Morgan Stanley
  • Research
  • Jul 27, 2017

Renewable Energy Revolution: Research

Learn how the economics of renewable power continue to improve and how solar and wind energy are on track to become the world's cheapest power sources.

The politics surrounding climate change and calls for greener sources of energy remain contentious. But beyond global accords and national policies, market forces are now making clean, renewable power a competitive lower-cost reality.

In central regions of the U.S., wind is now the least expensive type of power.

“Numerous key markets have reached an inflection point where renewables will have become the cheapest form of new power generation by 2020, a dynamic we see spreading to nearly every country we cover,” says Stephen Byrd, who leads coverage of North American power and utilities and clean energy industries, and has been watching developments in this sector for the past several decades.

Thanks to years of heavy investment in new and more efficient technology and manufacturing capacities at greater scale and less cost, wind and solar power are winning over perhaps the most significant constituent in the global energy market: the large-scale utilities that generate, store and distribute power across vast energy grids to industrial, business and residential consumers. Globally, the rise of renewables is set have a dramatic effect on utilities, presenting investors and consumers with unique opportunities—as well as some potential pitfalls.

And thanks to utilities’ rising adoption of renewable sources of energy, the U.S. now appears to be on track to meet its original Paris accord carbon-reduction targets, even if the country pulls out of the pact, says Sustainability Analyst Eva Zlotnicka.

New Tech & Cheaper Supply

How did this happen? First, solar panel manufacturers have spent the past few years in a race to ramp up production, finding cheaper and more efficient ways to make panels in the process. The result: An oversupply of solar panels that pushed down panel prices by 30% in 2016, with another 20% decline expected this year, according to the Morgan Stanley report. With panels often accounting for up to 40% of utilities’ cost when building large-scale solar energy plants, falling prices mean more affordable solar development.

When it comes to wind production, the savings are all about physics. Manufacturers have been increasing the length of wind turbine blades over the past several years, while engineers are adding more height to wind turbine towers. Both factors have resulted in big changes to power production and efficiency, ultimately reducing the cost of wind energy, Byrd notes. For instance, in central regions of the U.S., wind is now the least expensive type of power, at about $30 per megawatt hour, compared to $40-$60/MWh for natural-gas-fired power generation, the next cheapest form of fuel.

This seismic shift toward renewable power will have significant effects on the performance and profit of the global power industry. “Utilities with deregulated power plants, which must compete to sell power, generally will experience greater upside if they are leaders in renewable energy development, and additional downside if they own large fleets of fossil and nuclear power plants in competitive markets with cheap renewable energy,” Byrd says.

Global Jolt

Globally, India's energy sector could feel the greatest impact. Solar power there recently reached a tipping point, becoming more affordable than coal. While this is significant news for a country that is the world's third-largest source of carbon emissions, it may disrupt India's coal power generators. The latter have played a big role in doubling the country's coal capacity over the past few years. “Renewables have achieved grid parity, and the first stage of disruption in the market is underway. Grid parity for storage and long-term power contracts’ expiry would be the second and third stages of disruption,” says Girish Achhipalia, who covers Indian utilities, as well as industrial and agricultural companies.

In the U.S., meanwhile, affordable renewables will dramatically change the carbon makeup of many utilities, and could ensure that the country exceeds its original targets to reduce greenhouse-gas emissions under the Paris climate accord agreement—regardless of the current political winds, says Zlotnicka.

A micro example of this comes out of Texas. While the state has opposed the Environmental Protection Agency's Clean Power Plan, it actually leads the country in installed wind capacity—because for Texas utilities, wind is simply good business.

Internationally, regions such as Mexico, which is riding a second mover advantage with solar power development, also stand to benefit from the shift to renewables. The clean power economics will have less of an effect on European utilities, but that is because many of them have already transitioned to renewable energy sources.

And the Winners Are …

It may be too soon to call this a win for the planet, but consumers of all stripes, as well as forward-looking utilities and savvy shareholders, stand to reap the rewards of this renewables revolution. Low-cost renewables would reduce consumer power bills, which in turn could fuel more consumer spending and economic growth, and lead to more investment in renewables—or what Morgan Stanley analysts consider to be a “virtuous cycle.”

In addition, utilities' focus on replacing carbon fuels with clean power also typically improves their regulatory environment, which means a lower-risk operating environment that can bode well for bottom-line results, spurring more investment in projects that modernize the power grid, Zlotnicka says.

On the flip side, utilities that don't capitalize on the affordability of renewables and stick with fossil fuels could experience lower profitability. “We see this trend, which has been evident in the U.S. and Europe, spreading to India, China, and South America—in many cases with much more severe effects than generally appreciated,” Byrd says.

For more Morgan Stanley Research on the outlook for renewables and the energy sector, ask your Morgan Stanley representative or Financial Advisor for the full report, “What Cheap, Clean Energy Means for Global Utilities” (Jul 5, 2017). Plus, more Ideas.