Daniel P. Duffy 2016-08-03 10:15:38
It became undeniable last year that renewable energy in general, and solar energy in particular, had reached its tipping point. After decades of promise and struggle through adverse market conditions, while incrementally improving its technological performance, solar energy was poised to take off. And take off it did. It is no longer a question of if solar and other renewable forms of energy can compete in the market, but of how much can be maximized in a particular region, and what kind of renewable energy makes for an optimum economic mix? But we are still left with the question of “why now?” Why did solar energy take off now—and why not years ago? What has changed? Why have prices dropped? How is the market different? How has the technology advanced? Is it the result of exciting, new high-tech breakthroughs in photovoltaic cells, or incremental advances in ordinary things like installation and production methods? Has the market price of energy reached a point at which solar can stand on its own without subsidies, or is it just a case of attractive financial incentives that make solar affordable to small users? The Solar Tipping Point “Tip·ping point: (noun), the point at which a series of small changes or incidents becomes significant enough to cause a larger, more important change.” In his brilliant book The Tipping Point, Malcolm Gladwell further describes how a tipping point occurs. “The tipping point is that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire. Just as a single sick person can start an epidemic of the flu, so too can a small, but precisely targeted push cause a fashion trend, the popularity of a new product, or a drop in the crime rate.” In the past few years, solar energy has achieved significant market penetration. According to the Solar Energy Industries Association (SEIA) and GTM Research, in 2013 solar energy had a breakthrough year and installed 4.75 gigawatts (GW) of energy, including 2 GW in just the fourth quarter. And this pace has accelerated: 6.2 GW of solar photovoltaic cells (PVC) were installed in the United States in 2014, a 30% increase over 2013. In 2015, a new record was set with 7.3 GW of solar PVC installed. At least 20.0 GW are expected for 2016. According to the SEIA, as of 2015 the solar market in America had achieved the following milestones: There are now over 22,700 MW of cumulative solar electric capacity operating in the US, enough to power more than 4.6 million average American homes. With over 135,000 installations in the first half of 2015, nearly 784,000 US homes and businesses have now gone solar, and a new solar project was installed every two minutes. Growth in Q2 was led by the utility scale sector, which posted its largest quarter of the year at 729 MW, and the residential sector, which grew 70% over last year to install 473 MW and will likely surpass its 2014 total in Q3. Since the implementation of the investment tax credit (ITC) in 2006, the cost to install solar has dropped by more than 73%. While residential costs have dropped by 45% since 2010, utility scale costs have dropped more significantly, with recent contracts at prices below $0.05 per kilowatt hour (Solar Energy Facts: Q2 2015, SEIA December 2014). As of 2015, solar accounted for 40% of all new 2015 electric generating capacity, more than any other energy technology. This number is expected to increase to over 50% in 2016. Renewable energy of all kinds (biomass, hydro, wind, concentrated solar, and PVC) accounted for 7% of all American electrical generation in 2015 (US Energy Information Administration). And while PVC itself is currently a small percentage of our overall energy mix, its growth rate is nothing but astounding with solar power’s contribution to America’s energy needs projected to reach 10% by 2025. Increases in the market value of solar energy continue to gather steam. “Over the next two years, the United States will install 26 gigawatts of solar, which is roughly the same amount that has been installed in the entire history of the industry” (SEIA March 2016). According to the SEIA, the US solar energy market will more than double in 2016, growing 119%. The extended federal ITC for solar energy is expected to support an additional 93 GW of PVC generating capacity over the next six years. What are the market segments that make up the solar energy industry? There are basically three: community, commercial, and rooftop. The first represents large-scale solar “farms” spread over a multitude of acres and servicing an entire town or part of a city. Commercial installations provide power to businesses and factories. Rooftop solar is the smallest of the three and represents small-scale systems for individual homes. Each has its different cost per watt installed based on economies of scale, market demand, and operational methods. Large-scale community and commercial systems, for example, can take advantage of both economies of scale and mechanisms that allow the solar receptors to tilt their orientation and align there, facing towards the sun throughout the day. This results in cheaper costs per kilowatt, but higher upfront capital costs. Increases in market share for each of these segments have been matched by falling prices. Solar panel pricing fell by up to 10% in the non-residential sectors, and more than 17% in the utility sectors in 2015 alone. The reduced costs were reflected in both hardware and software associated with solar panels. In fact, about 65% of the cost of a solar panel is now from installation labor, engineering, and man-hours devoted to permitting. As the use of PVC continues to spread, installations will occur in cheaper labor markets and achieve economies of scale that will drive the costs of these systems down further. The average price of a rooftop solar cell array fell to only $3.50 per watt (direct current) by the end of 2015. As for the material costs of solar cells, polysilicon prices fell an additional 4% over the past year. These falling prices were both cause and effect of the increased number of PVC installations. Decreased costs led to increased demand, which in turn led to economies of scale that further reduces costs in a positive feedback. The 2,099 MW (direct current) of solar energy installed in 2015 was a 66% increase of installation in 2014, and 2015 was the fourth consecutive year, with growth rates greater than 50%. This growth in solar capacity has been a worldwide phenomenon with solar energy making market advances in nearly every country. In 2014, renewables, including solar, made up more than half of the new electrical capacity installed worldwide, an investment of over $286 billion. More than half of this investment occurred in emerging BRIC economies (Brazil, Russia, India, and China). India alone expects to build over 100 GW of solar energy over the next seven years. Over 10% of the world’s electricity came from renewables in 2015, a doubling since 2007. That would represent an average annual growth rate over eight years of 9%, but in fact, the growth rate is accelerating. Meanwhile, the global price of electricity generated by solar panels fell over 60% in the past six years. In those parts of the globe with more sun, solar farms can sell electricity for half the global average price. It has been projected that solar energy in India will be 10% cheaper than coal-generated electricity by 2020. And then there is Scotland. As of last year, Scotland exceeded its goal of 50% energy from renewables by achieving a rate of almost 58%—the first nation to get more than half of its electricity from renewables. Denmark has since surpassed this benchmark, with more than 100% of their electricity generated by renewable energy sources. Increased Production The law of supply and demand has tilted in favor of solar energy customers in the last few years. According to this law, as supply increases, prices fall. And the market has been glutted with an overproduction of solar panels. How did this happen? Capitalism actually benefitted from poor economic planning on the part of the Chinese Communist Party’s central bureaucracy. Instead of China once again figuring out how to make something cheaper, the strategic economic planners in Beijing wanted to dominate the solar panel market through sheer size. Their government established subsidized loans, which in turn resulted in Chinese companies building a huge number of factories. All of these factories came online in 2009 and proceeded to glut the market with solar panels. As a result, the material costs of solar panels plummeted. In response to the lower costs, solar companies around the globe adapted and became innovative—or died. After the first wave of bankruptcies in the industry, the companies that remained were smart enough and lean enough to meet the Chinese on their own terms. Prices fell again and continued to fall. Still, the solar panel market became dominated by China, which produces 63% of the world’s solar panels as well as wind turbines. But the strategy has fallen apart as Chinese production capacity continued to exceed the rapidly growing global demand. And now, the Chinese are staring at financial disaster for both the state run banks that issued $18 billion in subsidized loans to solar panel manufacturers and the local governments that provided loan guarantees and sold land to the manufacturers at cut-rate prices. As a result of their self-generated price war, China’s largest PVC manufacturers lose $1 for every $3 of sales. And the loans will be coming due soon. Meanwhile, consumers around the world benefit from falling prices. Innovative Financing More positive examples of financial planning can be found in the new deals home owners and businesses can get in return for installing rooftop solar. And rooftop solar is not cheap. Depending on home size and location, the upfront costs can run as high as $25,000, and it is largely the result of SolarCity being short on cash. When a homeowner or business buys a roof top solar panel array from SolarCity, the customer pays nothing. The upfront capital costs are usually beyond the reach of a typical homeowner. Instead, a customer contracts with SolarCity for a monthly bill for up to 20 years, greatly reducing the cash flow requirements for the homeowner. A potential buyer can then rationally compare the monthly saving from the eclectic bill with the monthly payments for the solar array and decide if installing solar panels makes financial sense. How does SolarCity (or its competitors who use the same business model) afford this since they have to incur the large initial capital costs of manufacturing? They got Wall Street banks to invest in the solar panels in the same way they invest in bonds and stocks, only this investment has much lower risk. So, in effect, these banks own pieces of solar panels across the country and will receive steady cash flow from these investments for the next two decades. And then there are tax incentives. A main reason for anticipated surge in solar capacity in 2016 and beyond is extension of the federal solar ITC. Originally established in the Energy Policy Act of 2005, the ITC was extended for an additional five years under an omnibus spending bill passed at the end of 2015. The ITC provides a tax credit of 30% of the value of a solar installation. After the initial extension expires in 2022, the ITC will be ended for residential installation, but continue at a 10% for commercial projects. This will allow for the installation of an additional 20 GW of solar power systems, according to financial analysts—more capacity than in all of the industry’s history up until the end of 2014. “Lower component prices have certainly bolstered solar sales and facilitated project development,” says Jamie Evans, managing director at Panasonic Eco Solutions. “The Investment Tax Credit [ITC] extension has also played a big part in stabilizing industry growth projections over the next few years. The ITC provides a 30% tax credit for systems and drives tax equity-based funding—an important piece of the capital structure given most projects and system owners struggle to fully utilize their tax benefits. Thanks to the extension last December, the ITC will remain at 30% through the end of 2019, when it will begin to gradually decline.” Simpler Installation After material and financial costs, the last element in the reduction of solar energy prices has been a significant drop in the labor costs required for installation. Labor for installation could cost as much as the solar panels themselves. But installation has gotten cheap because installation has gotten faster and easier. The framework, struts, and supports for solar panels are now designed for easy, snap-together installation. Each panel fits into the adjacent panel like the pieces of a puzzle. The bulk of the costs of solar panel installation consist of soft costs, like the labor needed for installation, permitting, inspection, and interconnection; customer acquisition; financing costs; and installer/integrator profit margins. Onsite installation labor costs consist of the following tasks: pre-installation preparation, racking preparation and installation, solar panel preparation and installation, on-and-off roof electrical hook ups, and non productive downtime. A study conducted by the Rocky Mountain Institute and the Georgia Tech Research Institute found that US solar panel installation labor costs can be decreased by over 40%, from $0.49 per watt to $0.29 per watt, by utilizing installation best practices. This can be achieved by the further adoption of a simple, safe, standardized base installation process. This approach, pioneered by German installers, allows for reliable installation at labor costs that are three and a half times cheaper. Faster installation can be achieved with specialized crews, each with a different assigned tasked (setting up scaffolding, racking, and module installation, etc.) working in sequence. Grid Parity: Bigger and Cheaper So when will these reductions in the cost of rooftop solar and improved operational efficiencies achieve what is known as “grid parity”? This is the price point where total costs of energy from solar panels costs the consumer as much as power from the grid. It varies with climate, with areas receiving more sunshine annually being able to generate more electricity per area of installed PVCs. It should come as no surprise that Florida will achieve grid parity before Alaska does. But measuring total costs can be tricky. The standard measure is “levelized cost” (measured as dollars per kilowatt-hour), which includes all of the outlays for purchase, installation, and finance charges. This total dollar figure is then divided by the total amount of electricity the system is predicted to produce over its operational lifetime. This power generation figure is a function of both the characteristics of the solar array and the local climate in terms of sunny days and solar intensity. Similar costs and energy production rates can be applied to the operational lifetimes of nuclear or coal powered electrical plants and other sources of electricity—even other renewables like wind—to allow for an apples-to-apples comparison. What do we find when we make these comparisons? Solar from PVC arrays has a national average levelized cost of 12.2 cents per kilowatt-hour, about the same as the average retail rate (but this can vary considerably depending on location). To make these comparisons on a local basis, the Energy Department’s National Renewable Energy Laboratory (NREL) has analyzed detailed light detection and ranging (LiDAR) data for 128 cities nationwide, including the size and orientation of residential and commercial rooftops, to determine the potential of rooftop solar arrays. The resultant analysis reveals the potential of 1,118 GW of capacity and 1,432 terawatt-hours (TWh) of annual energy generation. This amount is equivalent to almost 40% of the nation’s electricity usage. Industry Leaders Like most business transactions, the solar purchasing process needs a middleman who facilitates contacts and provides a clearinghouse of product information. EnergySage serves this valuable function as the leading online marketplace for solar. EnergySage doesn’t provide or install solar systems. Its Solar Marketplace connects customers with pre-screened solar installers and financiers increasingly in cooperation with utilities. Recently, they have collaborated with National Grid, a major utility in the Northeast. This makes National Grid the first utility to offer a transparent, simple, and diversified market for solar energy products. Launched in the spring of 2016, the SolarWise Rhode Island program provides National Grid's Rhode Island customers with an online tool to research, comparison-shop, receive quotes from contractors, and purchase solar energy systems for homes and businesses. Under this program, Rhode Islanders could also be eligible for a bonus solar incentive based on an assessment of their overall energy efficiency and methods used to minimize consumption. EnergySage is currently speaking with several other utilities that have expressed interest in setting up similar systems. “We’re excited to be working with a forward-thinking and innovative utility company,” says Vikram Aggarwal, founder and CEO of EnergySage. “National Grid shares our dedication to proactively helping homeowners better understand the potential of solar energy by providing them with the right information and tools needed to make an educated purchase.” GEM Energy (part of the Rudolph Libbe Group) is a solar developer providing one-stop shopping for engineering, procurement, and construction capabilities, as well as operations and maintenance. By vertically integrating their services, GEM Energy optimizes facility efficiency while minimizing customer costs. It also allows the company to deliver comprehensive, rentable energy packages such as advanced heating and cooling systems, procurement, solar development, and FlexSet energy monitoring/building control systems for commercial, industrial, institutional, and mission-critical facilities. One of their recent projects is the Anthony Wayne Solar Array. Developed and owned by Ohio investors, this ground-mounted solar array supplies about 30% of the electricity for the Toledo Zoo, making it one of the largest suppliers of solar electricity for a facility of this type. Built on a 22-acre repurposed brown field site in south Toledo, the project utilizes 28,000 Calyxo solar modules, which use an innovative thin film technology developed by a local company. This award-winning project emphasizes aesthetics including perimeter buffer areas planted with trees and grasses native to northwest Ohio. Another local project is a 28-kW rooftop solar array that is reducing energy usage by 30% for V.E. Petersen Co., Inc., a leading distributor of replacement parts for the small engine based in Walbridge, OH. Designed and developed by Rudolph Libbe, GEM performed the electrical and installation work. The 108-panel solar array generates more than 30,000 kWh per year for V.E. Petersen and is a great example of how GEM Energy works to reduce its customers’ operating costs through renewable energy. “The price of utilities continues to go up,” says Jeff Lincoln, vice president of operations for V.E. Petersen. “In our business, some of our big customers, nationwide and globally, are implementing solar energy. After talking to some of them about their savings, we chose to do it. It’s nice if we can generate some of our own power, rather than go with the coal and fossil-fueled option. Solar seems the way to go, and the incentives with the government offers made it very attractive.” Headquartered in Denver, CO, Panasonic Energy Solutions (of the Panasonic Enterprise Solutions Company, PESCO) engineers, installs, and supports large-scale energy and digital solutions for enterprise and public sector organizations. With more than 20 GW of solar power generation operational, their goal is to provide comprehensive, integrated renewable energy solutions, and in the process remove hurdles that stand in the way of their successful completion. In addition to power supply systems, they also provide power storage facilities for microgrids, solar arrays, and cell towers. Instead of following the traditional path of solar development with a different third-party vendor at each phase, Panasonic Eco Solutions shepherds the entire streamlined process from start to finish. This approach avoids the inefficiencies and progress discontinuities that occur every time a new vendor is brought on board. Through the Coronal-Panasonic platform, the group acquired HelioSage Energy, a utility-scale solar project developer. This Panasonic/Coronal team provides complete project financing, engineering, procurement, and construction (EPC) services to long-term operation and maintenance (O&M). Their services mitigate project delivery risk while providing engineering that adheres to strict standards established by Panasonic, on a commissioning basis. It also provides a variety of financing options that eliminate the need for up front capital outlays. Conclusions How do we encourage the growth of solar energy? Aside from focused tax incentives to jump-start the market, we let the market decide. If the fiasco (for them, but beneficial for the rest of us) of Chinese over-production of solar panels shows us anything, it is that central planning doesn't work. It never has and never will. The main problem of any command economy is that it lacks an information feedback loop. In the free market, price signals provide this information to producers and consumers concerning the need for a product or service and their inherent value, thus allowing efficient allocation of resources. “To further drive clean technologies down the cost curve, the industry is focused on making continued advancements through research and development,” says Jamie Evans, managing director at Panasonic Eco Solutions. “We’re always looking for ways to be more efficient, and having stable policies in place helps us do that. At a federal, state, and local level we need long-term commitments that foster research and development, and allow sustainable technologies to continue to improve from a cost and efficiency standpoint.” BE Daniel P. Duffy, P.E., writes on topics of energy and the environment.
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