The truth about solar: now cheaper than coal

The conventional wisdom is that solar is expensive and will take decades more to be competitive. Yet last month, the world’s lowest priced solar was bid in Dubai at P1.345 per kilowatt hour. Other bids have resulted in P1.575 in Mexico, and P1.741 in the United States by Warren Buffett’s Berkshire Hathaway. These are the result of a 90-percent decrease in panel costs over the past decade, low interest rates, and high levels of sunlight—making solar in those places significantly cheaper than fossil fuel in the Philippines, where coal averages at P4, gas at P6, and diesel at P8.

Deutsche Bank has even ranked the Philippines ahead of those countries as one of the world’s most attractive markets for solar, given its high power rates and sunlight. So: Why is solar so cheap elsewhere but supposedly not here? Why do some say it needs subsidies, when now we argue it’s even cheaper than coal?

The reasons are similar to why we have the slowest internet, worst traffic, and most expensive electricity: Most local solar projects have until now been built inefficiently. But we can change that and cut the cost by up to 50 percent.

First, the local market has only now gained economies of scale. The Philippines had a total 4 megawatts of solar in 2013, but it has reached 900 MW by mid-2016. Second, few companies integrate development, investment, and construction all in-house. But as the market matures, agents, middlemen, and subcontractors will struggle to compete. Third, no local company has until recently gone into solar manufacturing, but now the need to beat fossil fuel is driving companies to vertically integrate to lower costs.

Fourth, projects previously avoided technologies like trackers that follow the sun and increase yield by 20 percent, because the Feed-in-Tariff had companies building fast to meet a deadline. But now, companies can take time to optimize performance. Fifth, solar previously had subsidies, which are necessary to start an industry but over time make companies uncompetitive because necessity is the mother of invention. And sixth, because companies may believe keeping prices high is in their best interest. But companies should consider that, if the entire industry lowered prices, solar would grow from a small subsidized market of just 1 percent of energy demand to 100 percent of the Philippines.

Solar needs storage to displace more than just daytime generation, and the question many ask is whether batteries are now viable. Today, you can roughly assume that batteries add around P2.50 per kWh to the cost of solar energy; based on current trends, this should drop to P1.25 by 2020, at which point solar and batteries will compete with coal. But even with present battery prices, solar can replace all gas, oil, and diesel in the Philippines, saving the Filipino consumer almost P100 billion a year, lowering our generation costs by up to 20 percent.

There’s no point arguing physics when one can show it; many doubted the Wright brothers could pull off manned flight, but they proved skeptics wrong by simply taking flight. Today, our solar installation at SM Mall of Asia is supplying power at 30 percent below utility rates. It’s worth noting that cost-savings are even greater for rooftop, which also saves transmission, distribution, and other charges. Thousands of homes and businesses have proven that rooftop solar makes economic sense. Our argument is that even solar farms supplying the grid can be competitive. We will showcase this in our next solar farm in Tarlac, which will be the world’s largest unsubsidized solar farm, replacing expensive gas, oil and diesel.

The energy transition will not happen overnight. The country needs to ensure reliable supply and hence transition gradually, replacing the most expensive plants first, saving the lowest cost plants for last. The full shift of all peaking and mid-merit to solar can happen as soon as 2020—assuming existing gas, oil and diesel contracts expire, or power companies themselves shift their captive markets to lower-cost solar. By then, new coal plants will come online, solar plus batteries will compete with coal, the market will show who really has the lowest cost, and solar will take over the majority of our baseload by 2030.

The only problem is that coal plants about to start construction already have long-term contracts. If those projects push through, they will lock in an entire generation to expensive, dirty, 20th-century technology when cheaper, cleaner alternatives exist. Once the contracts expire, coal will be unable to compete with solar, but may well just run at a loss to recoup investment while needlessly burning dirty fuel.

Beyond appealing to the public or to policymakers, I believe we can convince power companies themselves to change their direction. Companies invest in coal with good intentions, believing it to be the cheapest power; but even they would agree that, the day RE becomes cheaper than coal, we should banish fossil fuel from the Philippines forever. That day has come, and wise coal investors should pull back before it’s too late. To think the entire country, years from now, will tolerate dirty power at a higher rate simply due to contracts signed in 2016 is a dubious assumption; even if these contracts finish their term, as soon as they expire, there is no chance one will be renewed, as the market will be flooded with low-cost solar.

We must give credit to conglomerates taking steps toward renewables, and cheer them on. These include the Lopez Group, which recently declared it will never venture into coal; SM and JG Summit, which have the world’s largest solar mall installations; Aboitiz, Ayala and EEI, which now own some of the country’s largest solar farms; and the MVP Group, which is now also venturing into solar. These and many others study solar with interest, but have been led to believe that it is still expensive and so have made it just a small part of their portfolio.

When mobile phones disrupted land lines, the country’s biggest conglomerates saw the writing on the wall, and decided the best approach was to join the disruption. Solar is now heir to the mobile revolution, and power companies should heed the lessons of the telcos for their own survival. Remaking the country’s power supply will be capital-intensive, and cannot be done by one company alone; there is room for all the companies now planning to invest in coal, as well as new players, all adding competition and scale to the market, bringing electricity prices down.

All these claims are indisputable in countries in the Americas, Middle East and Asia, where solar is already beating coal in unsubsidized competitive bidding, and are especially true in the Philippines, with its abundant sunlight and high fuel costs. The only problem is it takes time for decision-makers to shed their preconceptions. It will require the public’s help for this reality to sink in. We must send a strong message to everyone in the power industry that the time of low-cost solar has arrived, and the era of fossil fuel is near its end.

Leandro Leviste ([email protected]) is the founder of Solar Philippines and a Forbes 30 Under 30.