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Going Solar

By Adam Browning

Solar energy has been “just around the corner” for the past 60 years, ever since the first photovoltaic (PV) cell was invented in Bell Labs in 1953. Has solar’s moment in the sun finally arrived? There’s a good case to be made that the answer is yes.

According to the Department of Energy, the U.S. will need 386 gigawatts (GW) of new, nonnuclear electricity generation by 2015 to meet anticipated demand. That’s the equivalent of adding the demand of about seven Californias, and it’s due online in just six years. Where is all the new generation going to come from? Nuclear plants take at least ten years to build. Over the past five years, coal’s costs have tripled, the price of natural gas has doubled — and with the leaders of both political parties calling for carbon regulation, those prices are only going to go up. Indeed, the cost of carbon is already being factored into investment decisions, and numerous coal deals have recently fallen through over regulatory and investment risk.

On the other hand, as the path for fossil fuel grows more challenging, Congress is smoothing the road for solar energy. On October 3, 2008, Congress extended a 30% investment tax credit for solar energy through 2016. Think of it as a 30%-off sale — and not just for the day after Christmas, but for the next eight years. This historic action is the first time the federal government has granted solar energy — or any renewable fuel source — the type of ongoing market support necessary for the industry to make long-term investments. Frankly, it’s a game-changer, and it should cause skeptics to rethink all they thought they knew about solar energy’s potential.

Demand for Solar Is on the Rise
The solar industry is well situated to rise to the energy-demand challenge. In 2007, over $12 billion in venture capital and private equity was invested in solar companies globally. Strong market support in Europe and Japan has built the foundation for an industry of robust strength throughout the value chain, poised to deliver on a serious scale. In fact, in a major milestone, the industry has grown to a point where many analysts predict that in 2009, the supply of photovoltaic modules will exceed demand for the first time in the past four years. This is widely anticipated to result in lower prices for solar modules, and from a development perspective, lower prices dramatically increase market opportunities — a virtuous circle, if you will.

The photovoltaic industry generated $17.2 billion in global revenues in 2007, with a market growth of 62% worldwide, according to Solarbuzz.com, a leading industry analyst. The U.S. accounted for just 8% of global PV sales, but solar’s prospects in the U.S., with a growth of 57% in 2007, are growing brighter by the day. Below, we discuss some of the drivers in each market.

Residential Opportunities
There are a couple of reasons why the residential market is the hot new growth sector for solar energy. First, residential retail electricity rates are typically higher than commercial rates, making an investment in solar more valuable. Secondly, the cap on federal tax credits for residential installations was recently lifted, raising the value of the investment tax credit to the homeowner from $2,000 to an average of $6,000 — making the economics in the sector even better. Finally, there has been a burst of innovation in this sector, as companies look for ways to reach and serve the needs of the residential homeowner market. Sungevity, for example, uses proprietary satellite imagery to deliver quotes to potential residential customers online — an advantage that allows the company to cut costs by reducing site visits and gives customers the convenience of completing transactions online. Meanwhile, Navigant Consulting calculates that residential rooftops will have the technical potential to host 552 GW of solar energy by 2025, and that bringing solar sales into the digital age will help the industry deliver on that kind of scale.

Combating Costs for Consumers
One of the chief obstacles to going solar is high up-front costs — a problem that has been the focus of a great deal of recent innovation. SolarCity, based in Foster City, Calif., now gives customers the option of leasing solar panels instead of buying them outright, with monthly lease payments typically less than utility bills. SunRun, based in San Francisco, Calif., has developed a partial-power purchase agreement model, in which customers pay by the kilowatt-hour (kWh) rather than by the panel. Financial innovation is just as important as technological innovation when it comes to bringing solar energy into the mainstream.

Installing solar panels on new home construction has been an increasing trend. In tight times home builders look for ways of differentiating their product, and a home that can be advertised as a ‘“zero energy home,” with no future utility bills, has proven to be an attractive selling point. Aaron Nitzkin of OCR Solar & Roofing, a company that builds solar-integrated roofs, reports, “One of our builder clients launched a new 100% solar community in March 2008. Since then, it has released 28 homes and sold 27, which is pretty impressive considering the overall housing market conditions of the year.”

A successful business is one that knows how to control costs — a maxim that’s true in good times, and even more so in bad. Over the past five years, retail electricity rates have risen by an average of 4.7% per year, outpacing inflation by approximately 1.2%, according to the Energy Information Agency. Going solar offers businesses the opportunity to fix their energy costs as a hedge against long-term utility rate increases. Walmart, for example, has made a significant investment in solar energy, putting solar panels on 22 retail stores in California and Hawaii, with reported plans for national expansion.

Shiseido, one of the world’s largest cosmetics companies, installed a 699 kW solar roof on its American headquarters in New Jersey. While a corporate culture of environmental responsibility was a decision driver, the business case closed the deal. The system saves over $100,000 annually, with a six-year payback.

Efficient Financing
Over the past several years, the preferred purchasing model for the sector has been the Power Purchase Agreement (PPA). Under this model, instead of buying and installing a turnkey solar system, a customer buys solar energy by the kWh under a 15- to 20-year contract from a third-party solar service provider who installs, operates and maintains a solar system on the customer’s roof. This business model overcomes two obstacles: First, the customer has no need to find financing for what would otherwise be a large cash outlay; secondly, it shifts the performance risk to the service provider. The customer pays only for what the system produces.

Utilities Get on Board
One of the most significant recent developments in the sector is utility. State-level renewable energy mandates have induced utilities across the country to sign PPAs with large central-station solar plants at an unprecedented rate from a wide variety of solar technologies. In June 2007, Acciona commissioned a 64-megawatt (MW) solar parabolic trough plant in Boulder City, Nev., the first solar thermal electric plant to come online in the U.S. in the last 15 years.

The rush is on: California utilities have signed over 3.5 GW in contracts with a wide variety of solar technologies, including dish sterling engines, concentrating photovoltaics, tracking photovoltaics, thin-film photovoltaics, heliostat power towers, parabolic troughs and linear Fresnel lens systems.

While the concentrating thermal technologies have the advantage of a clear path to storage, long a holy grail of many renewables, PV technologies don’t use any water — a big factor in desert climates — and can be installed inside distribution networks without the need for new transmission. All have projected future price points below those of the fossil fuel alternatives. First Solar, a thin-film manufacturer, projects that it will be able to profitably sell electricity in the U.S. for between 8 cents and 10 cents per kWh by 2012, and the National Renewable Energy Lab estimates that concentrating solar power technologies will be able to deliver energy at 11.5 cents per kWh by 2015, a rate comparable to that of a combined-cycle gas turbine.

In the past six months, a new, unprecedented trend has emerged: Utilities across the country are not just contracting for solar power, but getting into the solar generation business themselves. Southern California Edison has submitted a proposal to regulators to install 250 to 500 MW of solar energy on leased rooftops in its service territory; Los Angeles Water and Power has signed on for 400 MW; San Diego Gas & Electric, for 80 MW; and Duke Energy Carolinas plans to spend $100 million over the next two years on solar energy as a wholesale generating resource. One of the underappreciated regulatory changes is the fact that the legislation that extended the federal investment tax credit also removed the utility exemption, and so this trend is very likely to accelerate.

The Future Is Bright
Call it the intersection of inevitability. As fossil fuels are getting more expensive, solar energy is getting cheaper. PVs can deliver energy at or near retail grid parity in some areas of the country right now, and if the Department of Energy’s projections hold true, going solar will be cheaper than buying from the utility for about 40% of American households by 2015 — without further subsidy. Solar’s future is bright indeed.