#23. Power to the people?

What with so many other things happening, you might well have missed an important report* confirming that solar panels can now produce electricity more cheaply than coal, gas or nuclear. Though the limitations of this breakthrough need to be noted – hence my stress on ‘electricity’ rather than ‘energy’ more generally – this has implications that go far beyond the obvious matters of price and the environment.

One of these implications, and one that we’ll be hearing quite a lot about in the future, is “utility death syndrome”. In essence, the huge progress made in improving the efficiency of solar may render the current “utility model” obsolete. In brief, the “utility model” is the system whereby power is generated by small numbers of large plants and then transported long distances to the customer. This model has prevailed hitherto because, although long-distance transport is both wasteful and costly, siting small power stations all over the country would be costlier still. In other words, large plants provide economies of scale which are greater than the costs of long-distance distribution.

Solar, though, is likely to work very differently. The benefits of having one large solar plant instead of lots of small ones are negligible, and are certainly not enough to counter long-range transport costs. In the future, the most cost-effective way of delivering power might be to dispense with concentration in favour of a myriad of small and medium-sized solar farms serving cities, towns, villages and even individual homes and business premises.

A number of thoughts are likely to have occurred to you, not least that you need power when the sun isn’t shining. Though this is true, there are solutions to peak management which need not require connection to the grid. Battery efficiencies continue to improve, and small supplementary power stations (running on gas or coal) might be feasible, but I suspect that the best solution could well lie in generating heat from waste. This is a technology that we’re going to need anyway (as the supply of low-cost, high-EROEI conventional fuels continues to dwindle), and it could easily be used for ‘peak-shaving’ infill at times when solar is offline.

Please remember that our industrial economy requires high levels of utilisation. Trains and aeroplanes lose money unless they are nearly full, factories are uneconomic if they sit idle for much of the time, and private roads and bridges only work financially if they are pretty fully utilised. So, if large numbers of customers disconnect from the grid, the remaining customer base may simply be too small to service the capital costs of the utility system.

My approximate estimate is that, if as little as five per cent of customers went ex-grid, the utilities would cease either to make profits or to pay tax. At a defection rate of ten per cent, cash flow could fail to cover depreciation or the cost of dividends and debt interest.

Of course, the prices charged to remaining customers could (and no doubt would) be increased, but this would simply accelerate the rate of customer defection.

This, in essence, is what “utility death syndrome” means, and it worries not just utilities themselves but governments as well. Who, for instance, would collect the taxes currently garnered by the utilities?

The fact that governments are conflicted over this helps explain the regulatory and investment uncertainties that have contributed to a sharp fall in global renewables investment. This investment fell to US$214bn in 2013, from US$250bn in 2012 and US$279bn in 2011. Experts have identified the US, Britain, France, Germany, Spain, Sweden, Romania, Poland and India amongst countries where policy uncertainty has been an issue. To be sure, escalating solar efficiencies have contributed to the decline in investment (because you can now install more capacity whilst spending less), but the divergence between what the customer wants (cheaper, cleaner and more sustainable power), and what governments and utilities want, has played a much bigger role in the 23% slump in investment in renewables.

Ultimately, the continuing decline in conventional fuels’ EROEIs (energy returns on energy invested) will swing the balance in favour of localised solar, because the flip-side of a declining EROEI is a rising ECOE (energy cost of energy), and my analysis suggests that these ECOE costs are already on a sharply rising trajectory.

The next big twist in the story is likely to be the realisation that shale gas is not the “magic bullet” solution to energy constraint that its starry-eyed supporters continue to believe. Even in shale “sweet spots”, production declines at an alarming rate, and the surge in investment – a surge so large that it has brought US gas prices down sharply –already seems to be tailing off, not least because the oil majors are walking away from shale. When shale output peaks (probably in 2017 or 2018) and then enters a precipitate decline, the economic case for solar will become unanswerable.

To those of us who understand the implications of EROEI trends, of course, the pro-solar case is already wholly convincing.

Solar alone will not answer the problems posed by falling EROEIs and escalating ECOEs, problems which are already crimping economic growth and raising frightening questions about a global economy mired in debt. Solar makes pretty big acreage demands, and electricity cannot, in any case, supplant fossil fuels in activities such as mining, agriculture or steel-making. Neither can solar preserve our car-based societies, because electric cars are enormously energy-wasteful (whereas the case for electric public transport is a strong one), whilst our enormous thirst for plastics will continue to depend on hydrocarbon feedstocks.

This said, progress in solar is highly encouraging, and governments need to think through the implications of a future supply system that is likely to be far more localised than the monolithic model which still, for the moment, prevails.


*From US brokers Sanford Bernstein