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Ignore solar parity at your investing peril

Australian energy policy is a mess. Investors should ignore the arguments. The antagonists are stuck in a perpetual time shift, prosecuting cases from five to ten years ago, ignorant of the incoming change in solar economics.

Five years ago, coal and gas were the cheapest sources of energy in most countries. Now wind and solar are.

“But but but, gas and solar are intermittent. YOU NEED BASELOAD!!!” cry the fossil fuel defenders.

The more solar we develop, the cheaper it becomes 

Sure, battery + solar is currently more expensive than baseload coal. The problem is you don’t have to look too far forward to see that it won’t be like that for long. Coal, gas and oil have economics based on a scarcity curve: the more we use, the deeper we need to dig and the more expensive it is to extract. Solar and battery power is on a technology curve, the more the world produces, the cheaper it becomes:

Solar + batteries are the 'killer app'. They are extremely scalable once they reach an acceptable cost. All the current trends point to energy parity soon for electricity.

Relative cost of energy

The figures in the table below are USD/kWh for international comparability. We use levelised cost of energy, which adjusts for the up-front cost of building power plants or solar arrays, asset life and tax issues. These numbers are approximate, rely on a lot of assumptions and vary by country and region. In general, the numbers are for new installations with recent technology.

Gas is no longer a transition fuel

Note the fuel cost of natural gas in the table above. Electricity prices from gas are more sensitive to fuel prices than other technologies. Fifteen years ago, there was a push in Australia to use gas as a transition fuel from coal to renewables. And gas was viable. But 15 years later, solar + battery option has fallen so much that gas is no longer feasible across Australia.

If you live in a country (say the US) or state (say Western Australia) with lots of gas and domestic reservation, then gas is still a viable option. Prices are US$3 per mmBtu or lower.

Energy companies have co-opted energy policy in the rest of Australia. Narrabri coal seam gas, the centre of a current battle in NSW, at best will be around $6 per mmBtu. As you can see from the table above, solar + partial battery is almost cost-competitive at that price.

Future prices

In the last 10 years, solar costs have fallen around 20% per year. Given how low solar costs are, the critical assumption is battery prices. A 20% fall in battery prices will have a much larger impact than a 20% fall in the cost of solar. I suspect this will slow a little, but if it doesn’t the impact will be immense:

Rooftop solar

I have deliberately left rooftop solar out of the above tables, as it is less comparable than might be expected. Rooftop solar has costs of around $0.13 assessed on the same basis as above.

But that is not important. Rooftop solar is not competing with a coal plant, it is competing with grid power + grid infrastructure, which is an important distinction.

I don’t care whether my rooftop solar produces energy cheaper than the local coal-fired power station. I care whether it produces at a cheaper rate than I pay for power – and it does:

But my panels provide power during the day when everyone else’s panels are also producing electricity. At $0.28 for partial shifting (i.e. generating enough power to get you through the evening peak) having some battery capacity is profitable in the right climate, but the return is low.

Looking at the 20% cost reduction scenarios again:

There are lots of questions that the above table raises. If everyone starts going off-grid, who pays for the poles and wires? Do we end up in a ‘death spiral’ where more people leave the grid, raising the cost for those who remain, which means more people leave and so on?

My best bet is that it is going to be a battle of vested interests. Wealthier people will leave the grid when it becomes economic as they can afford the upfront cost. This leaves renters and the poor left paying higher bills to account for the transmission assets. Governments will have three options:

  1. Prevent retail electricity price rises, support the rights of the many over the few and make the asset owners pay the cost of their mistaken investment.
  2. Socialise the losses and bail out the transmission asset owners.
  3. Let the asset owners raise prices, shift the cost of adjustment onto the poor.

While option 1 would be my preferred choice, the cynic notes option 3 will be the path of least resistance. The lobbyists will no doubt be hard at work on option 2 in case any government has the fortitude to explore option 1.

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Investment outlook

Battery costs are the primary determinant at this point. If the rate of improvement slows significantly, then it may take 10 years. My base case is that battery improvement will be sustained, but it is far from a given.

The US is not the market to watch. Energy costs are lower there than almost any other developed market. A better indicator of the future will be developments in Europe.

Key investment sectors and opportunities

  • Coal/gas: I’m not saying that coal and gas will cease to be used when we hit parity. However, the price will be limited to no more than solar + battery, and that cost will fall year after year. Any investment in these companies should be made with falling commodity price expectations – i.e. value them in run-off. There may be short-term shortages and price spikes, but these are selling opportunities. Increases in electric car penetration may limit the downward trend for a few years.
  • Solar companies: Solar manufacturers are difficult. The technology is moving too fast to work out if there will be a ‘winner takes all’. Service providers to the solar industry are probably a better investment if you can find one that’s not already very expensive. We have made a few profitable investments in semi-conductor stocks that manufacture ‘commodity-type’ parts for solar companies. It is not a sexy area of the market with thin margins, but at the right price, some of these stocks are interesting.
  • Industrials: Companies that have high electricity bills during the daytime (or can shift costs to the daytime) will benefit. There are many European materials and refining companies that struggle to compete with US companies because of the lower-cost US energy in recent years.
  • Oil: At the margin, less diesel will be used for power generation in remote areas. Expect this to continue. It is not a large part of the oil market, but it will mean oil demand will be weaker than they would have otherwise been.
  • Electricity transmission: Will these companies get bailed out? Will increased prices to offset falling customers be allowed? Or will companies take the pain of the ‘death spiral’? It is a country-by-country decision with lots of risk in this trade.
  • Electricity production: The toughest thing about an investment today is that the company which builds a solar array next year will have lower costs than the one who built last year. Plus there’s the regulatory risks from the ‘death spiral’. Another risky trade.


Damien Klassen is Head of Investments at Nucleus Wealth. This article is general information and does not consider the circumstances of any investor.


Allan Wilson
November 05, 2020

What happens to countries that don't get a lot of sun for substantial parts of the year? Australia could be self sufficient if we share i.e as a Queenslander the Tasmanians can have my excess production in winter as the sun varies little here but who shares with Canada et al?

Brad D
September 03, 2020

Thanks for the article. This overly simplistic analysis is too narrow and misses many important points:

- Solar energy is too diffuse to be harnessed efficiently. To power the world with solar + battery would require panels covering approximately 1/4 of the land surface of the earth. Unworkable.
- The cost to achieve this will be well beyond what we can afford. Into the 10s of trillions globally, unworkable.
- There is simply not enough raw materials to produce the amount of battery storage capacity required to achieve the stated goals on a global scale. Can't create elements.
- Batteries and solar panels degrade over time and will need to be disposed of and replaced. Please factor this into the analysis above.

Given the above - having large, efficient, reliable gas generation that can be scaled up/down in minutes doesnt sound so bad does it?

Just my 2c.

Mark Buchanan
September 03, 2020

Spot on Brad

Richard de Crespigny
August 28, 2020

Good article.

The current unintelligent grid is moving towards being (but does not have to become) a legacy burden.

Intelligent decentralized power distribution (like the eBay marketplace on the internet) gives every energy creator (home and power station) the option to supply to all grid users, maximizing competition, minimizing costs and increasing resilience.

This is an increasing opportunity for owners of solar+storage.

Chris Jankowski
August 27, 2020

Germany already dealt with the users going off grid, I believe. If you do, you still have to pay the connection daily fee to the local distribution company, so they can maintain the grid for their remaining customers..

August 31, 2020

Hi Chris, Yes, grid needs to be maintained. After capital used to 'go solar' 10years ago for minimal/almost nil electricity cost in future retirement, I considered it insurance against unknown future electricity cost when on a future fixed income as felt it was something I could not otherwise control. At time, electricity cost was $3000 p.a. No objection to daily supply charge for poles,lines & grid maintenance but do object that after cooking, laundry & recharging appliances whilst sunny to maximise solar usage, my excess power generated is on-sold for up to 0.548 cents/ (peak price) including me, and I am paid 0 . 08 cents/ for power collected by my depreciating equipment, so they make a whopping 85.77% gain/KwHr with little collection cost except down the lines I am happy to pay a daily charge for. Ten yrs ago, 25yrs was estimated life of this asset so my depreciation cost is $400 p.a over its' life. I believe providers should give a small discount per KW/hr to solar suppliers on ACTUAL billed usage sunset to sunrise to compensate for a depreciating asset because .08cents Kw/hr credit of unused power back to the grid will not account for future replacement of my equipment and nowhere near extra house insurance cost for having solar system on one's roof---added fire risk. I don't expect anything for nothing but nor should the electricity companies.
For people working in sun hours, based on my experience I would not advise my children to install solar system until batteries become affordable. My bill is now approx $1200 p.a. despite capital expended plus all done to avoid electricity use outside sun hours and between 2- 9p.m. (winter peak) including my fridge being on timer for no peak hours operation. I don't use a heater, just wear layers of wool & finger gloves. Thank heaven for merino sheep!

August 27, 2020

A 20% per annum cost reduction would see the cost fall by more than two-thirds in 5 years. Is that realistic? Is there some point where the cost reductions become harder to obtain? The graph shown points to that happening for wind over the last 5 years.

Martin Lenard
August 27, 2020

And that's the case without adding any pollution costs to fossil fuel sources of energy!

Damien Klassen
August 27, 2020

Yep. 10-15 years ago you needed to add in carbon taxes and pollution costs to get the business case to stack up. That is no longer the case. Fossil fuel lobbyists have well and truly earned their keep over the last decade.


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