Would a businessman run your country better? (2/2)

Note: this piece was embargoed and meant to be released on the 11th of March 2016.

Last week, we saw a few positive and negative examples of businessmen running countries. Donald Trump is still leading the Republican race. This week we will see a few examples of successful countries without businessmen as leaders. We will find out what skillsets are actually needed and we will thereafter check whether the US presidential hopefuls and the current world leaders share these competencies.

Looking East
When I was a pupil at school, the geography syllabus made references to the 4 tigers or dragons in Asia: Hong Kong, Singapore, Taiwan and South Korea. At that time, there was some French arrogance in covering these 4 smaller countries with good growth rates and large manufacturing base. Let’s cover a couple of successful leaders in these countries.

We start with Singapore, which recently mourned its former Prime Minister Lee Kuan Yew. Lee graduated from Cambridge with the highest honours in Law. During WWII, he learnt Japanese to be able to deal with the occupying nation. He started his career as a lawyer before being seduced by public office. In 1965, as Singapore was ejected from the Malaysian federation, Lee led the country into a major transformation, pushing the income per capita from $500 to nearly $60,000 today. There were several phases of the success story. First develop tourism and beg the British to not destroy the local harbour. Then set up a cheap manufacturing industry, using this harbour in a central location. Third, attract multinational corporations to set up a base in Singapore thanks to world-class infrastructure and the rule of law. In the early 70’s, the likes of Texas Instrument, HP or Hewlett Packard establish Asian bases on the island. Finally, in the late 70’s, develop a financial centre to attract and recycle capital inflows. During these decades, Lee surrounded himself with economists, senior bankers and law professionals, locals or foreigners, in order to keep economic development, fight against corruption and rule of law at the centre of the agenda.

Lee yuan kew young

How a Singapore leader looked like young

In South Korea, Syngman Rhee and then Park Chung-Hee propelled the country from a level of wealth equivalent to Ghana to Spain in 50 years. Both “presidents” shared a teacher background, an early experience of exile (in the USA for Syngman, after evading jail for political activities and Japan for Park, who was enrolled in the Imperial army) where they learnt foreign languages (English and Japanese). Syngman years in the US helped him build the right high-level connections which decided the US to defend the South against the North in the Korean War while Park used his Japanese links to negotiate that Japan paid some War Reparations and made the soft loans that gave the initial capital to create a manufacturing base in Korea.

What about Europe?
One major success to me of the continent over the past decades has been the creation of the EU. The main proponents of the project, the so-called “fathers of Europe” were Konrad Adenauer (Germany), Jean Monnet and Robert Schuman (France), Paul-Henri Spaak (Belgium), Johan Beyen (Netherlands), Joseph Bech (Luxembourg) and Alcide de Gasperi (Italy).

Mr Bech was a lawyer who studied in France and Germany.

Mr Beyen read law, worked in Switzerland in finance at the Bank of International Settlements and fled to the UK during WWII.

Mr Spaak learnt German as a war prisoner and then studied law, becoming a lawyer.

Mr Monnet left home to live in London and then the US – he was perfectly bilingual, a rare thing before WWI! He was a cognac merchant before becoming a politician. During WWII, in 1940, he was sent to the US to negotiate arm deliveries. This is where he met F.D.Roosevelt and convinced him to start re-arming, leading the whole project. He is credited by John Maynard Keynes to have cut short the war by one year thanks to his skillful planning.

Mr Schuman was born in Luxembourg, lived in Germany when France lost territories in 1870 and then became a lawyer.

Mr De Gasperi was born in what was Austria-Hungary (but now Italy) so had command of German from his youth. He read philosophy and became a politician quite quickly.

Finally, Mr Adenauer studied law and politics and also showed entrepreneurial skills by creating the CDU, the party of Mrs Merkel.

Have you noticed a pattern?
Many successful or visionary politicians share a legal education, significant time spent abroad (voluntarily or forced), mastering foreign languages and making connections at the highest level while abroad with businessmen, economists and politicians.

Why are lawyers so prevalent? Governments are here to write and execute laws, not to run a factory. Having a legal background is therefore a necessary condition.

Why is time spent abroad so important? These leaders have been exposed to new ideas and they have built connections at high levels that they have used with great success thereafter.

Foreign languages? All these leaders are multi-lingual. Look at your company or own life – will languages reduce your prospects or improve them?

Final word
Below I summarise the US presidential race as well as some current world leaders. I let you conclude yourselves about the prospects for the US and for the major countries.

US Presidential Race
presidential-race-us

The current world leaders
world-leaders

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Will businessmen run your country better? (1/2)

Bonjour,

First, apologies for the hiatus last week. I am now back on track.
As most people, you must have been following the US elections primaries, especially the Republicans’ race, with Donald Trump defying all the earlier forecasts. Mr Trump mentioned repeatedly that he will bring his business acumen to run better the country. Four years ago, Republican candidate Mitt Romney (a founder of private-equity group Bain Capital) also promoted the same idea. It therefore interested me to check whether businessmen ran countries better.

 

'I don't want to be president when I grow up, I want to be Donald Trump.'

Donald Trump – the youth idol

Pros?
At first glance, a successful entrepreneur or CEO of a multinational seems equipped for running a country. They understand economics – they know the impact of labour laws, trade deals, infrastructure, regulations on business. They master managing teams of people – if they are great managers, they will surround themselves from smart people. They also are used to make tough decision – closing a plant, shedding jobs, buying a rival, risking money on a new venture.

trump grate

They need to oil their message

Donald’s nephews
The US have actually had several examples of entrepreneurs/businessmen running the country. One is not too old: Jimmy Carter (1977-1981). Mr Carter was raised in a poor family in Georgia, spent his childhood in social housing (the only US president ever in this case). His education was completed at the Naval Academy in nuclear submarines after which he took over his father’s derelict farm. He had become a peanuts farmer. He actually did very well, multiplying production and profits. He then entered politics and was an efficient governor, merging agencies, saving costs (good farmer thinking) by being the first person to trust zero-based budgeting (a budgetary process in which every year, each line of spending has to be approved from scratch and justified, often accompanied by a reduction of that spending). A few years later, Anheuser-Bush Inbev used ZBB as an edge to become the biggest beer company in the world.

Jimmy Carter was unlucky that his terms coincided with a deep economic crisis. A lot of his deregulation policies have benefited the man on the street in the US, unbeknownst to them: in 1978, the US deregulated the airline industry, creating the leisure airline market while in 1979, the US authorised craft breweries, that some of you must enjoy today!

Democratic Presidential Candidate Jimmy Carter Leaving California Aboard the

As it was called before Air Force One

Run the country like your business? 
There have been a few other examples in the US of successful businessmen leading the country: Abraham Lincoln had a general store and ran a law practice (he even patented a product!). Warren Harding (1921-1923) was a successful newspaper magnate and ran the country during the boom years of the early 1920’s. George HW Bush (the dad) was a relatively successful oilman (although quite “helped” by local connections). These examples cannot hide some terrible failures. George W Bush (2001-2009) presided over the Great Recession. He previously made 15x his money buying and selling the Texas Rangers sport franchise.

The worst example is Herbert Hoover (1929-1933). A successful mining entrepreneur (among the pioneers mining for ore in Russia – he was not the inventor of the vacuum cleaner), he famously said: “If a man has not made a million dollars by the time he is forty, he is not worth much”. His ascent in politics was through being the Commerce secretary where his work centered on eliminating waste and increasing efficiency in business and industry. He promoted international trade by opening overseas offices to advise businessmen. As the Great Depression struck, he struggled to combat the slump and ended up raising trade barriers and taxes – what a change of heart!

herbert hoover

Famous last word

What about foreigners?
Current examples are rare. Finland is run by a tech entrepreneur – Juha Sipila. Finland is struggling to escape recessionary times and Mr Sipila has had to enter a coalition with nationalists True Finns to continue as Prime Minister. Not as exciting as his corporate career.
In Chile, Sebastián Piñera, president between 2010-2014, built a fortune in TV, credit cards, an airline and the ColoColo football club. During his presidency, a Richter 9 earthquake struck, fires destroyed the wild forest and a volcano erupted. Mr Piñera is now associated with bad luck in Chile.
Finally, there is one entrepreneur in an European country, who started in the construction industry before branching to advertising and then media, who was seen as the saviour of domestic politics given the low level existing at the time. He failed to make as much an impact on the country as he did in his businesses or in the tabloid press.

berlusconi-3

The saviour

To conclude this week, business acumen is not enough and sometimes may not even be useful. We will see next week that a lot of successful leaders in thriving countries have common skillsets, life experiences, education backgrounds and the composition of their staff is not a random affair. Also, by next week, we should have more indication whether Mr Trump will still benefit from enough momentum to become the Republican nominee.

 

Watch out for the new Dutch disease epidemic (2/2)

Bonjour,

Last week, we touched upon the new case of Dutch diseases around the world. While these countries are very dependent on oil and lack diversification, some tried to put some money aside for rainy days and built up financial reserves, constituted in a mixture of cash, debt instruments, stocks and other asset classes such as property.

Severe weather alert
The unexpected fact of the oil price fall has been that rainy day funds are now facing hurricanes: Saudi Arabia already spent 15% of its financial reserves in 2015 and is set to lose at least another 15% this year. Algeria, with an oil output of 1.7m bl a day will have swung from its usual $10bn trade surplus to a deficit of $20bn in 2016. The Kazakh sovereign wealth fund lost 16% over the past 18 months.

cartoon oil brains

One of the symptoms

How did we get there?
At this point we can introduce another economics concept called the Permanent Income Hypothesis. What the concept says is that one adapts its consumption not to one’s current level of income but rather to the expected future levels. So a lower income in one year will not change the spending pattern as long as the future level of income is still expected at the same level. Only a permanent large change in your income level would warrant a change of spending. Our oil producing countries are now only waking up to the fact that the expected future levels were too high.

At the country level, Brazil is finding that 90% of its spending cannot be curtailed given the guarantees it gave to pensioners and civil servants. The following chart shows that many oil producing countries are highly dependent on oil revenues, showing both symptoms of being a carrier of the Dutch disease and affected by the Permanent Income Hypothesis bias. The fact that many countries need an oil price around $100bl to balance their budget shows how fast their spending has tracked the higher oil prices. Oil started trading above $100 only in October 2007 against less than $10bbl in 1999, 8 years before.

_87777556_oil_breakeven_price_624v3

Watch Country Extreme Weight Loss on your TV in 2016.

Spend spend spend
The influx of dollars made these countries feel rich, enabling them to fund generous social programmes such as those in the Middle East, Eurasia or Latin America. Maybe one reason for spending can be found in the story of United Arab Emirates’ Sheikh Shakhbut ibn Sultan, 60 years ago.
Worried that oil revenues would turn the heads of his loyal subjects, he hid the cash received from oil sales under his bed.
Sadly, mice started to eat the dollars so he had to put the incoming notes into the bank. His comical penny-pinching (one had to obtain his royal permission to build a road or open a shop) led to his demise and in 1966, he was overthrown.
Understandably, no other ruler in the Middle-East or beyond were inspired by this experience.

Hillyard-Shakhbut_2830517c

Payments in cash, not Sheikhs

Let me now share the case of Venezuela. Under President Hugo Chavez, the country embarked on a massive spending through the Bolivarian missions. These missions built hospitals, houses, schools…

Very noble objectives which contributed to a fall in poverty rates from 49.4% in 1999 to 30.2% in 2006 according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). However, the ECLAC showed a nearly 7% jump in poverty in 2013, from 25.4% in 2012 increasing to 32.1% in 2013. Local universities now put the poverty rate at 48.4% in 2015. it is now thought that only 10% of Venezuelans benefited from the missions’ money, out of which half were not poor in the first place. Some money could have been saved for rainy days.

chavez-oil-industry

Save save save
Today, there is no more money so profligacy is out of the question and local populations suffer. Algéria, a large oil and gas producer, already lost 25% of its reserves. The last period of low oil prices, between 1986 and 1995, led to a decade long recession and a civil war costing at least 60,000 lives. The country is only now reacting to the fall after thinking for one year that Saudi Arabia’s increased output was just bluff (!) Kazakhstan, best country in the world and third producer of potassium according to Borat, cut spending by 10% in 2015 by lowering the funding for winter sport events and delaying a subway in Almaty.

Some countries try to find original strategies to lessen the pain of austerity. Nigeria is banning imports of several categories of goods as to avoid stocking domestic inflation – inevitably, this creates shortages and substitution with lesser quality goods. Another tactic is more autoritarian: as shortages of many goods accelerated, Venezuela increasingly forced foreign companies to sell to the State their local subsidiaries. The total lack of management expertise led to the collapse of many consumer product supply chains. 80% of consumer products are now missing. You can hardly find toilet paper in shops in Caracas.

store-empty-shelves

Buy one get one free – if you can.

Looking ahead, for the countries affected by the Dutch disease, two solutions are possible: further spending cuts and/or selling assets. Spending cuts will endanger many regimes, which rested on generous handouts to silence the crowds. Firesale of assets are currently depressing global markets.
However, they are a great opportunity for other investors to get involved at better prices. For instance Saudi Arabia is considering opening the capital of Saudi Aramco, its oil producing company, to the public. This move is done in a position of weakness and will imply a low price during depressed business conditions to tempt investors.

Saudi Arabia’s loss can be our gain.

 

Watch out for the new Dutch disease epidemic (1/2)

Bonjour,
The falling oil price over the past 18 months has had the consequence to expose both the unpreparedness and the lack of diversification of many major oil producing countries. For those, oil represents the biggest economic sector and most of the foreign currency revenues. Some countries have tried to manage the oil dependency though. Dubai, for instance, discovered oil in 1966 but as soon as the 1970’s invested in new industries such as a financial hub or aviation infrastructure to create a tourism destination. The Emirate only derived 4% of its revenues in 2015 from oil exports. The then ruler, Sheikh Rashid, was surely wary of the Dutch disease.

diversification investment

Benefits of diversification

The pandemic’s roots
The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of the large Groningen natural gas field in 1959, the 10th largest in the world. In economics, it describes the apparent causal relationship between the rise of one sector (in our story oil production) and the relative or absolute fall of other sectors. The idea behind is that massive exports of oil create an influx of dollars in the economy, pushing up the value of the local currency, making other sectors uncompetitive globally. While for the Netherlands, the Groningen gas field was finally cleared of wrongdoing a few years later, for many oil producing countries, we can notice that the energy companies and affiliated (such as the petrochemical firms) dominate the economy.
Below I have assembled the data showing how important oil is to many leading oil producers.

Oil dependency

Nobody is working two jobs

As you can remark, these countries are very dependent on oil. They also have many companies linked to the oil complex. The biggest company listed on any Middle Eastern stock market is Saudi Arabia Basic Industries Corporation. SABIC is a world leading petrochemical company, dominating production of chemicals using crude oil as input – so much for diversification! In Russia, 40% of the stock market index is represented by oil companies. As a comparison, energy companies weight around 10% of US or European stock markets.

diversification

Diversification for dummies…

Become a Forex trader
Of course, as soon as crude prices fall, the inflow of US dollars slows. This has for consequence pressures on the domestic currency. If the country wants to keep a stable currency, it needs to use its reserves to prop it up. If it chooses to let it drop against the dollar, this increases domestic inflation considerably, slowing growth and making the population poorer. Russia spent $55bn in 2014 to keep the Ruble afloat – 10% of its reserves at the time. Despite this record amount of money put at use, the Ruble continued to fall and the Central Bank admitted defeat decided and let the Ruble drop. Nigeria, who had seen its budget revenues fall 35% in 2015 while GDP growth dropped from more than 6% in 2014 to 2.3% in 2015, also initially used a few billions to defend the local currency. However, the Naira fell 25% in 2015 and the currency can now be traded for ⅓ less on the black market.

A falling currency would be great for export-driven companies: they would be more competitive abroad. Unless your country does not have an export industry, that is…

USDRUB Curncy (Russian Ruble SPO 2016-02-11 12-50-31

Cheaper holidays anyone?

In white, the Russian Ruble, in yellow the Nigerian Naira, in Green the Kazakh Tenge, in pink the Mexican Peso and in red the Brazilian Real.

Arabian dreams
Of course, local governments are aware of their lack of diversification and are trying to remedy it, using successful countries such as Dubai as an example. Below is a picture of the Jeddah Tower, a one kilometer high (!) tower under construction (currently 140m high) part of a $20bn redevelopment of Jeddah, one of the major economic lung of the Saudi kingdom. The aim was to attract new industries to diversify the economy. The project started in 2012, when oil prices were above $110bl. Will the tower will ever reach the ambitioned height?

jeddah tower feb 2016

My tower will be bigger than yours

PS: two weeks ago I wrote about the jet engine’s reliability. I am happy to quote that the latest Rolls Royce engine, the Trent XWB, powering the new Airbus A350, reached a 99.84% dispatch reliability factor in its first year of operation, bettering the 99.65% of the CFM-56, powering the Beoing 737’s and Airbus A320’s families. Wow!

Will Chinese Astrology make you Rich?

您好,新年快樂,

monkey

Year of the monkey

There is no issue with your browser, this is hello and Happy New Year in Chinese.
The New Year kicks off officially on Monday the 8th but I wanted to be early.

This New Year will be that of the Monkey as you may have guessed. The Chinese follow a bizarrely-modified Lunar calendar by also adding one solar month in the equation (lunar months are only 28 days long). That explains why the New Year day changes every year. They have 12 animals symbolising the zodiacs: rat, cow, tiger, rabbit, dragon, snake, horse,goat, monkey, chicken, dog and pig.
People born in the years 1920, 1932, 1944, 1956, 1968, 1980, 1992, 2004, 2016 are monkeys.

If you do not know what sign you are, here it is*:

chinese sign

The animal in you

Nostradamus
With a new year come predictions about everything and believe it or not, about the markets. A good macro-analysis should incorporate a few economic, political, sentiment drivers. The sentiment indicators do not include, in general, astrological signs.

But should we really care about the position of the moon or that of Uranus? What can we expect in the markets according to our Chinese friends?
Well, if you believe that astrology drives returns, then 2016 could be an average year, according to this chart by The Economist – note though that 2015 was the year of the goat and it turned out OK with the US markets roughly flat (S&P500 down -0.7%), Europe up mid single digit while the Chinese stock market itself was a roller-coaster but ended up 9% for the year.

stock market and Chinese sign

Monkey business

2008 was the year of the rat and equities plunged 40%. 2011 was the year of the rabbit and global stocks fell that year. 2013 was an excellent year, with the Dow up more than 20% and yet it was the year of the snake! Recent years hardly seem to validate the Chinese visions. Maybe we need to look into more details because there must be more subtleties to this?
Looking for experts, I found that Feng Shui experts could help us. What can they tell us then? I have selected the main inputs of Raymond Lo, Feng Shui expert, in his paper.

“The Year of the Monkey, 2016, in the Hsia calendar, is symbolized by two elements – with Yang fire sitting on top of metal. I can expect 2016 will be comparatively less violent than 2014 and 2015. It will be easier to reach agreements and treaties to resolve conflicts and struggles.

Regarding the economy, fire element is often the driving force behind the stock market. The industries that will perform well in the year of the Monkey will be industries related to Fire and Water elements. Fire industries are energy, stock market, finance, entertainment. Water element is referring to transport, shipping, communication. In general, the Yang Fire Monkey year is symbol of optimism and flexibility and progress.”

The portfolio created by Lo would be buying many of the industries that fell sharply over the past 2 years. Chinese Astrology in 2016 is contrarian.
Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time.

'When you said you're a contrarian, I just assumed you meant your investment style, Mr. Kobenz.'

Contrarian at work

Does it mean we should rely on astrology to manage our money?
While famously John Pierpoint Morgan (the man who built JP Morgan) had an astrologer on staff, apparently saying that “Millionaires don’t use astrologers, but billionaires do.”, several studies have failed to show that astrology-based returns were more than random events.
What it meant is that there is no proof that astrology adds value.

Furthermore, in 2007, the very aptly named Professor Wiseman and The British Association for the Advancement of Science asked a professional investor, a financial astrologer and a five-year old child to invest a fictional £5000 on the FTSE100. The investor chose shares on the basis of his experience, the astrologer based her decisions on the ‘birthdate’ of companies and the child chose her shares randomly. The child lost the least amount of money and the financial astrologer made the largest losses.

jp morgan

JP Morgan and the Wiseman study

Conclusion
新年快樂 again.
Astrology was not proven so far to be reliable in forecasting markets. However, it may have an impact on some market operators. This is because investors are emotional and do not always rely on facts.

 

Forget computing, this is the real technology industry

Bonjour,

I wanted today to describe my amazement for an industry which is coming up this year with a major innovation that will propel it further forward. You most certainly have been the beneficiary of the products of this industry at least once in your life and for a few of you on a regular basis. Let me describe it to you in a few sentences.

This industry is an oligopoly – it is dominated by four firms exclusively and there are no signs of any potential entrant. Each product cycle lasts around 20 years and each new product requires billions of dollars of investment in research and development. Having a fortress balance sheet is therefore an imperative.
One of the 4 players is introducing this year a brand new technology, which it had initially wanted to launch at the beginning of the 1990’s! This is a 25 years delay due to the complications the new technology generated. The total research and development expense was a massive $10bn, to be compared with profits around the $1.3bn mark, around 8 years of those. This will represent probably a good third of total sales going forward so quite a commitment.

high riser budget

Who delivers on time and budget nowadays?

The Nines
The technological content of the product beggars belief. Parts are manufactured with atomic precision and must resist massive variation of temperature (from minus 70 to 1,400 degrees Celsius, pressure and operating speeds. Reliability is to the highest standards, one of the leading range of products from a French-American competitor having achieved a 99.65% dispatch reliability factor over the past 20 years.
The dispatch reliability factor computes how on time the product is delivering on its specifications. If the product was required to be used continuously, a 99.65% reliability factor means it will not be available on time for operations only 4 hours per year or 8 seconds per day. Imagine your local metro/train/bus with an average daily delay of 8 seconds.

"Sorry, I'm late. My train was delayed."

What low dispatch reliability means for you

Suspense over…
This product is the modern jet engine.
The 4 companies are Rolls-Royce of Britain, Snecma of France and the Americans General Electric and Pratt & Whitney. We have become accustomed without noticing to the extreme reliability and effectiveness of jet engines. The CFM56, powering all the Boeings 737 (the ones used by Ryanair or Southwest Airlines) and half the A320s, are capable of handling more than 50,000 cycles over a lifetime. That means they will allow 50,000 flights. Imagine you use your car everyday to commute to the office and also on week-ends. This is 14 trips per week or 728 per year. To use your car engine as much as a 737 jet engine, you would need to keep that driving for more than 68 years. The first large maintenance round for a CFM56 is usually after 12,000 cycles. There again, it means around 16 years of car driving before the first service.
Can you imagine not servicing your car for 16 years? How bad is an engine failure on your car? On your next flight?

Airliner passenger sees mechanic reading book on how to repair the engines.

Let’s hope he will remember how to do it again, like cycling

Pure Power
Pratt & Whitney is introducing this year its new type of civil jet engine range called Pure Power. It is based on a novel design called the Geared Turbofan (GTF) . If you want to know more about the new engine, you could try a few Internet links such as here or here. This engine was originally meant to power the then-brand new Airbus A340, which launched late in 1993 because it had to find an alternative (they used the CFM56 if you want to know but the plane still flopped as it was under-powered despite all the great attributes of the CFMs).  The GTF advertised goals are to reduce noise by 50% and fuel burn by 15%. The first noises I managed to hear about the second goal is that it will exceed this target by 2-3pp and even 4-5pp by 2020, when performance improvement packages are delivered.

Ge95962

Of course, this is not the way to get the most out of your engine

Conclusion
I hope, for your next journey by airplane, that you will be able to also marvel at the amount of human knowledge that has gone into producing the engine powering the aircraft taking you to the next destination. In its infancy, air travel was reserved to the favoured classes but thanks to these motorists, and soon the Pure Power, the world will continue to become smaller.

Solar Power: a New Hope

Bonjour,

In this last part of our series, we will talk about why we should rejoice and pay attention. For this installment, I have interviewed my friend François Sonnet, a founding member of the Solar Change network, but first and foremost one of the pioneer of solar power in Europe.

The Swanson Law
The cost of solar panels has dropped considerably over the past 40 years. In 1977, the price of a solar panel was around $77 per watt. Francois tells me that in 2007, at the last peak of the solar industry, the price was still $3.5/w, still a 95% drop. However, a supply glut after the Great Recession has meant that panel prices dropped to $0.50/w in 2015, another 86% decline. In the past 38 years, prices have declined by a massive 99.4%! If you are familiar with the Moore Law for computers, the Swanson Law, from the name of the founder of SunPower Corporation, states that the price of solar panels tends to drop 20 percent for every doubling of cumulative shipped volume. Between 2015 and 2007, new capacity installed has grown by a factor of 25x!

francoit sonnet solar panel 2

What a solar pioneer look like today

Soft costs
However, panel costs are only part of the equation. François explains to me the concept of soft costs: they are things like the cost of obtaining permits, the installer fees, legal costs…He tells me the anecdote of a solar project in Romania, where he has to employ security guards to protect the grounds of the solar farm: “one soft cost I did not put in my initial spreadsheet”!

In 2014, globally, an installed solar system cost $2.16/w. Progress is urgently needed on that front to help lower solar power costs. The bad news is that soft costs have generally held flat over the past decade, therefore growing in importance and now representing more than 2/3 of total installed costs!
The good news is that governments are working hard to lower soft costs. See for instance the US Department of Energy, creating a $10m prize for whoever comes up with a way to significantly quicken the installation of a solar power system.
The CEO of First Solar, a US solar system manufacturer, believes we will achieve a total installed cost of $1/w in 2017 for large solar farms, hereby implying that soft costs are being worked on. “We think 2017 could be conservative”, smiles François.

Of course cutting back on this level of bureaucracy will require a lot of work... We'll need LOTS more staff... And personnel will need extra support with recruitment.

Enlightened bureaucrats

It is all about money
Why does this matter? We need to look at the concept of levelized cost of electricity (LCOE). Think of it as the minimum price of electricity needed to break-even on your power generation system. The next set of data are the LCOE for major fuel types in 2014.

LCOE globally by fuels

LCOE in 2014

If First Solar CEO is right, then the LCOE of the best solar farms will drop below the level of natural gas power stations in the next two years. That implies that solar power will need no more tax credits or subsidies to be competitive. In the UK, the retail price of electricity is around USD200MWh. There again, you can see that it will soon be profitable for households to generate their own energy and remain autonomous.

I have some battery left
One aspect of solar panel which is exciting is the progress in battery technologies. The main drawback of solar power is that electricity production is variable and peaks around noon, when electricity demand (and therefore price) is not the highest of the day. Being able to generate power and store it until better prices can be achieved and/or storing it for personal use in outside of working hours make real sense. Fortunately, batteries are improving but along different directions. Tesla, in the US, is betting on economies of scale to lower battery costs fast, Bolloré in France is banking on a new lithium-polymer technology while China’s BYD is pushing its own technology of lithium-iron batteries which are better suited for power storage.

turtle solar

With new lighter batteries, anything is possible

Smarter grids
One of the main criticism of renewable energy on a power network is its variability. The system must absorb large amount of electricity production and be robust enough to fill the gap with power from other sources when the sunshine wears out. In summer, Germany can generate 90% of its electricity from solar sources at peak times. Widespread thinking about power networks is that such systems can cope easily with up to 20% of variable energy sources such as solar but faces Armageddon above that level.
However, new research shows that a level of 40% could be manageable and increase power prices by around 10% only. This is because of the integration of weather models and smarter grids. They allow power system operators to smooth energy demand at peak times and for instance reduce voltage or shut down remotely power hungry equipment and mills.

Smart-grid

How smart grids work

Politicians finally useful
Last but not least, politicians are pushing in the green direction. In China, there are talks about raising the 2020 installed solar capacity of 100GW to 150GW, from the current ~50GW. 150 GW is the total power capacity of France. India has only 5GW of currently installed capacity but has set aside the Thar Desert for solar projects. At 320,000 square kilometers, it is the size of Norway. In the US, tax credits for solar energy, which were due to expire in 2015 were renewed until 2019 at least.

Thar_desert_Rajasthan_India

Finding Wally in the Thar Desert

Conclusion
Within a couple of years, solar power costs will have halved to the level of fossil fuel rivals and batteries will be cheaper and better. It opens a new era where clean power is becoming a reality.