21 August 2015
by Giles Parkinson

Why ‘God parity’ will be the end of centralised generation

Ever heard of the expression “grid parity”? It’s the term coined to describe the point when electricity generated from rooftop solar panels is cheaper than power purchased from the grid.

In Australia, it occurred in around 2012, and now the cost of solar has continued to fall so quickly that the cost of solar generation is probably little more than one-third of the cost of grid power.

Grid parity is seen to be highly disruptive because of the changes it causes to the energy industry, and the sudden empowerment of customers who are no longer just consumers, but pro-sumers. They don’t just have parity with the grid, but increasingly parity with the power companies themselves.

It turns out that grid parity may be the least of the problems facing utilities. Now we have “god parity” – when the cost of electricity generation falls below that of the cost of the network. As we noted in our piece for The Guardian last year, and for RenewEconomy, it means that even if the cost of coal-fired, gas-fired or nuclear generation (or, for that matter, utility-scale solar or wind) were free, it would be too expensive to compete with solar.

As Charles Yonts, an energy analyst with Hong Kong-based CLSA notes in a new report, this is bad news for centralised generation. It’s also bad news for conventional utilities.

“In this new world, baseload power (ie the stuff that we have all relied on for most of the time for our entire lives) will be like needing a mainframe,” Yonts writes.

“There will have to be some large generation systems, just like big data centres today, but most generation and storage will be distributed.

“This lends itself to further analogies with the internet – an Internet of Energy … Just like we upload / download data now, we will upload/download energy; a transactive economy.”

Australia, as we know, is the proverbial canary in the coal-mine on this issue. Solar generation costs are about 10-13c/kWh, below what most customers pay for network costs. As battery storage costs come down further, it will be inexpensive enough for millions to potentially get off the grid and/or build microgrids.

Yonts’ source for these forecasts is Tony Seba, the Stanford University academic who predicts that Silicon Valley will make oil, nuclear, natural gas, coal, electric utilities and conventional cars obsolete by 2030. Seba expanded on the “God Parity” theory in a blog last year.

“By 2020, rooftop solar in sunny areas like the US Southwest will generate electricity onsite at less than the cost of transmission and distribution.

“This bears repeating, a house, a business, or a Big Box store in Los Angeles, CA, or Phoenix, AZ, will generate solar for less than what their centralized generation utilities charge the ratepayer for transmission and distribution costs. This means that it won’t matter how much these conventional generation facilities cost.

“The cost of generation plus the network (transmission and distribution) will be more expensive than onsite solar generation. How many utility executives are losing sleep over Walmart generating its own solar electricity, let alone getting into the electricity retail business?

“Even if the utilities miraculously invented a new technology that used the ‘God Particle’ to generate electricity at a cost of zero (remember the nuclear promises of ‘too cheap to meter’?) they will not be able to compete with solar self-generation.

When the cost of the network (transmission and distribution) is higher than the cost of rooftop solar generation the market will hit “God Parity”.

At this point, Seba says, centralised generation will not have a business model, and most utility-scale generation assets will be stranded.

This, Seba says, will start happening around 2020. Of course, it is already happening in Australia, and Seba’s prediction of how the utilities will respond is instructive.

“The only way utilities might even stay alive after that is to work through the regulatory system to maximize short-term cash flow at the expense of ratepayers,” he says.

And guess what, that is exactly what is happening in Australia. As we reported earlier this month, the utilities lobby is proposing to change depreciation rules that would allow them to recoup their investment more quickly than they do now, and hit consumers with the extra costs. The alternative, they say, is to charge all users for the grid even if they are not connected. Even the utilities lobby admits this is not practical, and not fair.

Seba goes on: “Utilities may not like distributed solar, but they will sure try to make money from this exponentially growing market without investing a single dime. Solar taxes, anyone?”

Hey presto, that is what is happening now. In Spain, it is flagrant, in Australia slightly more subtle – extra network charges for households with solar being just the start.

The problem comes down to the inability of these massive businesses to deal with a new business model. Like the arrival of digital photography, established businesses don’t know how to react when the marginal cost of production is zero.

Kodak found this a decade ago. It failed not because it did not develop digital photography, it did. As Yonts notes, Kodak got killed because it didn’t realise the marginal cost of digital imaging was zero, and they wanted to grab a slice of each photo – but that was a slice of zero.

The new (digital imaging) paradigm required new business models. So does energy generation, because the marginal cost of generating electricity from solar and wind turbines is also, effectively, zero.

Like the digital camera, and PCs and mobile phones, established technologies are being “disrupted from below” by products that were once dismissed as toys, but have improved at a fast rate.