Growth Of Renewables - 100% Renewables Possible? End Of Natural Gas Part 4

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Includes: CAFD, CSIQ, FSLR, GLBL, JASO, JKS, KOL, SPWR, TAN, TERP, TSL, TSLA, UNG, XLE, YLCO
by: Siddharth Dalal

Summary

I continue my series on renewable energy.

I take a more in-depth look at US electricity production growth history with a focus on renewable energy growth.

I take a look at global renewable energy growth in electricity production.

What companies are currently positioned to take advantage of this?

This is part 4 on my series on renewables in electricity production.

In my first article, I discussed the growth of renewables compared to natural gas in the US. Thanks to the overwhelming response in the comments, I decided to turn this into a series.

In the second part of the series, I looked at utility scale solar vs. the cost of natural gas generation. One thing I did not mention in the article is that utility scale solar PPA pricing is guaranteed for 20 years, while natural gas is likely to rise from the record lows it is at now.

In the third in the series, I looked at the economics of replacing gas peakers with storage batteries.

In this article I will take a detailed look at US electricity production growth, global renewable growth, the cost to go 100% renewable and list the global leaders in renewable energy.

Renewables in US Electricity Production

In my first article, almost all commenters who disagreed with me, believe that the natural gas is going to continue to rise as a source of producing electricity for decades to come. However, the current reality presents a very different picture. Some were nuclear proponents and some believe solar and wind cannot be a significant component of the grid or are too expensive to deploy.

In 2015, we have seen record low gas prices. Yet, both wind and solar have outpaced natural gas this year as a source of new generation. Simply because wind is the cheapest form of energy and solar is getting there.

2015 YTD (until Oct) New Capacity
Wind 4178
Solar 3815
Natural Gas 3528

Source: Cleantechnica

Here is what US electricity generation looked like from 1995 to 2005:

Source for most charts: EIA (2015 data, if used is extrapolated from all monthly data available)

The future of coal wasn't in question. Lots of coal plants were in the works or planned. In fact, in May 2007, there was a list of over 150 new and proposed coal plants. Most of those were cancelled. According to that site, 80% (139/236) of coal power plants have been cancelled. Note there is negligible power from wind and solar is not even in the picture at all until 2005.

This is what happened in the 10 years from 2005 to 2014:

Coal started on a decline that is not going to recover from. 2015 represents a record low for natural gas prices. Maybe natural gas will continue growing for a few more years as a source of electricity but the decline is inevitable. The current low in natural gas prices is unsustainable and without that kind of low price, natural gas cannot stay competitive with wind and solar.

As I have pointed out before, natural gas electricity production only grew in the last 5 years when gas prices were at record lows.

I expect this trend to continue in the future as natural gas electricity pricing is as low as it can go. Solar and wind pricing on the other hand continues to go lower.

It looks like solar and wind are still too small a component of electricity generation to have an impact on natural gas. But unfortunately, the exponential nature of deployment is not visible on the charts. And if solar and wind continue to grow at their current pace, something has to give.

My expectation based on this information is that a few years from now, new natural gas plants will crawl to a halt. Any new natural gas capacity will be from conversions of coal plants to natural gas. And almost all new capacity will come from renewables. As, I've shown in a previous article, this is already happening:

Source: For 2013 and 2014. For 2015

The graph above doesn't do justice to how fast solar is growing:

It took wind 8 years (1999 - 2007) to grow as much as solar has grown in the last 4 years.

Global Solar and Wind Capacity

Globally too, solar and wind are growing very rapidly. From almost no renewable capacity in 2004, solar and wind are now over 10% of global capacity.

Sources: Ren21 Annual Reports, EIA (total capacity extrapolated linearly)

As renewables now account for a majority of new global electricity capacity with a 50% share in 2014 and growing, it seems that this trend is likely to continue. Also IEA estimates for the future are generally poor and vastly underestimate renewable growth. Maybe they are incapable of using exponential trend lines in Excel? (I jest).

The chart shows that if the exponential growth continues, we would reach 30% - 80% of global capacity in 10 years. However, for technical reasons, 80% is unlikely without major expansion in global battery capacity, which is happening as we speak but unlikely to reach enough capacity for 80%. However, 20 years from now, that is completely feasible. But solar + wind are most likely to reach over 30% in the next 10 years.

Will it really cost $100 trillion to go 100% renewable?

A commenter pointed out a study that estimated the cost of going 100% renewable to be about $100 trillion. But some basic logic can show that to be completely out of touch with reality.

Current global electricity generation capacity is about 6.2TW. Of that, over 20% is renewable energy. In 10 years, I expect total capacity to be 8.4TW. In 20 years, I expect it to be about 11TW. Let's say all current fossil fuel capacity needs to be replaced with renewable energy and all new capacity needs to come from renewables in 20 years. For the purpose of simplicity, I'm ignoring all renewables except solar and wind.

For this, over the next 20 years, we need to deploy 9.8 TW of solar and wind. Approximately 50% of that is to replace existing fossil fuel capacity and 50% is for new capacity. At an average cost of 1$/W - this is a high estimate as First Solar (NASDAQ:FSLR) plans to drop the cost of fully installed utility scale solar without subsidies to $1/W by 2017. Plus, solar costs are expected to continue to decline. Wind is even cheaper than solar. But to be conservative, using 1$/W, it would cost $9.8 trillion for the solar and wind capacity. Let's just round that to $10 trillion.

But for solar and wind to have such a high grid penetration, we need a lot of batteries. At 11TW of capacity, daily consumption would be about 110TWh. If we need to store 50% of that (a very high number to be conservative), that is 55TWh.

Currently Tesla (NASDAQ:TSLA) has priced their storage battery at $250/kWh. And prices are expected to keep coming down. Let's say, over the next 20 years, the average price paid is $250/kWh installed, 110TWh of batteries would cost under $14 trillion.

That brings our total $24 trillion. A quarter of the $100 trillion mentioned. And it is likely to be a lot less as prices drop and efficiencies improve. Also this is not $24 trillion extra dollars. Half of the $24 trillion is for new capacity so in theory it would only cost $12 trillion to switch to all renewable energy. But if we only switched existing power plants at their end of life, that would bring the additional cost down to practically zero.

Investing in the Future of Energy

So how does one invest in this trend? Let's look at the ETFs. The Market Vectors Coal ETF (NYSEARCA:KOL) and US Natural Gas ETF (NYSEARCA:UNG) and even the SPDR Energy ETF (NYSEARCA:XLE) are performing poorly compared to the Guggenhiem Solar ETF (NYSEARCA:TAN) in the last year. This is in spite of poor performance by solar stocks regardless of company financials.

TAN Chart

TAN data by YCharts

The top global solar manufacturers - Trina Solar (NYSE:TSL), Canadian Solar (NASDAQ:CSIQ), Jinko Solar (NYSE:JKS), JA Solar (NASDAQ:JASO) and the top American Solar manufacturers First Solar and SunPower (NASDAQ:SPWR) are all expanding capacity as fast as they can. While the performance of TAN is not exactly spectacular, solar stocks, especially Chinese solars are currently significantly undervalued based on fundamentals. And at some point solar companies are likely to be decoupled from the general energy pessimism.

SolarCity (NASDAQ:SCTY), the largest residential installer in the world, plans to open the largest solar factory in the western hemisphere in Buffalo, NY. Even with this massive expansion, the market penetration is tiny and there is room for everyone to grow.

As for batteries, the best bet is Tesla.

The equivalent in the Solar world of an MLP is a YieldCo. Some of the big ones are 8Point3 (NASDAQ:CAFD), Terraform Power (NASDAQ:TERP) and Terraform Global (NASDAQ:GLBL). There is a YieldCo ETF (NASDAQ:YLCO).

Personally, I'm building a diversified renewable energy portfolio while at the same time divesting from fossil fuels because I just cannot ignore the global growth of renewable energy. We live in exciting times where the economics of renewables are so good that the clean factor doesn't even need to play a factor in their deployment.

Disclosure: I am/we are long CSIQ, GLBL, JASO, JKS, SCTY, SPWR, TSL, TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may open/close/modify my position in any of the stocks mentioned in the article at any time.