Politically Incorrect Solar Blog

Yesterday's Solar Eclipse – Tomorrow’s Healthy Solar Industry

There was a solar eclipse yesterday.  The kind in the sky where the moon partially obscures the sun.

Not an eclipse of the Solar Industry.  Definitely Not.

Yes, I know things are tougher than they've been in recent years.  35% tariffs on modules using Chinese cells.  Low (or negative) gross margins for many companies.  Renewed criticism of our industry from the incumbent energy producers and distributors, threatening our relatively meager incentives while they continue to feed like hogs from their own direct and indirect incentive troughs.  And a worldwide economy that, at best, faces major challenges.

We'll get over it.  Solar is the future -- and we all know it.

The tariff is a temporary setback.  Our government made their preliminary decision, and we will adjust -- while still advocating for free trade and good jobs.  I predict that the adjustment will happen very quickly.

Some manufacturers may raise their prices slightly, taking advantage of the tariff.  But there is so much supply that it is unlikely that wholesale prices will increase sustainably — if at all.  Far-sighted Chinese manufacturers are already procuring non-Chinese cells for only a few percent more, and these cells are on their way to the U.S. in tariff-compliant modules.  There are dozens of non-Chinese module suppliers who are starting to sell their quality products in the U.S., so there will not be a sudden shortage of inexpensive modules.  Because solar cells and modules are a commodity, high cost manufacturers will not magically see their pricing disadvantage erased.  On the contrary, prices are likely to keep declining.

The most important fact is that rooftop solar is cost effective today in many U.S. locations.  With today’s lower installed costs of solar, all you need are high electric rates and a reasonable amount of sun.  This “cost effective” equation continues to improve as solar costs decline and electric rates increase – so much so that by 2020 rooftop solar will be cost effective for most of the U.S.  For “wholesale” solar, the results of California’s Renewable Auction Mechanism demonstrate that solar is also one of the cheapest generating sources for utilities.  20-year power purchase contracts averaged 8.9 cents per kwh, a price that is very competitive with fossil fuel energy sources.  Let's repeat that mantra:  solar is cost effective today.

 Seemingly arbitrary public policy decisions – such as tariffs here in the U.S. or incentive roulette in Europe -- are only temporary. Irrational capitalist market behavior – such as 50% industry overcapacity with prices still dropping -- albeit painful, will only make solar even more cost effective.  It is inevitable:  the solar industry will eclipse, gradually and inexorably, traditional forms of energy and energy distribution.

 

Solar Rights Manifesto

Solar Rights Manifesto

Although equipment and direct labor costs have declined as solar systems become simpler and safer, the sad truth is that the paperwork and bureaucracy have become even more complicated.  Our greatest savings as an industry will be to attack these bureaucratic costs at their source and simply eliminate them.  Please join with your fellow solar enthusiasts and stand up for these five Solar Rights.

Solar Right #1: Solar power shall be installed to provide the lowest cost for ratepayers on a whole, taking into account all applicable costs and externalities.

Solar Right #2: There shall be no restrictions on solar installations for any reason other than pre-existing health and safety concerns.

Solar Right #3: There shall not be any added paperwork for connecting a solar power source as long as it is comparably sized to the building’s existing electrical service.  If there is no “interconnection” paperwork for a 3 ton air conditioner, there should be no paperwork for a 3 kw solar power system.

Solar Right #4:  There shall not be any demand charges, standby fees or extra expenses for net metering.  Net metering customers put power into the grid when the electricity is most needed. 

Solar Right #5: There shall not be a separate inspection for building departments, fire departments, utilities and rebate administrators.  One – and only one -- jurisdictional inspection shall be required for a solar installation.

Quick Trip to Grid Parity with New Solar Distribution Channels

Hmmm.  Seems like our solar industry’s crystal ball is a bit blurry these days.  Or maybe we don’t like the picture.  With prices for panels continuing to decline, and players entering and leaving the industry like a game of musical chairs, the solar industry of the future won’t resemble the industry of the past.  We’re sailing into uncharted waters.  It’s a good thing that we’re looking forward because the distribution channels of the future are likely to be quite disruptive (in a positive way) for our industry.

Two driving factors – lower prices and new distribution channels – remind me of the computer industry’s transition from mainframes in the 1970s to personal computers in the 1980s.  Like the processors in PCs, solar panels themselves are become much cheaper.  But as with PCs, solar power won’t become a mainstream product just because a few components are inexpensive; instead, new distribution channels will drive the industry towards mass-market adoption.

In 2008 the average price of a residential system was $8.00/watt.  Even if the panels and inverters were free (amounting to about $4/watt), we still have indirect and direct labor costs of about $4.00/watt.  Too expensive and too complicated for a mass market (we didn’t see very many home mainframe computers, either). 

Simple, easy-to-install systems sold through new distribution channels have the potential to reduce these labor costs to $1.00/watt.  Within a year or two it’s reasonable to expect panel prices in the range of $1.75/watt.  Add in another $0.75/watt for an inverter and other BOS components and we’re at $2.50/watt.  If systems were really easy to install, then electrical and HVAC contractors could join our installation workforce – doing all the installation related work for $0.75/watt.  If systems were inherently safe we wouldn’t need any code-compliance paperwork, so the documentation can be drastically simplified and completed for $0.25/watt.  That adds up to $3.50/watt – a price point at which existing tax credits and high electric rates would provide sufficient economic justification on their own.

The technology changes that will get us to this low price all relate to drastically simplifying the sales, design, engineering and installation costs for a system.  Plug and play AC panels are the best way to achieve this goal.  In the mean time, our industry is likely to continue with three distinct distribution channels: utility, commercial and residential.  But it’s also likely that a new channel will emerge to serve the low end of the market – much the same as the personal computer industry grew in the early ‘80s out of the mainframe industry.

The area where low cost easy-to-install systems will have the most impact is for smaller residential and Do It Yourself (DIY) installations.  Because of the dangers and complexity of high voltage DC systems, DIY solar has traditionally been inconceivable.  But when a 1kw “solar in a box” product becomes available, it will open up the low end of the market just as PCs brought computing to the masses.

There are two types of companies that are likely to serve this new channel:  traditional electrical or HVAC distributors, and big box hardware stores.  They are both characterized by convenience and low prices, and are where the solar installers of the future are likely to shop.  For years the solar industry has attempted to sell through these channels, but the parts count, design requirements and mounting systems have made it unfeasible to stock traditional DC panels and inverters.  What used to take days to design, permit, order and receive should now fit in a single standardized retail box that a contractor loads in a truck in the morning on the way to the jobsite – like standard electrical supplies.

From an installation and a cost standpoint, most qualified electrical or HVAC contractors will have the right skills.  Many “handy” homeowners will also take the plunge; perhaps they’ll just hire an electrician for $250 to install a dedicated PV branch circuit to the roof.  The remaining work should not be much more difficult than installing a ceiling fan.

What’s extraordinarily significant about this new “contractor-retail” channel is that, because of the inherent safety and ease of installation of plug & play systems, there will be very little motivation for customers to go through the existing blizzard of permitting paperwork and interconnection documents.  As a result, the indirect costs related to this paperwork will be eliminated, with negligible (or in the case of DIY) zero direct labor costs.  Ironically, a professional solar contractor may still need to be hired to help with the paperwork to get the incentive – because that is the only remaining complicated part of an installation.

In this new channel – with labor and paperwork costs effectively reduced to zero, net system costs will be lower than the fully loaded costs of current utility, commercial and high-end residential installations.  These lower net costs, coupled with typically higher marginal electric rates, will create short paybacks and lead to rapid market adoption.  Customer buying habits may also change:  small, simple PV systems will be purchased on a credit card.  Need more power?  Buy another 1kw of panels with your next paycheck.

Just as the availability of affordable home computers created the desktop software and add-on components industry, this new low-end solar channel is also likely to spawn an ecosystem of related companies and services.  Naturally, electrical and HVAC contractors will participate in the solar boom.  Supplemental services such as monitoring, panel cleaning, troubleshooting and energy management capabilities are likely to find a market.

Plug & play solar panels will change our industry in ways we never expected.  It’s going to be a faster ride to grid parity than many people expected. 

Supply Modules > Demand Modules

It’s Econ 101.  Prices for solar modules will fall.  But not smoothly...nor painlessly.  Except for the highest efficiency suppliers (basically SunPower and Sanyo) and specialty products (Andalay) there is absolutely no differentiation in the module supply chain.  Since all modules are basically just blue/black glass with aluminum frames, the only way to get an integrator’s order is based on price.

So prices have started to fall — and fast.  Second and third tier manufacturers without strong downstream distribution will have to reduce their price the most in order to get orders.  Smart integrators will hold out for even lower prices, and will direct their orders to manufacturers who have staying power.

There are not many people who were in the solar industry in the “Old Days” when module manufacturers had to actually MARKET and SELL their products.  I’m talking 2004 here!  I may be “geezing”, but I remember when module prices marched steadily down to the mid $2 range, and that was when worldwide production was a fraction of what it is now.  Since 2004 it’s been purely a sellers market; module companies (and upstream players) steadily raised their prices because that was what the market supported.

It’s changing almost overnight to a BUYERS market for solar modules.  While this may put some stress on the margins of module manufacturers, these lower prices are terrific for the industry.  Low module prices mean low system prices — which will mean a huge increase in customer demand.  These lower prices, coupled with the 8 year ITC in the U.S., means that the residential retrofit, commercial flat roof and utility scale markets will all see very rapid growth in the coming years.  The surviving module companies will do terrifically well once prices and margins settle down to a more sustainable level.

It’s reasonable to expect other value chain adjustments as module supply exceeds demand.  Module manufacturers will slow down their production ramp and only consume the raw materials to which they have committed.  Silicon prices will come down quickly. Manufacturers will consolidate, both horizontally and vertically.

And finally, as these silicon prices plummet, the cost advantage of thin film modules will completely disappear.  Remember, BOS and installation costs for thin film are at least $0.75/watt higher than crystalline.  So who needs an 8% efficient thin film module at $1.75/watt when a perfectly good 15% efficient crystalline module is available for $2.50/watt by late 2009?

All industries go through cycles, and we’ve got a front row seat on the solar industry gaining scale and becoming much more customer focused -- and AFFORDABLE.

Are Republicans the Party of Big Oil?

In February the U.S. House of Representatives approved the Renewable Energy and Energy Tax Act of 2008. This Act would eliminate $18 billion in tax breaks for big oil companies to help pay for extending renewable energy tax credits. Now we’ll see if Senate Republicans can vote for good energy and environmental policy – or just vote for Big Oil again.

We’ve been through this before. Last December Senate Republicans voted along party lines – at the urging of the White House – to defeat a similar bill. This year, Republican opposition to this bill and favoritism to Big Oil is becoming a theme of the presidential campaign.

The result is that solar power and other forms of renewable energy have become politicized – to the detriment of everyone who uses electricity and cares about the environment. Fortunately, it looks like the next new thing is clean tech: silicon for solar cells as well as chips. But there’s a cloud on the horizon – and that is the Federal Government’s apparent hostility to any industry that has the potential to impede Big Oil. We’ve seen this with absurdly lame CAFÉ standards, the EPA’s refusal to allow California to regulate their own emissions, and outright obstruction of the Kyoto Protocol’s efforts.

The Spicy Solar Guy has been a registered Republican for over 20 years. This year I find it impossible to support a party that bends to the wishes of Big Oil. Their excuse is that the White House does not want to reduce incentives for finding new sources of oil and gas. We’ve obviously got an energy shortage – but let’s put these renewable energy incentives in perspective.

Renewable energy legislation that Republicans should pass moves $18 billion in tax incentives from Big Oil to the renewable energy industry over 10 years. In 2007 alone the profits of the Big Five oil companies were over $120 billion – if these profits continue at this pace they’d generate $1.2 trillion in profits over the same ten-year period.

Sound public policy is compromised when there is that much money at risk by incumbent industries. As a result, many people in the renewable energy industry are resigned to just waiting until the next President takes office for any substantive change in federal policy. But that delay will jeopardize thousands of Silicon Valley jobs, billions to our local economy, and puts us just that much farther behind compared to the rest of the world.

It’s an opportunity lost for the most transparent of reasons – Big Oil’s influence on our country’s energy and environmental policy. The impact is now being felt economically as higher energy prices create inflationary pressures. With $4/gallon gas and $110/barrel oil, our economy is going into a recession while our country writes ever bigger checks to foreign oil producers.

Big Oil does not need tax breaks while they’re earning record (some say windfall) profits. Senate and House Republicans need to wake up to the fact that their votes for big oil are embarrassing and politically suicidal. Our country’s energy policies are an economic and environmental dead end, and we cannot wait until next year to turn around. Let’s get an Energy Bill passed now that removes unnecessary support for Big Oil and accelerates the growth of clean, renewable power.

Record Utility Rates Make Solar Even More Cost Effective

Did anyone notice the juxtaposition of two utility news blurbs in the August 8th, 2007 Mercury News? Are we really that naive that we can’t follow a simple money trail?

The first article pointed out that California’s largest electrical utility saw a profit boost of 16 percent due to higher electricity rates.

The next article right below quoted the same utility’s CEO as saying that the California Solar Initiative (CSI) is behind in its goal of 3,000 megawatts of distributed (on customer rooftop) solar power. This CEO continued to say that the issue is that solar power is too expensive.

Huh?

A typical 3kw residential system costs $24,000 without incentives, and will produce 4,300 kwh per year virtually maintenance-free for 30 years. That works out to costs for solar – on a residential or commercial customer’s rooftop – at 19 cents per kwh. With incentives (both from the CSI and a small federal tax credit) costs for solar are 11 cents per kwh. I don’t know how many of you live in California, but pretty much anyone with an air conditioner and a few electronic toys pays closer to 25 or 30 cents per kwh. And these prices -- as this utility’s stockholders will be happy to say – will continue to rise.

Because of these high electric rates customer demand for solar power systems is an all-time high in California. Unfortunately, the new California Solar Initiative is now administered by this exact same utility – and delays to get customers connected and paid for their rebates have stretched from one month to well over six months.

And these delays are profitable! Let’s see, for a $300 monthly electric saving, that five month delay means an extra $1,500 in profit for each stalled solar customer. Multiply that by thousands of customers and you can see how much more profit a utility can generate by poorly administering the best solar program in the country.

Distributed solar power is cost effective today when it’s on a customer’s rooftop. Maybe that’s what this CEO meant – that solar power is not cost effective for him since it’s so good for his customers.

Beware Before You Compare World Solar Markets

For the past few years I’ve been hearing about how efficient and less expensive it is to install solar power systems in Germany. Many people credit this growth to their feed-in tariff. But at the end of the day, it’s really lower costs that will drive faster market growth.

So I wondered, why are German installations so much less expensive than U.S. installations? Is it because of superior engineering, better beer or something else entirely.

Well, there’s only one way to find out – and that’s from the roof down. So…after tromping all over the country with our Regional Director (who’s got more roof time than me – plus much safer driving skills) we learned that fundamentally, costs are lower in Germany because there are fewer system requirements and regulations.

- Negligible incentive paperwork (job folders are 2” thick in the U.S.)
- No engineering drawings (installers work off diagrams)
- No local building permit
- No local inspection
- No utility interconnection paperwork
- No utility inspection
- No rebate “check is in the mail”
- No AC disconnect
- No DC disconnect
- Source circuits from modules are run with USE-2 cable with quick connects right into sockets on the inverters – no wire transistions
- Source circuit cabling runs in snap-on plastic raceway – no conduit
- There are residential solar installers with storefronts in many towns
- Jobs are done in a week – from start to finish, including paperwork
- Oh, and by the way, no grounding is required on each module and rack component.

So before anyone here in the U.S. advocates that feed-in tariffs will result in a market that grows as fast as Germany, we must first recognize that our costs are structurally $1-$2 higher. Regardless of how much more efficient our industry gets (and some companies already run a very tight ship here), we cannot make these additional costs disappear easily. Note that many of these additional costs are fixed, so on larger systems they are not as significant. On smaller residential systems incentives must be designed to take this substantial “bureaucratic friction” into account.

Ten Solar Predictions for 2007

1. Lot's of M&A activity throughout the solar value chain.  Wafer-Cell-Module companies will vertically integrate -- and integrators will merge.

2. State incentives, primarily those in CA, will drive solar growth in the U.S.  East coast states, most likely NJ, will come back to life as their programs get rejuvenated.

3. The U.S. government will wake up to solar in a big way -- with more generous and sustained tax credits in 2008.

4. Module companies will go back to selling, with market share as their primary goal.

5. Module prices will decline by $1/watt, and price tiers will develop based on perceived product quality and company reputations.

6. Third tier module companies will not be able to maintain profits after subtracting $1/watt from their top line -- and will bail out.

7. Thin film technologies will see slow and steady production ramp ups.

8. Another severe gas crisis -- as we had in the 70s -- will spur demand for solar power and electric vehicles.

9. "Carbon Neutral" will replace "Global Warming" as the environmental industry's catch phrase.

10. The solar silicon shortage will be replaced by the cosmetic surgery silicone shortage as new silicon plants come on line and Dow gets back into the implant business.

Open Letter to Solar Venture Capitalists

Ponder these four realities when you consider a new solar technology:

1. Start your due diligence on a 10 year old roof.  It is an extremely hostile environment.  When I go up there just about the only thing I see that is still in good shape is corrosion-proof metal and glass.

2. Does anyone remember TV antenna and sattelite dish rotators?  How long did that mechanism last?

3. High efficiency wins except where space is virtually unlimited.  Roof space is generally not sufficient to meet a building's load for any structure over one story high.

4. Customers don't buy solar cells -- so it doesn't matter what they cost per watt.  The only things that matters to the customer are the total installed cost per watt of the entire *system* and lifecycle energy output.

Financial Impact of the real "Silicon Shortage"

Since the "silicon shortage" began two years ago in the solar industry, it had the following financial impact:

- Silicon refiners made more money as the industry grew
- Solar module manufacturers raised their prices and made more money as the industry grew
- Designers/Integrators (like Akeena Solar, etc.) made more money as the industry grew
- Customers (business and commercial) purchased more solar because their electric rates and environmental concerns escalated
- Incentives in key states (CA and NJ) were reduced (generating more installed kw per dollar of incentive) as the industry grew

Everyone has benefitted throughout the value chain.  Yes, customers paid a bit more....and I would rather see prices declining rather than staying the same or even increasing.  But it is a misconception that this shortage was entirely a bad thing.

Nevertheless, I'm looking forward to the day when prices throughout the value chain begin to decline again.