Solar: Powering the transition
Solar power has huge potential to be a driving factor in the energy transition over the next five years. In fact, Harald Överholm, CEO and co-founder of Alight believes solar could account for up to 50% of global energy production within our lifetime.
In this episode Harald discusses some of the critical success factors of solar energy, including its low price, sustainability and scalability – all of which result in solar being one of the most accessible energy sources available for both the corporate and consumer markets.
We also discuss some of the incremental advances in solar technology that are helping to reduce costs and boost demand from larger corporates, and the impact this has on the industry as a whole.
Finally, Harald describes the vital role of entrepreneurs within the renewable energy industry to bring new passion, vision and experience, all of which will help increase momentum for the energy transition.
MATHIAS STECK Hello and welcome to the tenth series of the DNV Talks Energy podcast. I'm your host, Mathias Steck. In this series we take a fresh look at the role businesses play in lowering the world's carbon emissions and how they can work with governments, policymakers and other key decision makers to transition faster to a clean energy future.
In this episode we explore the role solar plays in helping to accelerate the energy transition and I speak with Harald Överholm, CEO and co-founder of Alight about some of the reasons behind the huge increase in demand for solar power. Harald talks about the exciting potential for solar energy to account for up to 50% of global energy production within our lifetime, thanks to a combination of low price, sustainability and flexibility and the incremental advances in solar technology that are helping to fuel demand from corporates. Harald also describes the need for more entrepreneurs within the energy industry to drive forward the transition with passion and vision. We hope you enjoy the episode.
Harald, we want to talk about the importance of solar energy for the energy transition today but before we do this, it would be great if you could give us a little bit of background of yourself and explain what Alight is doing.
HARALD ÖVERHOLM To me solar has been a bit of a calling I think throughout my career. I've spent 15 years now in solar and clean energy in different ways. I graduated in 2005 as a renewable engineer and I think even at the time I was very, very focused on just going into clean tech and finding a way to turn that into my career.
Why is it a calling? I think it's just the fundamental logic of climate change and the enormous challenge that that means. It feels like such a critical issue to work on that I've never had the patience to work on anything else really. And I remember how solar became important to me because when I graduated in Sweden I knew renewables but solar was still really small. Renewables in Sweden was much more about biomass and wind.
And then my first job as a clean energy investor, I was sent to Milan in 2006 for the EU PVSEC conference and this was a fact-finding trip for us because we didn't know much about solar. As I got there, I didn't know what to expect really. It was something that I hadn't engaged with much. But I got there to Milan and I got to the conference centre and there was this really massive exhibition area with what I just immediately realized was highly professional people from across the globe. And I was just struck by how this industry was ready to go.
It wasn't at all a future industry. It was an actual functional industry. And it seemed to a large extent to also be perhaps the key answer to the climate change issue. So, from that point on, from understanding how ready the industry was, for me that was a movement I really wanted to be a part of.
So, I spent a number of years as a clean energy investor and then increasingly my interest became how can solar be growing on a subsidy-free basis? How can it be an actual commercial organic process, because that seemed to be very important in terms of making it long-term viable, not just something based on the individual decisions of governments, but something based on demand.
Then I was able to go to Cambridge and do research for three years. So, I left my investor role to go to Cambridge and do research. That was the second epiphany for me in solar because I had identified someone, a guy called Jigar Shah in the US who became my hero at the time. He built SunEdison which was arguably the first company that turned solar into a commercial business model.
Jigar seemed to have all the answers but I for some reason I just hadn't found a way to reach him. But at Cambridge by chance I met someone who said, oh, Jigar Shah, I know that guy, I'll send him an email right away. And he sent off an email and Jigar wanted to meet me in the US, and so that became the start of my PhD period at Cambridge.
I was able to do my PhD about the US market for subsidy-free solar, largely based on learning from the entrepreneurs like Jigar. And then seven years ago when I was done with the PhD, so based on my findings from the US, we started Alight with a vision to take subsidy-free solar as a packaged business model to Europe and bring the US experience to Europe. So, that really goes back to solar being a calling, but I think being able to turn it into an organic business model is really how you put that calling into action for me and Alight symbolizes that to me.
HARALD ÖVERHOLM I think solar is going to be very important for the energy transition but the riddle here is that thus far it's not been that important if we're honest with ourselves. At this stage, the last time I looked, it is 2.9% of global energy production. So, you have this massive potential, but you still have a small footprint. And as far as I can tell these last two or three years have been really a tipping point for solar. So, maybe now is the point where solar starts to prove that it actually will be important.
I think last year and the last two years solar has been the most installed new energy production technology in the world globally. So, almost I think last year 50% of the new generation capacity that was installed was solar, and last year the estimates for levelized cost of energy, so the cost of producing energy from different types of energy sources, solar was the cheapest globally. And Lazard is the company doing this global outlook.
That really symbolizes something because that's happening now over these last two years. So, probably this is where we will start seeing solar really grow to become very important internationally. How important it's going to be, we've all seen the scenarios of IEA, how they've forecasted solar going forward and being consequently very wrong from every year that they've tried to. So, perhaps none of us know.
DNV, certainly yourselves, you have long-term forecasts so I shouldn't be the forecaster here, but I think it's not crazy to think that solar is going to be 50% of global energy production at some point within our lifetimes. So, I think solar is heading towards a very big role to play.
HARALD ÖVERHOLM Yes, so as you say the main success factor for solar of course has been that it's become very cheap in terms of producing energy. And the second very obvious success factor is that it's clean, so it fits into every kind of framework, whether you're an investor or you're a customer or you're a government, solar is something you want to engage with.
But I think what's perhaps sometimes overlooked in the general conversation is how flexible in terms of size solar is. And why is that important to deployment rate? Well, it is because it means that physically you can do solar in so many different situations. You can do the massive mega scale rollouts in a desert somewhere, but you can also do the individual rooftops and everything inbetween. You can do the floating solar as we've seen, agri solar, all these things coming along, and you can't compare that to any other kind of energy.
Certainly with wind, which is a fantastic way of producing energy, still the land development around wind is always difficult and it's bound to stay so. Not only does this mean that solar is physically very flexible, but it also means that solar can reach a lot more ways of creating value. So, solar can be installed to create value for a single consumer on a rooftop and that's one kind of value. Solar can also be deployed at a very large scale to just create what we call merchant value or speculative energy pricing value from an investor, and there's another five or six use cases that you can think of. So, I would think that that is actually something that's underlying solar growth that is a bit unique for the technology.
HARALD ÖVERHOLM If you look at EU, historically the growth has come from the government basically, from government feed-in tariffs and auctions. Now, that is changing and it's changing to corporates mainly. It's logical that it would be corporates because if you look at power use in society, corporates use about 70% of all of the power that's produced in society. So, it's logical that they would have a say in how the energy system is changing and they would be an important driving force.
Residential will matter too but again it's a smaller part of the equation, and residential by nature amounts to a whole lot more people making a lot more smaller decisions. So, the growth will always be a little bit slower in residential.
So, what we see globally is that corporates are really leading the rollout. I think we crunched a bit of the numbers ourselves in terms of what is driving the EU market. Four years ago, almost the entire EU market was driven by government subsidies in one or another way. And this year, these are our own estimates, crunching data from people like Bloomberg and New Energy Finance and Solar Power Europe, our estimate is that about half of the planned solar build-outs that are confirmed this year, 2020, comes from corporate buyers of clean energy. So, certainly it's a very large shift in the EU right now pointing towards the corporate uptake.
HARALD ÖVERHOLM Yes, definitely. So, the essence of what we do is what's called a power purchase agreement and a power purchase agreement is a business model for solar, where the essence is that the power user - the corporate - is paying per produced kilowatt hour, period. So, they're not paying anyone for the CapEx of the installation. They're not paying for the installation. They're not paying the upfront cost. They're just paying as the energy is produced per energy produced. And something new is then built for them.
So, by signing up to buy energy per kilowatt hour they are making sure that someone else can build something new. So, they're not buying the kilowatt hours from some existing solar plant. They're buying it from something that's being created for them and at the price that should be creating a saving for them that they want certainly.
Now, the whole point of doing this is of course simplicity. So, this is what we inherited from the Americans. We did not invent corporate PPAs ourselves.
We have learned from the US market and we've seen how powerful this can be. It's powerful because it's very easy. This is how corporate customers are used to buying energy. They buy energy today per kilowatt hour from the grid. You are not forcing them to have any kind of behavioural change. You're just helping them to buy new and better energy but in exactly the same way.
And secondly by saving money, if you can use the cost level of solar to really turn it into a saving for a corporate, then you know that you will be driving strong demand. Of course, a lot of corporates are motivated by the green aspect as well but there is almost no one who uses power who doesn't want to achieve a saving. So, if you can create savings, they want in a credible way then you know that you have something that is going to be relevant to look at for almost every power use. So, that's in a sense what we do. We create the power purchase agreements by talking to customers and we source the long term capital in order to be able to build these assets and then own them and manage them ourselves over the long term.
HARALD ÖVERHOLM Yes, that's a good question and first of all let me say there are two big use cases for this. The one is the onsite rooftop. Onsite is typically rooftop but it's when we do something on your own premises. It can be rooftop, but it can also be the parking lot, or it can be the ground next to your rooftop, but it's within your premises.
The other use case is when you do a PPA for a ground mounted solar offsite, so it's a field somewhere out there and we're going to transport the energy to you via the grid or actually obviously transportation is not really what happens but it's a financial and it's a legal contract that makes sure that you get the benefits from this electricity produced. Some corporates will opt for both these options. They will want solar on their own premises but also in order to get a larger volume of solar they will want it from the grid. Others will pick one of these depending on what's most lucrative for them.
HARALD ÖVERHOLM I think it's very similar. Tesla is a very large PPA supplier in the US, so Tesla Energy was originally SolarCity which is one of the pioneering companies of power purchase agreements. So, Tesla would know very well how to do this themselves, and then also perhaps do it for themselves. So, they will essentially create the PPA for themselves.
But essentially, it's exactly this. What they're doing is to create the PPA for themselves but the value of the PPA will be that they save money upfront, it protects them from power price fluctuations over time, it protects them from volatility, and it's of course an essential part of being green or having a strong sustainability footprint. So, I would see that as exactly this kind of driving force.
HARALD ÖVERHOLM Yes, it's very important, isn't it? The grid has been pivotal to all kinds of energy buildouts that we've had but there are probably a lot of things that need to happen to the grid in order to accommodate solar going forward. I am probably not the right person to comment on the details of that, but what I really can comment on and what I think is an un-reviewed point to make here is that the services to the grid that can be provided by solar, because it's increasingly clear that the reliability of the grid, there is a huge role to play for solar, especially when you combine it with storage and you combine it with intelligence that automates the function of the storage, solar can do so much to provide essentially what we call reliability services back to the grid.
And reliability services can be things like frequency and voltage regulation which is not power per se but it's more of the quality aspect of the grid. But reliability services can also relate to actually how, when you produce power in time, you can move power back and forth in time to make it easier for the grid. We've seen a number of cases. There was a great case a few years ago where First Solar in California, the 300 megawatt plant, they optimized it to sell reliability services back to the local grid operator, which I think was PG&E at the time. And they came to the conclusion that they could basically produce almost the full amount of solar electricity from the plant while, at the same time, delivering excellent reliability services back to the grid and with even better flexibility and quality than a comparable gas peaker.
So, this is very interesting, and it tells you something about the untapped potential of distributed energy resources. And then you might ask, so what needs to happen in order for this to really work and in order for solar to really contribute to grid reliability? Certainly, we as suppliers have a lot of work to do in order to activate this functionality, but there's an interesting story here also I think in terms of marketplaces.
So, the grid owners and/or the governments will need to open up sophisticated marketplaces for creating liquidity and creating a pricing point and creating a depth of contracting around these reliability services. And then once we as a market see those price points and we see those markets; we can respond to that and we can build business models around that and deliver a lot of services back.
And then coming back to your original question, the issue is then to what extent can this actually defer other investment costs in the grid? Here's where I'm not an expert, but reading up on what's been seen in California and other places where they've tried this, I think to a large extent actually the projected investment needs in the grid can be partly transferred then to distributed energy operators, if the price point is right and if the marketplace is there.
HARALD ÖVERHOLM Yes, absolutely, and I think the first question as to what's happening on the actual solar production side, sometimes I find myself giving the dull answer to that question, which is that a lot of things are happening but perhaps nothing revolutionary. Really what we benefit from as an industry is just to keep shaving the production cost of solar, and we do that in a myriad of ways in parallel, nothing revolutionary again but just the combined effect of everything from the panels.
There is this constant incremental innovation going on on the panels side and you have probably seen things like bifacial panels that can produce electricity also from the diffused insulation that comes from the back of the panel basically. It's just one of many examples of how the existing crystalline silicon technology is becoming a little bit more efficient, a little bit more cost-efficient every day, and it contributes to the end goal which is the lower cost of electricity.
Now, because of how the solar market is working globally, where typically there's an ecosystem around a finalized solar installation, someone is financing it, someone is insuring it, someone is providing warranties, someone has installed it, etc, it's really an ecosystem that has to work together. And I think because of that we're unlikely to see much traction in new panel technologies.
So, the crystalline silicon technology that we've been using for such a long time now and it's really the first PV technology ever to emerge, the whole ecosystem has adapted to work on that technology. And if we can just make a projection, it seems very unlikely that that's going to change, but instead what you're going to see is a lot of ways in which we keep shaving the production cost. And as far as we can tell the production cost keeps going down by about 10% every year from these learning costs.
So, that was the first question about the existing generation technology. The second question on storage and what's happening in that market, I think just speaking from our point of view as someone in the market who is looking to deploy storage, that's really something we want to do, actively looking at situations. What is the bottleneck? Why aren't we doing that even today?
The bottleneck is squarely I think in terms of the digital automation of how you create value from storage. So, it's not the actual digital side of just running the battery, which is fairly straightforward and it's out there, but more you want the battery to create financial value in a predictable way, because otherwise you can't build a business model around it and you can't finance it, etc.
In order to do that, you have to automate the battery dispatch, so that it really works across a number of situations and that it can create several different financial values on top of each other. So, it probably needs to create some kind of value from frequency regulation and another kind of value from time of use, energy time of use, load shifting, etc. And there's no way you can have an operator that switches on and off the battery. That just doesn't work. So, it does need to be automated.
What we see today in Europe is that when storage is deployed, typically people have customized the software needed for that one single deployment which is obviously what you need to do. But in order to do something more than just pilots, in order to do something repeatable, we will need to see that software get much more adaptable and much more of a platform architecture. That's what we're seeing in the US, a number of very sophisticated companies in the US developing that. But to a fairly large extent you need to adapt to local circumstances and those US companies have not done this for Europe yet.
I think in Europe this is really the bottleneck and in the US that's perhaps not the bottleneck anymore. So, you actually see large scale repeatable storage deployment now in parts of the US and that's definitely where I would like to see Europe in just two or three years from now.
HARALD ÖVERHOLM Yes, it's very important. This is what solar is all about and this is what I feel a lot of times is not understood when we talk about ourselves as a company, what is it that we are really good at? I would actually say we're really good at orchestrating this complex network of actors, and it's everyone from the construction people on the rooftop to the insurance agents that are specialized in solar rooftop insurance, to the utility trading desk that might be the off-taker of the PPA. There are just so many counterparties with so many different perspectives. And that's only from the view of an individual deal, and then when you want to look at it as an industry you can have of course the regulators and all kinds of policymakers, the general public, the grid operators, etc.
Solar is right in the middle of energy security and real estate and finance, and these are three areas that are so critical to a lot of things in society. If I can go off on a small tangent here, there's a great book by someone called Gretchen Bakke and the book is called The Grid. She's a US economic historian who's been doing research on how the electricity grid emerged and one of her key theses that she's using this book to explain is that the grid is a technical thing of course to start with. It's massive. It's the world's largest machinery.
But it's also a cultural being. It's an ecosystem of stakeholders. The grid has grown over 100 years to become the most important central machinery of our society, and throughout those 100 years it's just accumulated a lot of permanent stakeholders with permanent roles and a certain culture of how things are done, their own language, etc. It's really something that is very entrenched.
And now suddenly that whole system is just filled with new actors such as ourselves, and I think basically what you're asking or where I'm heading with this answer is that we have to be, as new actors in the system, we have to be very humble and realize that this is something critical for society and we need to have empathy for how that system is working. And we also need to be humble in terms of how massive it is. It's so big. Electricity is literally the mother of all markets. It's a $2.5 trillion global industry, and with electrification happening that industry is just going to get bigger. And then somewhat here we turn up and say that we're going to disrupt this industry and that's a bold claim.
The industry will be disrupted but it has to be done in a way that's very careful about the service that's being delivered to society essentially.
HARALD ÖVERHOLM My spontaneous answer from the heart to that question is actually we need to build more companies doing good things because I, for one, believe in entrepreneurship and the power of building companies to deliver new products and new services. If I didn't believe in that I wouldn't be an entrepreneur myself. I wouldn't channel my energy and my calling into entrepreneurship.
So, I guess it's a very generic answer and maybe you wanted something more specific. I actually think in most situations that we see right now, what's missing is a certain company. You can even see a lot of times that this is the company that's missing here, and someone needs to build a company and someone with a lot of passion, intelligence and drive needs to put a company in place to solve that issue. So, yes, just more entrepreneurs, that would be my answer.
HARALD ÖVERHOLM Thank you so much, Matthias. It's been a pleasure and truly the grid is one big machinery holding us together, and what is so exciting is the transition that it's going through. So, thank you for helping to shed light on that.
MATHIAS STECK Thanks for joining us for this week's episode. It was a thought-provoking discussion about the huge potential of solar energy to help us transition faster. Next week in the final episode of series ten of DNV Talks Energy, I speak with two of my colleagues, Lucy Craig and Ditlev Engel about some of the key findings from the forthcoming 2020 conclusions report, part of DNV's Transition Faster Together series.
To hear more podcasts in the series, please visit dnvgl.com/talksenergy.