Renewable Energy

The Old Grid is Dead: Long Live Local Solar

Solar panels on the roof of a home
Credit: Kent Johansson / stock.adobe.com

Our global power industry was built around large, centralized power stations, mostly coal and natural gas. Electricity is brought to users via long, high voltage transmission lines that are connected to substations that lower the voltage and connect to a distribution network. The U.S. electric power grid, for example, is the world’s largest machine. The reality of these fossil fuel installations is that much of the energy content of fuel sources like coal, diesel or natural gas are wasted by inefficiencies in the conversion of energy and later on in losses in the transmission and distribution processes. How do we make electricity generation more efficient?

The last decade has been transformative for solar and batteries. Not only is solar now the cheapest source of electricity, but most analysts also expect solar panel prices to continue to go down. Therefore, it makes economic sense to replace outdated, centralized, and high emissions infrastructure with a local, distributed and green source of energy that is only increasing in price competitiveness. The current energy crisis and fiscal stimulus offered in many jurisdictions (like the new policies brought forward in the U.S. under the Inflation Reduction Act) are prompting users to embrace behind-the-meter products that allow users of electricity to also be producers, termed "ProSumers."

Immediate savings, a hedge against further future increases in electricity rates and security of supply are the three main reasons consumers of electricity are actively looking for ways to move away from full reliance on the big grid. Self-sufficiency is now an alternative to the local utility and many consumers are adopting the behind the meter solutions.

Sunrun (RUN) is the U.S. leader in residential solar rooftop installation which is, alongside energy efficiency, the most robust (and clean) short term solution to the energy crisis. In the words of Sunrun’s CEO Mary Powell: "The confluence of a growing understanding about the virtues of powering your home with solar energy and storage, compounded by rapid utility rate inflation across the country, is driving record levels of demand. Rapidly escalating utility rates sustain a very strong customer value proposition."

Solar rooftop adoption is a global trend speeding up

The house of the future is a self-sufficient home, one that meets its energy requirements via the use of solar systems combined with energy storage solutions, and powers and connects electric vehicles. It also switches out methane-burning components for those powered by solar for water heating and to power heat pumps. A relevant positive externality is that the self-sufficient home is close to running as a “net-zero,” beneficial to reaching our collective climate goals. However, the primary two reasons why countries across the globe are now promoting “local solar” is because it allows consumers to save money and give the countries security of supply. 

In August, the U.S. passed legislation supporting solar rooftops, and the name of the program says it all – the Inflation Reduction Act. The European Union has been elevating solar rooftops as a solution since the invasion of Ukraine in February. Germany recently adopted new measures to promote short term solutions to their dramatic energy crisis; the country recently passed legislation to support solar installations below 30 kW in size, exempting the purchases of value added tax (VAT). Also in September, the French government announced new measures to promote solar energy for collective and individual self-consumption.

These measures are yielding results. Earlier in September, Spanish grid operator REE confirmed the sunny European country is reaching the milestone of 20 GW of solar PV installation, ca. 15% of total installed capacity in the country. Of that total, 17.1 GW is large utility scale installations, and 2.5 GW is behind the meter, so “local solar” is already over 10% of all solar capacity in Spain. The level of penetration is already much higher in other parts of the planet.

The World Bank has mapped out Solar PV potential globally. They estimate that 86% of the global population live across 150 countries where the average daily output from solar PV is above 3.5 kWh/kWp. If we look at Brazil and Australia, countries where the difference between the maximum and minimum output across seasons is below a factor of two, we can see why they have embraced distributed solar in a massive way. In Brazil, from the 18.6 GW of solar PV installed capacity as of August 2022, 12.7 GW (over 68%) is distributed, across ca. 1.2 million systems the vast majority (over 78%) is in commercial buildings, while 5.9 GW (32%) is utility scale in front of the meter.

In Australia, regulators are promoting smart energy, beyond replacing coal generation with renewables, it is about giving the ca. 10 million homes in Australia access to solar rooftop installations at $1/W of capacity, which after financing translates into ca. $60/MWh which is 20% of the electricity tariff from the utility. A noticeable milestone was reached in the Western Australian non-interconnected grid, when a few weeks ago 72% of the total electricity output was generated from solar rooftops. The grid does not have utility scale batteries yet, and that is the next phase in the development of the “local solar” innovation, firming the intermittency of solar energy.

Where we will be: Solar rooftop to represent half of all solar PV in Europe

The EU RE Power has increased the bloc’s ambition for solar energy. As we explained above, policy is in place and solar rooftops are being built. If the European Union Solar Rooftop Initiative yields its full results, the countries will be adding 58 GW of “local solar” by 2025. A key part of the push is a solar rooftop mandate for all new public and commercial buildings by 2026, all existing public and commercial buildings by 2027 and all new residential buildings by 2029.

That brings us to the end of the decade. By 2030, the share of wind and solar energy in Europe will double from the current total of 33% to 67%. By then, solar installed capacity in the block will be ca. 600 GW, representing the largest electricity source in the EU - with more than half coming from rooftops.

In the U.S., the Inflation Reduction Act accelerates the adoption. If we consider the U.S. Department of Energy Solar Studies report, the U.S. could be adding ca. 1,000 GW of solar to its grid by 2035, of which over 25% could be “local solar." Between 300 GW of solar rooftops in Europe and 250 GW in the U.S., the world will have reshaped its grid by 2035, with over 500 GW of solar capacity installed at the point of consumption.

Rooftops enable a structural shift: Powering cars, heating homes and alleviating pressure on transmission lines

Local solar does much more than produce electricity at the point of consumption. It provides an alternative that is not only cheaper and price-stable, but also decarbonizes the grid. Solar is the technology that is at the base of the electrification of things, and solar rooftops will increasingly power EVs, heat pumps and charge stationary batteries for clean energy storage while structurally reshaping the grid. That is because the solutions are also digital and maximize energy efficiency. We will be able to bring demand response to another level, and the internet of things will help us not consume electricity when it is more economical to shift the load to a different time. Smart meters, smart thermostats, and smart EV chargers in what is called “Vehicle to Grid” (V2G) are all in place and the high fossil fuel prices accelerate the adoption of these more sustainable alternatives.

The energy crisis in Europe is dramatic and it is hard to criticize Germany for keeping running the coal and nuclear plants that had been marked for decommission for longer, while dealing with the shortage of NatGas from Russia. We still rely on the old, dated, fossil fuel-based grid, but local solar will soon be ubiquitous in buildings of all sizes and shapes. Long live the decentralized, digital, deflationary, democratic, decarbonized smart grid.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Gabriela Herculano

Gabriela (Gaby) Herculano has over 25 years’ experience in finance and in energy. She grew up in Brazil, is also a proud citizen of Portugal and has lived and worked in the U.S., Singapore and the UK. Gaby started her career in equity research, covering the Latin American electric utility sector at Lehman Brothers. After business school, she moved into the buy side, where she worked at greenfield project finance and M&A at energy developer AES Corporation and as an Executive Director at GE Capital’s Energy Financial Services team in London.

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