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Solar power

I received a notification from McKinsey Quarterly this week regarding a new article on solar power. As it came from McKinsey, you would expect that it would not be a scientific paper. Although the issue on solar power usually gives an impression of state-of-the-art technology, energy used in science fiction or an energy source which is going to save the world, the McKinsey paper is actually on management science, targetting the business environment and competitive strategies of the solar power sector.

With the limited supply of fossil fuel, and the adverse effect of this form of power generation, solar power has always been promoted as an alternative clean and sustainable energy. There has been a great expansion in the solar power sector in the last few decades, bringing some hope that it may eventually replace fossil fuel as the de facto energy source for mankind. Coupled with the rising price of fossil fuel, there is a lucrative future for the solar power industry. However, while developed countries and environmentalists are giving stern warning that emission from burning fossil fuel must be significantly curbed in the next 20 years, solar power is by no mean a saviour to help achieve this goal.

A realistic assessment based on the present rate of progress of development of the solar power industry gives an estimate that, by 2020, global installed solar capacity could be 20 to 40 times its level today. But even if all of the forecast growth occurs, solar energy will represent only about 3 to 6 percent of installed electricity generation capacity, or 1.5 to 3 percent of output in 2020. While solar power can help produce electricity with lower carbon emissions, it remains just one small piece of the puzzle to solve the energy crisis.

On cost competitiveness, an important indicator is the grid parity, which is the point when the price of solar electricity is on par with that of conventional sources of electricity on the power grid. In some regions, it is expected that solar power electricity generation will reach this point a few years away, partly due to government subsidy. However, in some countries such as China and India when the conventional electricity production cost is still low owing to ample supple of cheap coal, the time frame for solar power to achieve this goal is considerably longer.

At present, there are three types of technologies of solar power competing for cost leadership: silicon-wafer-based and thin-film photovoltaics and concentrated solar thermal power. Each has its own constraints.

Silicon-wafer-based photovoltaics

Silicon-wafer-based solar panels and their installation are costly because larger quantities of photovoltaic material are required to make the panels. Also, the technology is starting to approach the theoretical efficiency limit of 31 percent.

Thin-film photovoltaics

Thin-film photovoltaics solar panels are cheaper to make but its theoretical efficiency of 10 percent is much lower. Its durability is uncertain and some of its component materials are toxic.

Concentrated solar thermal power

Concentrated solar thermal power is the cheapest option because it engages simple technology of light reflection. However, it can only be installed at desert locations far away from its users. The simple technology also means there is not much room for cost reduction. The present forecast of the business environment is based on these three technologies. But if there is a major breakthrough such as the emergence of cheaper and more efficient nano-scale thin-film photovoltaics panel, the competitive environment will become uncertain.

On a vision of the road ahead, competitors expect that necessary technological breakthroughs will come from solar-component manufacturers, but rapid progress depends on robustly growing demand from end users, to whom many manufacturers have only limited access. While utility companies have strong relationships with residential, commercial, and industrial customers and understand the economics of serving them, they will have difficulty driving the penetration of solar power unless they have a much clearer sense of the cost potential of different solar technologies. In some regions, regulators can accelerate the move toward grid parity, as they did in California and Germany, but they can’t reduce the real cost of solar power. Poor regulation might even slow the fall in prices.

The threats will come from suppliers of components and raw materials, which will be in short supply owing to fast growth in demand. A business strategy in this direction is vertical integration. Also, there must be a close monitoring of the development of the latest technology on the possible emergence of a substitute. The dependence on government subsidy should be handled cautiously as it may not be sustainable.