Archive for the ‘Solar Grid Parity’ Category

Numerous solar industry analyst forecasts and media articles herald the U.S. as the next big market opportunity for global PV solar energy suppliers. Many offshore PV industry

State RPS Program Driven or ITC Driven?

companies have been setting up distribution and facilities across the country to position themselves for this growth opportunity.

At a recent Wall Street alternative energy conference, progressive utility CEO David Crane , a strong solar energy supporter, gave his view about government support for renewable energy. The federal government is too paralyzed to produce any meaningful support policy via either climate change or energy legislation, says Crane, but the renewables business will move forward strongly on the strength of state level legislation.

While the state-by-state paradigm has been credited with slow but steady solar energy growth in the U.S., the mid-term elections of 2010 resulted in new legislators in various states who have been reversing support mechanisms for clean energy and climate change mitigation.

The most recent example is New Jersey Governor Christie’s recent reduction in the state renewable portfolio standard (RPS) target (30% by 2021 now 22.5%) and language that may remove enforcement teeth for meeting the threshold by making it voluntary for utilities.  (An RPS is a requirement for utilities to produce or buy and sell a certain percentage of renewable energy to their customers.) He also withdrew New Jersey from the highly successful Regional Greenhouse Gas Initiative, an alliance of nine North East and mid-Atlantic states.

Seven other states have quietly reduced their RPS mandate and diminished or eliminated penalties for non-compliance by the utilities in the last few months.

Governor Christie and other detractors of RPS mandates routinely cite escalating costs to ratepayers (utility customers) for their lack of support. Christie believes the RPS is an “unreasonable transference of wealth from ratepayers at large to solar developers.” But an extensive Lawrence Berkeley National Laboratory RPS report in 2010 and more recent studies show that the “cost is a fraction of a percent.” Tiny by anyone’s standard.

The trade off, producing more clean energy which reduces health care costs and environmental damage costs (compared to burning fossil fuel) while creating a high number of quality jobs (17 jobs per $1M spent vs. 5 jobs per $1M spent in oil & gas sector)  in a new economic ecosystem, for that small cost, would seem like excellent bang for the dollar spent. Am I missing something here?

Source: Lawrence Berkeley National Laboratory

The chart above shows the projected amount of installed capacity (in yellow at top) if current RPS programs are kept in place. Approximately 6 million tons of C0₂ would be displaced annually if achieved, along with elimination of large amounts of ground level particulate pollution.

With the rapid reduction in the installed cost of PV systems, declining RPS programs may become less important in regions where high utility cost and other factors line up to make winning project proposals that are close to retail cost grid parity (including only the federal ITC incentive) in the very near future.

Recent, high frequency, global extreme weather events are affecting crop yields and increasing negative feedback loops, not to mention causing significant loss of human life. I am deeply concerned about the near term, current generation effects of climate change. With C0₂ levels now approaching 400 parts per million (350 ppm is the generally agreed tipping point) these decisions and others like it are reckless and irresponsible in my opinion.

The weekly update shows average sales price on the spot market still declining in all categories with the exception of inverters.

With inventory likely backing up at manufacturers, distributors, integrators and installers, many PV manufacturing companies have announced idling of production capacity. An example is REC’s recent announcement here.

It’s likely that the price bottom is near. With the corresponding drop at the installed cost level, many projects on hold that had borderline financing attributes in Germany, Italy and the U.S. will now go ahead as retail grid parity will become the norm in high utility cost regions. In addition, the race is on in Germany, again, before the next ratchet down in subsidy program. Q4 and Q1 2012 may see a return to manufacturing capacity utilization growth and normal 3 month inventory work through.

Following up on my 4/22 and 4/29 solar energy supply chain posts, the average selling price (ASP) of the main PV system components is still in decline across all categories as demand weakens further and manufacturing capacity continues to build.

Many industry observers believe that pricing will stabilize in 2H 2011 as inventory is worked through now that the Italian subsidy program has finally been announced giving markets some certainty. In addition, other markets (U.S., China & India) should continue to ramp up. Whether these markets can ramp quickly is the main question.  With global 2011 demand figures ranging from 16GW to 22GW (Tier 1 Asian manufactures can supply 15GW) and manufacturing capacity heading toward 30GW, the picture is not good for module manufactures with high operating leverage and weak balance sheets. Overall, this is difficult market to forecast demand and supply chain pricing will continue to slide with this lack of demand clarity.

Courtesy of the U.S. Department of Energy’s Solar America Cities program, the PV Cost Calculator is a system modeling tool, which computes and then provides various visualizations of solar PV’s trend toward retail grid parity in the next few years. The calculator is designed for residential (4kW size) and small commercial (20kW) installations. Retail grid parity is when the levelized cost of energy is same as retail priced energy from the utilities in a given region.

Modeling grid parity, whether in front of (retail) or behind (wholesale) the utility meter, is a notoriously difficult endeavor due to the large number of variables. The PV Cost Convergence Calculator models a complex set of variables that are highly dependent on local issues.  It takes into account long term federal and state incentives and provides a 20 year analysis period.

The screen shot below is for a 20kW commercial system using a moderate scenario – 4% increase in conventional utility energy cost and moderate decrease of the PV system price. With this scenario, the majority of Solar America Cities are at or below retail grid parity in 2012.

Dotted line - utility cost with 4% annual inflation

The PV Cost Calculator makes a number of assumptions to simplify the calculation set and is meant as an illustration for Solar America program cities.  Another DOE agency, The National Renewable Energy Laboratory provides a sophisticated, detailed PV system modeling tool called the Solar Advisor Model (SAM). SAM makes performance predictions and economic estimates for grid-connected solar systems. The SAM model calculates the cost of generating electricity based on information you provide about a project’s location, installation and operating costs, type of financing, applicable tax credits and incentives, and system specifications. The SAM model is an invaluable tool for feasibility modeling of a proposed project and for working with project financing entities. Its also an interesting tool which we use for targeting the sales process of PV system components.

This is clearly the topic of the day for many of my readers who follow publicly traded solar energy stocks.

Clearly the rush is on to install before subsidies decrease! /Source: Glasstec

The basic facts:

• The recent government subsidy scheme reduction announcement in Germany and a likely reduction for the overheated Italian market by mid-summer, combined with reductions and subsidy caps in France and other smaller EU programs, have created a rush to initiate and complete projects in 2011—before the new solar subsidy schemes kick in later this year.  Consequently, the PV supply chain is currently in hyper-drive, and there has been a temporary increase in c-Si wafer and cell selling price.

• Recent manufacturing capacity addition announcements from the top 20 c-Si and thin-film solar energy producers will add another 6GW – 10GW of production capacity in 2011.

• With global demand seemingly dropping by as much as 50% due to the EU country’s government subsidy reductions, and rapid increases in manufacturing capacity, oversupply is a looming problem in Q4 2011 and into 2012.

• Demand in 2011 may reach approximately 22 GW, and manufacturing capacity is climbing to approximately 32GW (all module providers). For any industry, this is not a good supply/demand picture.

As I wrote in a previous piece, this situation has many unknowns, is highly fluid and can change rapidly. The three main unknowns are 1) when and how fast does that new PV solar energy manufacturing capacity come on line, 2) how quickly will the overcapacity drive down prices to the point that solar grid parity is achieved in many markets (creating a true market demand signal) and 3) whether countries such as the US, China and India can increase demand sufficiently to reduce the severity of the oversupply.

Solar grid parity looming /Source: Deutsche Bank

There is also much talk about developing nations in Africa and Asia increasing demand. But my recent experience consulting to a few companies targeting these regions doesn’t instill confidence. Aside from the ever-present finance barrier (especially in under-performing economies), the utility grid in most of these locations is incredibly weak or non-existent.  It’s well understood that transmission grids are the PV industry growth limitation in the US but developing nations have an even direr situation with energy infrastructure.

While it is likely that 2012 will see significant industry realignment in price, demand and competitors at the module manufacturing level, this is an industry that has defied doom and gloom predictions many times over the last 10 years. A change in any one of the many PV market variables can have significant positive impact on the supply/demand picture.

For instance, one nation with a significant new subsidy program can change the global supply situation in one quarter or a spike in fossil fuel energy cost can lead to a massive uptake of solar energy in a given locale.

Stay tuned, it should be an interesting 18 months.

. . . is the project finance industry.  With the complexities of the PV industry, it’s easy to lose track of this fact while focusing on other issues, which are important but completely subservient to the finance issue. While subsidies, module efficiencies and other individual solar energy project lines are highly important, what matters most are the project pro forma’s NPV and IRR and long-term viability for project finance entities. That is their bottom line.

U.S SREC Programs Source: SRECTrade

So it’s surprising to me that the debate around Solar Renewable Energy Credits (SREC’s) vs. Feed In Tariff (FIT) is so hotly contested.  An SREC is a certificate representing the “green attributes” of one megawatt-hour (MWh) of electricity generated from solar energy. SREC’s can be sold into trading pools that have buyers (usually utility operators) who need the credits to comply with Renewable Portfolio Standard mandates set by a few states.  The price for an SREC can vary widely based on demand and legislative policy and a host of other factors. A good review of the SREC program can be found here.

A FIT program is a government legislated policy mechanism, which encourages generation of solar energy and other renewable energy.  FIT programs usually require utilities, under long term contracts, to pay a premium for renewable energy generation with the objective of avoiding building new fossil fuel generation facilities with attendant pollution costs. The overall goal is to foster renewable energy uptake where the kWh price of clean energy is reduced and reaches grid parity.

Energy subsidy programs are highly complex and devil is in the detail. But the basic differentiator is that a FIT is a fixed priced mechanism and an SREC is a variable priced mechanism based on demand from un-regulated trading pools. FIT’s provide a long term energy purchase price that give a solar project pro forma long term certainty for solar project financing entities. SREC’s create a difficult situation for solar project owners who are trying to forecast revenue in the near and distant future, an “SREC forward curve” in solar project developer parlance.

FIT = Rapid Adoption of PV

Most SREC proponents claim that it creates the most competitive environment and puts pressure on the solar industry to innovate to lower installed cost. FIT programs, when structured properly, have auction provisions, which achieve the same outcome. The recent Renewable Auction Mechanism (RAM) program by the California Public Utility Corporation is great example of this type of FIT.  The India Nehru Solar Mission is another recent FIT program that selects lowest tariff bids.

Neither the SREC or FIT programs are perfect solutions for stimulating renewable energy demand.  Both have their challenges in implementation due to the highly fractured regulatory environment at both the state and federal level. And FIT programs can lead to a severely overheated marketplace where the program is eventually withdrawn. But a FIT, when designed and implemented properly, will create the lowest risk option for project financing entities and create the steepest solar adoption curve.

As I wrote in a previous post, electricity generated from PV is moving closer and closer to grid parity. We may see grid parity (the cost of solar energy being the same price as brown fuel generated power) in the next few years over wide swaths of the U.S.

No Need For Those Cooling Towers Now

Now comes a study by Duke University, “Solar and Nuclear Costs – The Historic Crossover”, which demonstrates that solar energy is now equal to or less than the expected cost of $0.16/kWh of power generated from new, latest technology nuclear plants.

From the report, “Solar photovoltaics have joined the ranks of lower-cost alternatives to new nuclear power plants.”

This is another example of relentless downward cost line of installed solar.  It’s also a good example of the profound amount of subsidies (Solinequity) that nuclear, goal and gas industries receive compared solar. Contained in the report, “From 1943 to 1999 the U.S. government paid nearly $151 billion, in 1999 dollars, in subsidies for wind, solar and nuclear power, Marshall Goldberg of the Renewable Energy Policy Project, a research organization in Washington, wrote in a July 2000 report. Of this total, 96.3 percent went to nuclear power.” the report said.

As mentioned in previous posts, the installed cost of a photovoltaic (PV) solar energy system has declined by more than 50% in the past 2 years. This is a result of large cost reductions in solar panels, cost reductions in balance of systems and higher efficiency in the design, engineering and installation functions.  Overall, the levelized cost of energy (LCOE), a key metric for project finance entities, is significantly enhanced by these cost reductions, resulting in strong solar project bankability for the finance community. (LCOE is defined as all the expense line items of a PV system’s installed cost + the total lifetime cost of the PV system divided by the total amount of energy output in kW hours that the system will put out over its lifetime,)

At the same time, energy prices from conventional brown fuel utilities have been increasing by an average of 2.5% per year in the U.S. While there has been a temporary flattening of this price increase during the recession, all forecasts point to a 2.5% to 6% annual increase in electricity rates as the economy recovers.

These two factors are rapidly leading to a situation where the retail cost of solar PV electricity at the kWh level (the unit of energy your utility meter reads) will be same or less than utility-supplied energy (a.k.a. “grid parity”) by 2012 – 13 in vast geographies across the U.S. and globally. Currently, in a few regions solar is already at grid parity, including city centers in California and in New England, where utility rates are above $0.15/kWh with time of use (peaking) charges that are more 5X that rate. An excellent research report about near term, residential solar grid parity in the U.S. can be found here from the highly esteemed people at the National Renewable Energy Laboratory (NREL) which part of the U.S. Department of Energy.

Internationally, a recent announcement about the reduction in the Italian solar subsidy program (Italy has highest utility grid power costs in Europe) is in reaction to this drop in PV costs. Grid parity in that country is imminent.

Solar energy grid parity is not a simple subject. The number of variables, including widely varying utility rate structures from location to location, different insolation (incoming solar radiation), conditions labor costs, transmission and distribution costs etc. make broad generalities less accurate.  Diving down into the detail in a blog format is not possible but the NREL presentation cited above provides solid background on these variables and the process to determining grid parity. What is exciting is that this intersection of downward installed PV costs with rising utility costs will make the need for government subsidies less important.

As page 22 of the NREL presentation shows, 80% or more of the U.S. will be at grid parity with only the 30% federal investment tax credit (ITC) subsidy being applied (it also includes a CO2 carbon policy resulting in 0.3 cents/kWh – 2.5 cents/kWh utility cost increase depending on location). This removes the need for state subsidies and will go a long way toward a national solar energy market rather than the state-by-state paradigm currently hobbling U.S. market growth. Previously, photovoltaic solar energy has only been deployed where a strong state subsidy or mandate could be combined with the ITC to make a solar system economical.

For the first time in the history of the solar energy industry, there will be a demand pull market place on large markets instead of an artificially driven market that is a response to large and complex government incentive programs. While the industry needs the banks to start lending again to finance new solar installations, grid parity will go a long way toward making the industry  more predictable and make solar bankability less risky in the eyes of the finance community.