Finance & economics | Sunburst
Cheap solar power is sending electrical
grids into a death spiral
Pakistan and South Africa provide a warning for other
countries
The Economist, Feb 13th 2025
In 1812, Frederick Winsor, a madcap entrepreneur, invented the public utility. The
idea behind his Gas Light and Coke company, which would supply residents of
London, was that instead of each household buying its own energy—bags of coal,
bits of firewood—the stuff would be piped directly to them from a central location.
More customers, with differing patterns of demand, would allow power plants to be
used more efficiently. It was a natural monopoly: scale would spread the cost of the
gasworks, the pipes and so on across large numbers of customers, each spending
less than they would individually to consume just as much. The idea of “energy as a
service” spread across the world.
But cheap solar power is now breaking the model. Last year Pakistan became the
world’s third-biggest importer of Chinese solar panels. Many were destined for the
roofs of commercial and industrial outfits or farms, to replace diesel generators.
Pakistan has sky-high energy prices, a legacy of expensive contracts to pay for
capacity from often Chinese-built coal plants. The adoption of cheaper, cleaner solar
power is a welcome development. At the same time, however, it leads to a vicious
cycle. The costs of running the grid and paying for coal power fall on fewer people,
who then have more reason to opt out, undermining the economics of the whole
enterprise.
South Africa has seen a similar development. “Load shedding” by Eskom, a state
owned energy firm, cuts off users when there is insufficient electricity to meet
demand. This has led to a solar boom, causing financial problems for municipal
governments, which have to buy increasingly expensive power from Eskom to sell
on to consumers. By November they had unpaid bills of 95bn rand ($5bn, or 1.2%
of GDP) with the firm. In Lebanon, where the state energy company limited
electricity generation to a couple of hours a day in 2019, the amount of installed
solar power rose from 100 to 1,300 megawatts from 2020 to 2023. Rooftops in
Beirut’s richer neighbourhoods are covered by dark panels.
Even in America, high energy prices and blackouts after natural disasters have
persuaded people to go off-grid. Seyyed Ali Sadat and Joshua Pearce, both of
Western University, have found that in parts of five states a mixture of solar panels,
batteries and diesel generators is a cost-effective alternative to relying on the grid.
And prices of such systems are falling by around 9% a year, they estimate, owing to
cheaper batteries and solar panels.
For optimists these trends present a vision straight from the green movement of the
1970s. Back then, Amory Lovins, an energy analyst, coined the term “soft energy
path” to describe a future in which power would be renewable, decentralised and
small-scale. “An affluent industrial economy could advantageously operate with no
central power stations at all,” he wrote. Libertarians cheer the shift, too.
Technological change is making electricity markets more “contestable”, says Lynne
Kiesling of the American Enterprise Institute, a think-tank. The possibility of
disconnecting, even if unused, means that natural monopolies face the threat of
defection.
Daylight robbery
Yet there are drawbacks to the change. One concerns efficiency. Over its lifetime, a
solar farm’s per unit cost of energy comes to around a quarter of that from rooftop
solar, estimates Lazard, a bank. There are economies of scale in installation and
maintenance. On top of this, lots of self-generated power will ultimately be wasted.
Moreover, the upfront cost of quitting the grid typically makes it a viable option only
for the rich. Since wealthier Pakistanis can pay for their own solar systems, poorer
ones are forced to bear more of the costs of the grid or do without electricity
altogether. In Lebanon the lack of regulation has made the country “a dumpster of
low-quality solar systems and batteries”, says Jessica Obeid of the Middle East
Institute, a think-tank. The small firms that crop up to install them go bankrupt and
cannot provide maintenance.
Policymakers are now attempting to come up with solutions. “You can make solar
play nice with the grids,” says Jenny Chase of Bloombergnef, a research firm.
Pakistan’s problems emerge from its legacy of high-cost coal power and the way in
which customers are charged: fixed costs arising from transmission and distribution
are paid back through hourly prices, which do not flex much according to demand.
For the moment, few people have energy-storage systems, which means that they
use the grid as backup rather than disconnecting altogether. As a consequence,
those who are able to afford a solar system can free ride, enjoying their own
electricity when the sun shines and making use of the grid for artificially cheap
power when it sets. Residential consumers also enjoy “net metering”, gaining credit
for supplying electricity during daytime when it is less valuable. Eliminating such
incentives would help spread the cost of maintaining the grid in a fairer manner.
Yet the best solution would be for energy firms to respond to the competition and
sort themselves out. In Pakistan they often fail to make consumers pay their bills. In
South Africa, as Eskom has at last managed to curtail blackouts, the solar boom has
slowed down. Although decentralised energy production may be destabilising, it
does mean that providers have an incentive to improve. Rooftop solar offers an
alternative to a monopoly that can no longer be considered natural. ■