Having been in the solar industry since 2003, I have witnessed firsthand the monumental achievements in cost reduction. Historically this effort was solely focused on one goal—LCOE reduction—that is the lowest cost of energy for the life of the operating solar plant. CAPEX was the elephant in the room that wasn’t really hiding in the corner. There was a time, in an all-hands meeting back in 2007 (right after a particular industry-changing merger), in which our esteemed leaders proclaimed we would hit $2/Wdc installed by 2012. I was a project manager responsible for project costs and knew what all the numbers were going into projects. I looked at my fellow project managers and chuckled, almost out loud. We were highly competitive price-wise and installing around the $7-8/Wdc at the time.
Time came and went as it always does, and low and behold we all know what happened. There are various roots to the decline, and one can argue till blue in the face about the US contribution amid all sorts of local industry upheavals, but none can dispute the supreme achievement of <$30/MWh energy prices we regularly see across the country—what can be considered some of the lowest cost per MWh in the energy generation business. But that doesn’t tell the whole story and is only the first step of the renewable transition, Grid Parity 1.0. As we at Crossover Energy Partners stand around the virtual water cooler these days and revel, we are contemplating what the next step is. We are moving into the world of Grid Parity 2.0. Advancing beyond a constant LCOE hyper-focus to a new world where solar developers and owner/operators act in a way that optimizes value, allocates risk appropriately, and takes advantage of new technologies and market forces.
Historically, the solar industry benefitted from an energy procurement world that worked within the boundaries of an intermittent resource. Take-or-pay contracts, otherwise known as unit-contingent, put all the risk on the buyer, protecting the seller from any market inefficiencies and technical uncertainties. It made sense…kind of. Over the past 10-15 years the solar development industry was immature and somewhat unsophisticated, me included. Some had experience within the utility industry, understanding markets and energy products, but most were solar and wind veterans bringing a deep technical understanding of photovoltaics, incentive structures, and finance but lacked a true understanding of energy market dynamics. Policy proved to be more of a driver than economics, cultivating Grid Parity 1.0, and sellers were along for the ride. This worked mostly in part because of the trivial contribution from solar/wind to the overall supply mix, it was really an afterthought.
The industry has now matured, it is no longer an afterthought. Nationally it has gone from insignificance to more than 10% of all renewable generation in just 10 years. Renewables in total have doubled their contribution to the national electric supply in that same timeframe. It’s time to get sophisticated.
We are seeing evidence of this transition. A menu of renewable energy products are now being bought and sold, not just MWh. RECs have a market, capacity has a market, even ancillary services have a market in places like CAISO. Additionally, the delivery point is moving away from the busbar, pushing basis risk more and more to the owner/seller. As buyers begin to evaluate hundreds of offers and projects in each RFP, the evaluation criteria will follow a more holistic view of products offered and risks allocated.
Owners are now stepping up to provide a structure to the supply, much like gas did previously, but now with a mix of renewable generation and battery technologies. Guaranteeing generation according to a 12 x 24 schedule. This may have a perceived impact on the price, but again, it is all about risk allocation. A dirt-cheap unit contingent project carries with it all sorts of market risks. Selling excess energy during peak solar generation periods, being short power at the net peak hours, all this is risk, and risk costs money. So in reality it isn’t necessarily more expensive once it runs through the market machine.
All this being said, we are just at the beginning. At Crossover Energy Partners we are focused on this transition with our equity partner. We have the ability to craft structures and assume some of the risk that has historically been left off the table. It is more about what the customer wants now, than it is about the perceived capability of a single project.
Over the coming months, we will release more articles pertaining to Grid Parity 2.0. Sign up below to receive an email notification when new articles are published by our team.
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