From Solar Energy Torment to Distributed Energy Transformation

Dow Solar Shingle

In Solar Energy Tough Love I confess I ranted about the perverse impacts of government industrial policy on the solar energy sector in its vainglorious attempt to choose winners and losers.  That policy is failing.

The market gods hate to be trifled with and they respond with thunderbolts and torment.  This will continue until grid parity is reached, politicians find another target for their affection or ire, and the solar energy sector purges itself of the toxic practices of subsidies, fragmentation, and weak financial performance. So when I read the story in the trade press about SunPower’s wider Q2 losses I decided to get beyond the rant to look at some of the market factors tormenting the solar business and holding back its true potential.

Solar energy demand is up but so are input costs for solar panels.  Rising demand stimulates rising production and thus excess inventory is a persistent problem and results in falling prices for PV panels.  Then there is the FiT fits that cause burps and headaches as governments in Europe no longer able to afford the soaring cost of subsidies regularly adjust the tariffs—usually downward.  Changes in FiT shift demand from market to market as manufacturers adjust and seek to lose less margin on each incremental deal.  Often, as was true in SunPower’s Q2 report, revenue comes in at or close to investor expectation because demand is growing but cost and margin control has proven difficult and can quickly eat away at profits.

The Factors Driving Solar Torment

  • Deal Flow is Up but VC Funding is Down. The consolidation process in solar energy is clearly underway with the mixed news on the solar investment and funding front. While the number of venture capital funded solar deals remained about the same in Q2:2011 as the previous quarter (25 vs 26) the value of those deals fell to $354 million in Q2:2011 from $658 million in Q1:2011.  Even worse, that $354 million in Q2:2011 was down from $948 million in Q2:2010 even though deal flow increased 25 vs 18) according to Mercom Capital Group.
  • Bankability is limited, but deal flow schemes are abundant.  There are many vendors eager to sell solar energy systems but few of them are bankable meaning they look like what they are—a big credit risk.  So these solar firms spend much of their time dreaming up schemes to finance their deals.  Pace loans was one of those when upfront costs could be funded through government assessments like sidewalks and sewer lines.  It all sounded so logical and convenient until lien holders began to realize that the PACE loans would get priority ahead of the first mortgage in a bankruptcy since they were government bonds and that was a scheme not even Fannie Mae and Freddie Mac would tolerate.
  • One of those schemes is residential solar leasing.  Think about it!   If you are a homeowner and you want to ‘do the right thing’, save the planet and stick it to your utility company.  So you decide to put a solar rooftop system on your house but it costs thousands of dollars and tax credits and subsidies don’t cover all of it.  No problem, the vendor says we will lease you the system with no upfront cost.  This sounds like a great deal until you realize that you are signing a 20 year lease on equipment with rapidly falling prices and in a market of rapidly improving technology.  This is like locking yourself into a 20 year lease on a Chrysler Sebring left on the dealer’s lot.  This also sound more than a little like the no down payment securitized mortgages that just ate all the equity in our homes.  The trade shows are filled with CEOs of solar companies touting these schemes and assuring us that default rates on solar rooftop system are very low.  This may be technically true today but it is still deceptively wrong and it will surely hit the fan.  That is why many firms are not bankable because bankers have tried every scheme in the book and they know a bad deal when they see it.
  • Disruptive technology in the form of solar rooftop shingles is our friend. If these traditional looking roof shingle systems catch on and fall in price as quickly as panels they will further displace the old generation PV panels—and they are much harder to steal too!  That way the transaction is actually honest and bankable since putting on a new roof to replace an old, leaky one is a very practical thing to do and is bankable.  Using shingles that spin your smart meter backward can help mitigate the cost of the new roof, increase the value of the home and allow you to invest in the latest technology not the oldest technology.  The giants like Dow and others that make these new solar shingles have a competitive interest in driving down the price to make the solar shingles competitive with other roofing options. This is disruptive technology at its market best.  That is why more and more established roofing companies are likely to displace many of the fly by night solar panel vendors—and the sooner the better.
  • Global competition is scaling Solar Potential.  The solar PV market has been a global one since China decided to commoditize it and suction up as much of the FiT subsidy money governments were willing to throw away by selling lower priced equipment into Spanish, German, Italian, Czech and other markets and a few experiments with FiT in the US.   The current EU problems with FiT volatility and the failure of the industrial policy of raising utility prices to subsidize the development of domestic renewable energy manufacturing proved a failure in the face of China’s export prowess.  So as EU markets are saturated or the FiT subsidy money fades, solar manufacturers are looking for better global markets.
  • China adopts its 12th five-year plan with a focus on feeding its insatiable appetite for energy and access to resources to sustain its export growth.  The big push in this new five year plan includes new energy resources including developing unconventional oil and gas potential in China as well as energy to meet military industry, and the environmental remediation needs.  Expanding domestic production of solar technology can be expected not only to feed export growth but also satisfy some of China’s domestic energy needs as well.
  • North America is likely to be the market of choice.  Why?  There are millions of sunny rooftops in America and only about 130,000 of them now have solar PV systems installed according to Sungevity CEO Andrew Birch.  California alone has a goal of a million solar roofs and wants 3 million homes using renewable energy. No doubt many of them will target California after Governor Jerry Brown announced his clean energy plan this past week calling for adding 12 gigawatts of renewable electricity by 2020 or enough to power roughly 3 million homes.  That is a lot of rooftop cheese to attract solar roof rats from around the globe. Those solar shingles I mentioned above use thin-film copper indium gallium diselenide (CIGS) cells instead of the older polysilicon.  Dow claims its CIGS solar shingles are over 10% efficient, about 10 to 15% cheaper per watt, easy to install and harder to steal.  If California is going to have a million solar roofs it wants them using the newest technology not the oldest, least efficient stuff.
  • Global potential for solar energy is attracting the giants accelerating the technology learning curve process to give the giants competitive advantage over China.  China’s contribution will continue to be commoditizing the older technology and driving down its cost, but that is not the game the giants want to play. They seek scale, market diversity and ongoing business relationships for services and aftermarket solutions. Selling integration solutions that solve business problems for their best Fortune 1000 customers is the value-added proposition most are following.
  • Utilities are driven and constrained by regulatory requirements. The most profitable solar projects today are still the utility scale solar farms. But utilities have been reduced to procuring energy and capacity in power purchase agreements to satisfy renewable portfolio standards and emissions reduction goals.

USDOE SunShot Goal

The Grid Parity Imperative

Solar energy is still the only distributed generation technology capable of displacing the central station utility business model.  Achieving that ambitious goal will require grid parity prices to compete with natural gas, improving solar technology efficiency, and bigger scale players with bankable integrated solutions. Consolidation is rapidly weeding out the smaller players in this sector and that is good.

Customer Aggregation will be the distributed energy business model of choice.  We are seeing it first on the commercial and industrial side of the market with vendors offering demand response, energy efficiency and constant energy management to game the net metering and open access rules.  But the menu will expand to include microgrids, combined heat and power, waste heat recovery, energy storage, renewable energy supply options and the expertise to put it all together and manage it to reduce total energy spend.  As customer aggregation catches on it will accelerate the move toward a truly distributed clean energy economy as it wreaks havoc on the traditional utility business model.

But residential rooftop solar with higher efficient solar shingles is a game changer if the combination of better technology, stronger market participants, and customer aggregation as the business model that brings scale and diversity to solar to drive it to grid parity prices.  Customer aggregation designed to scale a portfolio of residential customers across the three interconnected grids will bring customers new bundled solutions, give them a champion to help eek out savings and bring an end to the separate sale of commodity energy thus ending the traditional utility control over the gateway to customers.

Solar energy must flare off its toxic dependence upon subsidies, industrial policy lobbying and political correctness and embrace the full potential of competitive global markets, integrated grid parity-priced solutions and customer engagement to deliver good value, good service and good outcomes for both customers and the environment.

Comments

  1. This is an excellent discussion of the problems with solar up to now and a pretty good look into the future. I have a few issues with the outlook though.

    Solar’s lack of dispatchability will hamper its adoption as anything but a peaking resource or a source of surplus energy on sunny April and October days. And at that, the heat degradation needs to be resolved if it will help those hot June-July-August days. Solar needs natural gas as its back stop.

    I don’t see it as the only replacement for central station power plants. Natural gas fired cogen/CHP/waste heat recovery is far more efficient, lower in capital cost (now anyway), flexible and dispatchable.

    And let us not forget the good old fashioned, boring, but reliable and increasingly cheaper options of conservation. Until everyone does the maximum amount of insulating, sealing and efficiency upgrades (yes geothermal too) then all of the exotics will only replace the higher cost retirements and bolster the weak points in the grid, like PJM East. Growth will still be met with rate base assets. That means natural gas combined cycle central station plants and distributed cogeneration.

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