This graph shows in black how much solar capacity was added globally each year, and in yellow it shows the path of solar capacity that experts had predicted each year. As you can see, not only did the actual capacity exceed predictions every year, growth of global solar capacity is already exponential, meaning that solar power is now projected to become so cheap that it will dominate the global energy mix by either the 2030s or 2040s.
This is why, in a deep-dive essay and related articles, the Economist has explored various questions such as, how did the solar revolution happen? How will it change our economies? And, importantly, given that China now all but dominates solar panel production, how will it change the global economic order?
Luckily, for this video collaboration with The Economist, I’ve been granted access to insights and lot’s of charts that help answer these questions, and give us a glimpse into the massive challenges and opportunities for our economies in the upcoming age of solar.
So, let’s delve into the fascinating journey of how solar power is already revolutionizing the global economy, starting with
How we ended up with a solar revolution in energy
Now, this is where you might expect a technical story about how solar cells became much more efficient or something like that. But, since this is the Money & Macro channel, I’d argue that, if we really want to understand how technology adoption becomes exponential, we need to look at the economics of innovation and, more specifically, at two distinct investment stages that make technological innovation possible.
During the first investment stage it is highly uncertain whether or not a new technology will be adopted. Therefore, in this stage the bulk of funding needs to come from governments. Indeed, The Economist notes that, initially, solar
“demand was created and sustained by subsidies early this century for long enough that falling prices became noteworthy and, soon afterwards, predictable.”
Now, that predictability is crucial if we want to get to the second stage, the exponential growth stage, which is funded for a large part by private investors. You see, while some investors have a lot of money, their investment capacity is still dwarfed by that of the government, which invests on an economy wide scale. So, because private investors are essentially less diversified, they need more predictability than the government before they will invest in a technology like solar. Luckily, given that buying and installing solar panels has now become the largest single category of investment in electricity generation, solar now seems to have entered that second investment stage where we have some predictability and therefore the fate of solar no longer completely depends on government support.
Instead, this new exponential stage of so lar adoption is dominated by a powerful economic feedback loop in which increased production reduces costs through both economies of scale and continued learning by doing. As a consequence of falling prices, demand for solar panels will then go up even more. Then, as demand goes up, investment and prod uction will again increase, and then costs and prices will go down further, and so forth.
And, if this feedback loop continues, the Economist notes that an optimistic scenario calculated by dr. Rupert Way and his colleagues from Oxford university will become increasingly likely.
In this scenario, where both solar and wind energy continue becoming cheaper, exponential growth will naturally lead to solar, wind, and other renewables to dominate the global energy consumption mix in just a couple of years.
But, is this a realistic prediction, or just some wishy washy hippy thinking? After all, as The Economist notes, even exponential growth will have come to an end at some point. Could it be that factors like the need for affordable storage technology, the fact that heavy transport and industries are hard to electrify, or a global pushback against Chinese exports will halt the exponential growth of solar?
Well, after reading this essay from the Economist, I’ve become convinced that the feedback loop can no longer be held back for two reasons. First the price of electricity of both new solar and wind power plants has already fallen below the price of other energy sources.
On top of that, the price of batteries —which are needed to make solar power useful when the sun is not shining— is plummeting as well, as that sector gets close to its own virtuous private investment feedback loop.
So, in short, the world is now seeing exponential growth of solar power capacity because government subsidies followed by private investments have already pushed solar to the point that it is now an economic no-brainer. And, if growth remains exponential for a few more years, then of course, the logical consequence is that solar will soon overtake all other sources of energy, just as dr. Way and his colleagues have predicted in their most optimistic scenario.
Indeed, in some countries, like Australia, renewables have already seen a rapid rise and are now responsible for almost 36% of all energy production.
Therefore, I think The Economist makes a really strong case that The exponential growth of solar power will change the world. So,
2 How exactly will Solar’s exponential rise revolutionize our economies
Well, here I think it will be helpful to make a distinction between two groups of countries. In the first group electricity is pretty much always available. But, it is still pretty expensive, holding back many applications and innovations. In the second group of countries, electricity is not available everywhere, and —importantly— its supply is frequently interrupted in the form of blackouts.
As an example of that second group, The Economist highlights Africa, where roughly 600m people still cannot light their homes. For these people, the solar revolution is already providing some much needed relief. In these countries, small solar home kits are now not just a cheaper alternative to unstable grid power, they are an alternative to expensive diesel generators, on which half of African firms currently rely because they are held back by dysfunctional government controlled energy monopolies, like South Africa’s Eskom. If Solar can help these countries overcome these shortcomings, they could soon join the first group of countries, where electricity is reliably available, even though it is still expensive.
Luckily, in the first group, expensive energy may soon be a thing of the past thanks to the solar revolution . This really excites me because it represents a new economic era. Indeed, if we go back to this graph from the Economist, we can see that the rise of coal coincided with the industrial revolution in the 19th century. After that, the age of oil enabled many of the innovations of the 20th century.
But, after the oil shock of 1970s, the price of oil, corrected for inflation, never really came down again. This energy shock has been widely blamed for slowing productivity and economic stagnation in industrialized economies after the 1970s. A slowdown that even the IT revolution of the 1980s and 1990s could not fully undo.
However, while we may predict productivity will re-accelerate thanks to cheaper energy, humans are historically very bad at predicting exactly what types of new innovations we will invent next.
That being said, in their essay, The Economist suggests that having abundant energy, at least during certain parts of the day, could enable innovative brute force solutions such as drastically speeding up the ventilation in buildings and vehicles all over the world to reduce the spread of airborne diseases or even to grind rocks on a massive scale to spread dust over the world’s oceans to capture CO2 from the atmosphere.
Exciting stuff. So, yeah, while we don’t yet know exactly what innovations abundant solar energy will enable, I am very optimistic that people will come up with so much new amazing stuff that this could power a new global productivity boom.
However, as we’ve seen in the age of oil, a new form of energy can bring great wealth to some countries, while ruining the lives of others. So, this raises the question:
How will the solar revolution change the global economic order?
To answer that question, let’s first have a look at this map from The Economist, which shows in black circles current solar power capacity, of which the bulk is located in China, Europe, the US, Japan, India, and Australia. However, as you can see here, there is a lot of land, colored in darker shades of orange, that has the most solar potential, and really not a lot of solar capacity yet. These areas are potentially big winners from the lower cost of solar panels, which could even power air-conditioning units on a massive scale, making living, and importantly manufacturing in these areas potentially much more viable.
But, of course all of that demand will need to be matched by increased supply, where the Economist reports that China now essentially dominates the solar industry to such an extent that the country
“is now able to produce more than twice as many solar modules as the world installs each year.”
Therefore, other major powers like the United States, India, and Europe have a difficult choice to make. Either they benefit from cheap, subsidized solar panels or they protect and subsidize their own industries.
The US has seemingly chosen the second path, when it chose to subsidize its solar industry with its inflation reduction act, and recently increased its tariffs on Chinese solar panels from 25 to 50 percent.
In stark contrast, Europe has effectively chosen the first option, given that its solar installation boom is 95% powered by cheap Chinese panels. And, it could remain that way, given that, according to the Economist, relying on Chinese solar is far less dangerous than relying on Russian gas for two reasons. The first is that, unlike with natural gas, even if the supply of panels can be cut off, it won’t create a crisis right away as existing panels will keep generating power for years. Second, while Europe’s solar panel production industry will suffer a heavy blow, the bloc could fairly easily switch to other subsidized producers, such as those in the US, in case China turned hostile.
Combine these two reasons with the facts that most solar jobs are in installing panels rather than producing them, and that by importing cheap solar, countries can make their other industries more competitive, I expect many countries will choose to benefit from cheap Chinese panels.
As a counterpoint to the narrative of exponential solar growth I presented in this video, I do want to mention that, in a recent op-ed, professor Brett Christophers has pointed out that the exponential part of global growth right now is mostly due to the Chinese installing so many solar panels. So, if it wasn’t for China, global solar growth would not be exponential.
However, I think you can counter that argument by saying that China’s solar frenzy has pushed solar prices so low that there is now a huge incentive for the rest of the world to catch up to China in the upcoming years.
Therefore, I still think that the optimistic case the Economist made is really convincing: solar production has reached critical mass, making it the cheapest source of energy in the world. This could spark another era of global growth and provide unprecedented opportunities for poor countries to catch up.
But, just as with the age of oil, the age of solar will radically alter the geo-economic balance of power. A new order that we cannot fully predict, but where the solar supply superpower will likely be China. This leaves all other countries with a choice: subsidize your own industry at a high cost, or depend on China for panels so that you ca become more competitive in other areas.
At the same time, as the influence of solar rises, the influence of oil will decrease. This will also have massive geo-economic implications. However, that is beyond the scope of this video, and therefore, I highly recommend that you read all about it in the Economist, who recently published a special report “the long goodbye”, about the end of oil. Then, I recommend following up by reading this article about how Saudi Arabia might actually transition from an oil juggernaut to become a solar star. Finally, to complete our discussion about predicting what will happen with solar next, I highly recommend you check out this article about what The Economist wrote about solar power from 1955 up to now. An article that goes into both what they got right, and ,importantly, what they got wrong.
In my opinion, this level of self-reflection is sorely missing in the current age of media and it is why The Economist has been a part of my media diet since well before starting this channel. Whether I’m commuting and listening to their daily world-in-brief update, or diving into their in-depth analyses on the app and website, the Economist consistently provides rigorous reporting and comprehensive analyses.
Therefore, I’m happy to say that if you want to stay properly informed, the Economist is no w offering a 20% discount on their annual subscriptions, just for Money & Macro viewers. An Economist subscription not only gives access to all of their articles, but also to all of their podcasts, newsletter and daily news summaries. So, if you want to stay properly informed about the global economy, then go to economist.com/moneymacro to take advantage of this unique discount or follow the link in the description or top comment below.