The opportunity is immense
Solar is still a relatively immature industry. About 0.2%
of electricity in the U.S. comes from solar generation and
solar has been installed on less than 250,000 homes in the
U.S. If a building or structure receives direct sunlight and
uses electricity solar could be used to generate some of
that electricity. The residential market potential is
immense: there are more than 90 million single family homes
in the U.S. and as many as 50 million more households in
multi-family structures and several million more commercial
and other non-residential structures. While solar may not
work on every structure in the U.S. just a small wedge of
this market is worth hundreds of billions of dollars.
In some markets it is already cheaper for a household to
invest in solar than to buy electricity, and the projection
is that at a $3 per watt for the cost of installed solar,
about 100 GW could be economically installed today without
relying on any state or federal subsidy programs. As the
market closes on that $3 per watt threshold, the rate of
growth will almost certainly explode. Manufacturing
capacity, capital and a skilled labor force will be the only
constraints on growth.
Some possible bumps ahead?
The future isn’t all sunshine and excitement – subsidy
erosion, attacks from utilities, a slowing of the price
reductions of solar panels, an uncertain market for utility
scale projects due to low wholesale power prices, and
structural market challenges like a lack of adequate and low
cost capital are all possible challenges to the near-term
success of the solar industry.
Both federal incentives and local support like net
metering are at
risk of being scaled back. The federal Investment Tax
Credit is set to decrease from 30% to 10% if not extended by
December 31, 2016. State-level renewable portfolio
standards, or regulations that incentivize or require
utilities to purchase renewable power or solar specifically,
also have an unpredictable future. These portfolio standards
are threatened by policy instability, driven by some
utilities, but more seriously by conservative political
groups like the American Legislative Exchange Council and
Heritage Foundation, which are actively campaigning (though
unsuccessfully so far) to roll back these programs.
Net metering policies that allow households and
businesses with solar to sell their surplus power back to
the grid are another important economic program for solar
growth, as solar output does not necessarily match energy
demand (getting value for electricity generated but not used
on site is typically vital for project economics to work).
Utilities have made targeted efforts to limit or reverse net
metering requirements, arguing that these programs increase
their cost of managing the grid, and that the additional
costs for solar connections are borne by consumers that have
not installed solar. Several utility executives have also
begun to acknowledge that distributed energy sources like
solar pose a direct threat to the utility business model.
This growing conflict, across state and local policy
supports will only add to uncertainty around the stability
of the programs that solar depends upon for growth in the
near-term. Additionally, as we have seen in markets like
with New Jersey SRECs, market dynamics can also erode
portfolio standard values and undermine a program’s
stability. Uncertainty with respect to program value has two
related effects: 1) direct reduction of program value is a
drag on project economics, and 2) the inability to obtain
loans or investments because investors and lenders will
discount the revenue associated with an uncertain program.
This pool of incentives is vital for distributed solar’s
immediate future in that they provide the bridge between the
price per unit of electricity from on-site solar generation
and the delivered cost of power from a utility.
As noted above, the downward trend in panel pricing
appears to have slowed. Investment in solar PV production
and manufacturing fell by 72% from 2011 to 2012, mostly
because of market overcapacity. Despite some recovery
(investment is expected
to rise by 30% by the end of this year) there is simply
less excess panel supply to force down prices in the
near-term. While advances in the economic efficiency of
other pieces of the full stack of solar system costs –
transactional, installation, non-panel components, customer
acquisition – will continue to decline, these have
historically represented a much smaller portion of the
overall drop in the price of solar, and the price declines
will be less linear than the decline in panel prices have
been.
The utility-scale market will drive a smaller portion of
growth than it has for past few years. The third quarter of
2013 saw a decrease in utility-scale solar installations to
the lowest
level in the past six quarters. Wholesale electricity
prices remain low in many markets (islands or any market
using diesel fired electric generation are an obvious and
important exception), and with fewer mandated pricing
premiums from utilities there are fewer opportunities to
build economically viable utility scale solar projects.
Additionally, the demand for capital against the rapid
pace of growth is a constraint that may not resolve in the
near term. The pool of investors and associated available
capital that has experience with solar finance remains
limited – critically so for tax equity investors – and new
market entrants face at least a significant educational
barrier to entry. The downstream market for installation and
ownership is still very fragmented, and without more players
that can draw investments in the hundreds of millions to
multiple-billions of dollars range into the solar market,
the appetite of large institutional investors, which drive
most large-scale infrastructure investment in developed
markets, will be limited.
The confluence of these three near-term challenges
creates the potential for some mild disruption to the still
nascent marketplace. So a market evolution that looks like
this:
rather than this:
Is a possibility that needs to be factored into planning
for anyone participating in the solar industry.
An aggressive, dynamic, and visionary strategy put
in place today will define who wins the solar race
The longer-term future of the solar industry, and
especially the future of distributed solar PV, is exciting
and the economic potential is simply immense. The industry
will certainly go through a period of exponential growth.
The solar skepticism that grew out of anti-solar campaigning
follow the failure of Solyndra is now a distant memory for
most of the industry and increasingly more investors.
Despite this well-founded enthusiasm, there are real
near-term concerns that could slow the pace of the
industry’s expansion until deploying distributed solar costs
less than the utilities’ per-unit cost of power delivery
with a high enough level of certainty to attract many more
investors than are already invested in solar projects.
Actual policy instability and the associated perceived risks
could create real limits in the pace of solar’s growth.
As the industry moves forward it will be vital to have
vision and strategy – investors and businesses that entered
the market early and have survived the challenges so far
already understand this. As new market participants look to
the huge potential of solar they too must make sure they
have the vision, knowledge and flexibility to navigate some
potential near-term bumps in order to win a commanding share
of the industry’s tremendous future.
Special thanks to Claire Austin, a very smart young
clean energy professional, and 2012 graduate of the School
of Foreign Service at Georgetown University, who was
instrumental in the research and writing of this piece.
Elias Hinckley is a strategic advisor on energy
finance and energy policy to investors, energy companies and
governments. He is an energy and tax partner with the law
firm Sullivan and Worcester where he helps his clients solve
the challenges of a changing energy landscape by using his
understanding of energy policy, regulation, and markets to
quickly and creatively assemble successful energy deals.
Republished with permission from
Energy Trends Insider
http://breakingenergy.com/2013/11/07/the-solar-industry-is-red-hot-will-it-get-hotter/