Here Comes the Sun

The Exponential Decline in Solar Costs

September 15 2020

A decade ago, the International Energy Agency (IEA) made some projections about the growth of solar energy. One was that total global installed solar generation capacity would reach 200 GW by 2020¹. As we head toward the close of 2020, it appears that actual capacity will be somewhere north of 700 GW².

Why did the IEA forecast fall so short of what actually happened? Another of its 2010 predictions provides some insight. The cost of large-scale solar electricity generation was expected to fall from $0.36 per kWh in 2010 to $0.22 per kWh in 2020, an anticipated decrease of about 40%³. As of 2020, the actual cost is in the area of $0.07 per kWh, a realized decrease of over 80%⁴. This has made solar generation costs competitive with fossil fuel costs much more quickly than even the most optimistic forecasts had anticipated and has encouraged far more capacity to come on line.

Though solar remains a small part of global energy consumption today, it is worth remembering that mass adoption of a technology is mostly a function of affordability. We are surrounded by examples of how technological improvements led to exponential cost declines that altered entire industries. Moore's Law⁵, which predicted the rapid growth in computer processing power, may be the most famous.

Yet we still often underestimate the likelihood of it happening. Perhaps it is because it is human nature to extrapolate current growth rates into the future in a more linear fashion. It may also be that exponential growth predictions take more courage to make because they are often far from the consensus view and nobody wants to end up in a 2030 article about failed predictions.

One of the most important, but difficult, things for investors is factoring in the possibility of outcomes that are well outside of consensus. While the market seems comfortable with the idea that fossil fuels will become gradually less dominant, there may not be enough weight assigned to the probability of it happening quickly. Investors in traditional energy companies should ignore this particular exponential pattern at their own risk.

Other reading:

- For those interested in more detail on the above, this well-constructed article not only demonstrates how far ahead of forecasts solar cost declines have been and continue to be, but builds a reasonable case for an explosion in solar utilization in the next decade or two.
- Hat tip to one of our newest clients for passing along this update. Last month, we discussed the leverage that large companies have in advancing climate issues. With trillions of dollars invested in shares across the world, BlackRock certainly qualifies as influential as well.

1. International Energy Agency; Technology Roadmap - Solar photovoltaic energy; 2010.
2. "Global solar capacity may reach 1,448 GW in 2024"; Emiliano Bellini; pv magazine; June 16, 2020.
3. International Energy Agency; 2010 World Energy Outlook, page 310.
4. International Renewable Energy Agency, "Renewable Power Generation Costs in 2019"
5. Moore's Law, Britannica.com