Economic gains of solar energy


Once again I am here still making noise on solar power and hoping somehow that someone reading may hear something and tell somebody.

Not wasting much time, I still believe it is about time Ghana looks at its large scale adoption. The solar industry has a serious public relations problem, but sadly people like me who try to make noise about it are bad communicators.

NO! Don’t even think I am been apologetic, because this is beyond that. Regardless of the extensive government and public backing for solar energy and the increasing utility interest in purchasing solar-generated power, a lot still do not know the several economic benefits that solar provides. Frankly, this has been as a result of political artificiality and weak regulatory goals which have muddied the economic value of solar power. Nonetheless, part of the problem has also been the excessive focus on the environmentally “green” benefits of solar power and very little on the economic “green” benefits.

I am however of the view that by enlightening consumers about its role within electricity markets and stressing solar economics relative to conventional power — specifically natural gas — the solar industry can attain some pricing power and be a non-trivial part of the energy market

In recent years the cost of producing solar energy has fallen dramatically. Let’s examine the economic effects of cheaper solar power on the energy industry and wider economic welfare.

Solar power as an alternative energy source to the fossil (oil and gas) family has significant positive externalities over the fossils (oil and gas) industry.

The fall in the prices of solar energy means that demand for fossil (oil and gas) is likely to fall, either in the short term or long term. The total module costs of leading Chinese solar companies have decreased from around $1.31 a watt in 2011 to around $0.50/W in 2014. The reason was primarily due to the reduction in processing costs, the fall in polysilicon costs and improvement in conversion efficiencies. This sharp downward trend brings much hope for solar power to become cheaper as technology continues to improve.

Here comes the fear of the conventional energy family because they are aware that as industry and consumers switch to solar alternatives, the fossil (oil and gas) industry will face a fall in demand. This could lead to lower prices of the fossils due to excess supply as we have had for oil lately.

This fall in demand for the fossils (oil & gas) could see firms leaving those industries (and a subsequent fall in supply). Alternatively, some fossil (oil & gas) firms may respond by cutting prices to try and challenge the price of solar power.

This increased competition could lead to even lower energy prices for consumers. However, ultimately, you would expect the fossil (oil and gas) industry to decline as people switch to solar.

Many countries are hesitant to invest in solar power plants because they believe it is relatively costly in its upfront expenditure. Also, they are unwilling to invest money in developing new power stations, and as a result continue to use fossil fuels.

Most importantly, let’s not forget that the existing fossil (oil and gas) industries have an influential lobby and seek to protect their interests. They lobby for shield to make sure the countries energy providers continue with the fossil fuel based generations.

Given the positive externalities of solar power, there is a strong case for the Ghana government to intervene hugely in solar energy to encourage its take up rate. This would be particularly beneficial for a developing economy like Ghana which is in dire straits in terms of its energy security.

The chart below explains that the collective marginal benefit of consuming solar energy is greater than private marginal benefit. The free market equilibrium is at Q1 (where S=D). However, due to positive externalities, the socially efficient point is at Q2 (where SMC=SMB). Therefore, in this case there is an argument that the government should “intervene hugely” in solar power, shifting supply to S2 and increasing consumption.

This would improve the collective efficiency because it would speed up the adoption of solar energy and reduce the costs from burning fossil fuels.

You would agree with me that the growth of solar power could have a big impact on other industries which result that in the long term, it would reduce economic influence of oil and gas producing countries. Let us not quickly forget how the strike by the oil and gas companies in Nigeria intensified our dumsor in the last few months.

Let me conclude by saying that it is need that we understand the role that solar power plays in energy markets and the relationship of solar to the fossils (oil and gas). Let’s ask the reason for choosing natural gas instead of hydro or wind? You would agree that the answer lies in the growing disparity between baseload power supply and peak power demand. Along with increasing demand for power in general, the gap between baseload supply and peak power demand is widening.

Conventional baseload sources such as coal, nuclear, and hydro generate at the same capacity throughout the day and cannot expand to meet mid-day peak power demand. Instead, natural gas turbines, because they can be dispatched quickly, are relied upon to accommodate the spikes in peak power demand.

Today, besides simply serving peak power demand, natural gas increasingly is being recruited to serve baseload demand. The number of gas-fired plants is growing at an accelerating pace. This means that an ever-expanding percentage of our energy supply consists of natural gas, which, is more expensive and volatile than traditional baseload sources.  Therefore, average power prices will increase and become even more subject to the price fluctuations inherent to natural gas.

This is where solar comes in. Because solar generates the most during periods of peak power demand, it can help grid operators alleviate these demand spikes without being completely beholden to volatile gas-fired power. Moreover, unlike gas-fired power, solar power costs are fixed from day one, which can protect utilities and consumers against climbing power prices.

The improved technology surrounding solar power is very significant. It has brought clean energy within practical use. Given the significant environmental benefits, there is a very strong case for government intervention to accelerate the shift to solar power. The reluctance to switch to solar power is delaying improvement in living standards of the ordinary Ghanaian.

SOURCE: Maxmillian Kwarteng | Gramax Energy Group – GEG |