy of a half penny per kWh. I think that might be off quite a bit, because the rate of cost decreases is higher for solar panels and batteries than it is for the complete systems that produce electricity. I do think we will produce significant pressure on utilities with distributed generation, but it may take a little longer. Let’s switch gears to talk about the 3 phases of solar.

3 Phases Of Solar Generation

For the simplicity of this article, we are going to say the price of natural gas electricity is about 12 cents a kWh, 6 cents for distribution, 2 cents for the power plant, and 4 cents for fuel and operating costs.

Solar Costs Lower Than Alternative Costs (Capital + Operating)

The first phase is when solar’s total cost is less than that of natural gas (which was the cheapest way to make electricity in most places not long ago). This happened in many areas when utility-scale solar hit about 6 cents a kWh a couple of years ago. That is covering fuel, operating, and power plant costs. So, when you are looking to add new capacity or replace a coal plant, solar wins most of the time.

Solar Costs Lower Than Alternative Costs (Operating Only)

Slide from NextEra second quarter conference call.

The second phase is when firmed solar (solar + battery) becomes lower in cost than just the variable cost of a natural gas (or coal) plant. Since economists ignore sunk costs, but cost accountants don’t, in the short run only variable costs matter. This means that if your fairy godmother built you a brand new state-of-the-art modern gas power plant and all you have to pay for is the fuel and people to operate and maintain it, at a certain price of firmed utility-scale solar (let’s say 4 cents a kWh), you would tell your fairly godmother, “no thanks, it isn’t worth the fuel and operating costs, but if you can turn this pumpkin into an electric carriage, that would be much appreciated.”

Why did I change the bar from solar to firmed solar? Because when solar is just a couple percent of your power, it doesn’t need to be firmed, since the rest of the grid has enough backup power to handle things when you aren’t producing; but as solar becomes a significant source, it needs to solve the intermittency issue. In this phase, which we are entering in some places now, you not only choose solar for new generation capacity due to power growth or replacing fossil fuel plants that are past the end of their useful life, but you start closing fully paid for gas power plants that are only a few years old and are in perfect condition. It might be wise to just mothball them and bring them up for a few weeks a year (similar to a peaker plant) until we get a little more solar, but many of these plants just can’t compete in the general market. CleanTechnica started reporting on cases like this several years ago, but they are still not widespread.

Solar Costs Lower Than Grid Costs

Phase 3 is called “GOD parity” by Tony Seba. It is when the price of distributed firmed solar (on your house or business) is less than the distribution cost of your local utility (6 cents in my example). This causes not just the gas power plant to be disrupted, but centralized solar and wind too! In this case, there isn’t an economic case for the utility grid. Even if a fairy godmother gave the utility a magic power plant that requires no fuel for free, it still couldn’t compete since it costs 6 cents to maintain its wires.

The quotes I’m getting in some places for a 10 kWh solar system are about $16,422 plus $12,250 for two Telsa Powerwalls, coming to a total of $28,672. That will provide 13,695 kWh of electricity a year for 25 years (or 342,375 kWh). Of course, there would be some downtime and degradation over time, so let’s say 300,000 kWh. So, today, $28,672/300,000 kWh (also not considering the time value of money or interest costs) gives us 9.6 cents a kWh. That’s very competitive with the 12 cents per kWh the utility charges, but not the 6 cents a kWh needed to reach this “GOD parity.” If the cost of solar drops 17% a year (which is the learning curve of solar in the last 10 years), it will hit 6 cents per kWh in 3 years, in 2026. That is when people will start going off the grid en masse and the utilities have a big problem.

Another big reduction is when I can just use my Tesla Cybertruck or Model Y instead of buying two Powerwalls. Let’s say you need to spend a couple thousand dollars to hook that vehicle to your house — your cost would be about $18,422/300,000 kWh, or 6 cents a kWh.

There is also the potential problem that your lights will go out if you run to the grocery store for ice cream! So, we probably need a small battery that stays at the house.

Overall, may be closer to utility disruption than we think! I think most people want to remain connected to the grid as a backup and would be willing to spend $30 a month for that, but the days when everyone pays hundreds of dollars a month to their local utilities may be numbered.

If you want to take advantage of my Tesla referral link to get Reward Credits, here’s the code: https://ts.la/paul92237 — but as I have said before, if another owner helped you more, please use their link instead of mine. If you want to learn more about Tesla’s new referral program, Chris Boylan has written an excellent article on it.

Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV], Hertz [HTZ], NextEra Energy [NEP], and several ARK ETFs. But I offer no investment advice of any sort here.