A Disruptive Energy Source

An excerpt from the latest Mckinsey  Resource Revolution report sees solar as having the potential to truly disrupt multiple sectors.

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Solar’s changing economics are already influencing business consumption and investment. In consumption, a number of companies with large physical footprints and high power costs are installing commercial-scale rooftop solar systems, often at less than the current price of buying power from a utility. For example, Wal-Mart Stores has stated that it will switch to 100 percent renewable power by 2020, up from around 20 percent today. Mining and defense companies are looking to solar in remote and demanding environments. In the hospitality sector, Starwood Hotels and Resorts has partnered with NRG Solar to begin installing solar at its hotels. Verizon is spending $100 million on solar and fuel-cell technology to power its facilities and cell-network infrastructure. 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.

As for investment, solar’s long-term contracts and relative insulation from fuel-price fluctuations are proving increasingly attractive. The cost of capital also is falling. Institutional investors, insurance companies, and major banks are becoming more comfortable with the risks (such as weather uncertainty and the reliability of components) associated with long-term ownership of solar assets. Accordingly, investors are more and more willing to underwrite long-term debt positions for solar, often at costs of capital lower than those of traditional project finance.

Major players also are creating advanced financial products to meet solar’s investment profile. The best example of this to date is NRG Yield, and we expect other companies to unveil similar securities that pool renewable operating assets into packages for investors. Google has been an active tax-equity investor in renewable projects, deploying more than $1 billion since 2010. It also will be interesting to track the emergence of solar projects financed online via crowdsourcing (the best example is Solar Mosaic, which brings investors and solar-energy projects together). This approach could widen the pool of investors while reducing the cost of capital for smaller installations, in particular.

Disruptive potential

The utility sector represents a fascinating example of the potential for significant disruption as costs fall, even as solar’s scale remains relatively small. Although solar accounts for only less than half a percent of US electricity generation, the business model for utilities depends not so much on the current generation base as on installations of new capacity. Solar 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. (Price increases have accounted for the rest.)

Depending on the market, new solar installations could now account for up to half of new consumption (in the first ten months of 2013, more than 20 percent of new US installed capacity was solar). By altering the demand side of the equation, solar directly affects the amount of new capital that utilities can deploy at their predetermined return on equity. In effect, though solar will continue to generate a small share of the overall US energy supply, it could well have an outsize effect on the economics of utilities—and therefore on the industry’s structure and future.

To read the full report

Categories: Economic Indicators, Solar

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