The Disruptive Potential of Solar Power outlines that despite the current hardships of the industry, solar power has a disruptive potential to adversely affect other areas of the market.
In the introduction, the authors state, The bottom line [is that] the financial crisis, cheap natural gas, subsidy cuts by cash-strapped governments, and a flood of imports from Chinese solar-panel manufacturers have profoundly challenged the industrys short-term performance. But they havent undermined its potential; indeed, global installations have continued to riseby over 50% a year, on average, since 2006. The industry is poised to assume a bigger role in global energy markets; as it evolves, its impact on businesses and consumers will be significant and widespread. Utilities will probably be the first, but far from the only, major sector to feel solars disruptive potential.
The report looks at four areas – Economic Fundamentals, Business Consumption and Investment, Disruptive Potential, and Broader Management Implications – in its analysis.
Under Economic Fundamentals, the authors state, While module costs should continue to fall, even bigger opportunities lurk in the downstream (or soft) costs associated with installation and service. Financing, customer acquisition, regulatory incentives, and approvals collectively represent about half the expense of installing residential systems in the United States. Our research suggests that as they become cheaper, the overall costs to consumers are poised to fall to $2.30 by 2015 and to $1.60 by 2020. These cost reductions will put solar within striking distance, in economic terms, of new construction for traditional power-generation technologies, such as coal, natural gas, and nuclear energy. Thats true not just for residential and commercial segments, where it is already cost competitive in many (though not all) geographies, but also, eventually, for industrial and wholesale markets.
The changing economics of solar are already influencing business consumption and investment, state the authors in the following section Business Consumption and Investment. There, they point to examples such as Wal-Mart, which aims to switch to 100% renewable power in the next six years from its current 20%; Starwood Hotels and Resorts, which has recently partnered to begin installing solar on its properties; and Verizon, which is spending $100 million on solar and fuel-cell technology. The reasons may be simple, say the report, but the effects will be amplified: Why are companies doing such things? To diversify their energy supply, save money, and appeal to consumers. These steps are preliminary, but if they work, solar initiatives could scale up fast.
Investment in this area is also maturing, according to the report, with major investors becoming more comfortable with the risks of owning solar assets. New financial products that meet solars investment profile, crowd-funded solar projects, and high-profile investors such as Google have made the sector an increasingly attractive harbour.
The reports goes on to show how the effect on utilities companies could be major, despite solar accounting for less than 0.5% of the USs electricity generation, [It] could seriously threaten the latter because its growth undermines the utilities ability to count on capturing all new demand, which historically has fueled a large share of annual revenue growth.
In Europe, say the report, this has already taken place. Over the last several years, the demand for power has fallen while the supply of renewables (including solar) has risen, driven down power prices, and depressed the penetration of conventional power sources. US utilities can learn many lessons from their European counterparts, which for the most part stood by while smaller, more nimble players led the way. Each US utility will have to manage the risks of solar differently. All of them, however, will have to do something.
The broader implications for management, say the authors, are manifold. As solar becomes integrated with energy-efficiency solutions, data analytics, and other technologies (such as storage), it will become an increasingly important element in the next generation of resource related services and of the worlds coming resource revolution. In the not too distant future, a growing number of industries will have to take note of the promise, and sometimes the threat, of solar to business models based on traditional energy economics. But, in the meantime, the battle for the customer is taking place today, with long-term ramifications for existing industry structures.
The Disruptive Potential of Solar Power was written by David Frankel, Kenneth Ostrowski, and Dickon Primer, who work in the US for McKinsey. Contributions to the report were made by Stefan Heck, Sean Kane, and Farah Mandich.