‘Wow!’ I thought. That depletes the EL supply-side strategy, leaving just industrial wind and distributed (micro-solar)–and maybe a little biomass.

I was reminded of this when I read a recent article in ClimateWire (sub. req.), by Lacey Johnson, “Boom in Solar Panels injects NIMBY Battles into Neighborhoods.”

The story begins with Barbara Katz, whose hilltop home in historic north Baltimore, amid roaming wildlife, was threatened by her neighbor’s plan to install a 600-panel solar array. Johnson reports:

“My initial reaction was, ‘Oh my gosh, this is going to be an eyesore,’” remembers Katz, who was confronted by a plan for more than 600 ground-based solar panels on her neighbors’ lawn. “No one would want this in their backyard. It looks like it’s an industrial park.”

Johnson continues:

It takes a good deal of work — and regulations — to keep suburban communities looking picture perfect, and arrays of shiny solar panels don’t always fit the vision homeowners have for their neighborhoods. All over the country, citizens like Katz have begun organizing to block renewable energy projects, throwing a wrench into some peoples’ plans to “go green.”

She reports that while the U.S. solar industry enjoyed a business boom last year due to government subsidies and falling costs, this “good news for the environment” was also “an annoyance for residents who are invested in keeping up the traditional appearances of their surroundings.”

The NIMBY (“not in my backyard”) problem has gone from landfills and power lines to wind farms and residential solar arrays, Johnson adds. In response, the solar lobby wants to differentiate their product from blight. Homeowners associations should look at “”someone’s roof looking slightly different” from “painting your house yellow polka dots,” stated one solar installer.

But for Katz, the negative externality of micro-solar is about economics too:

“The whole backside of my house faces that — the kitchen, dining room, living room, bathroom and a lovely cut stone patio,” said Katz, who believes the panels would also destroy the ecosystem of birds and animals that pass through her yard. “The neighborhood is not opposed to renewable energy and being green,” she explained. “Folks who have signed the petition are doing so because they feel it will lower the property value of their homes.”

Johnson goes on to report that many states’ “solar/wind access” policies protecting homeowner solar or wind systems are often overruled by bylaws of homeowners associations and historic districts. In Aspen, Colorado, for example,

residents are required to notify their neighbors before installing any solar array larger than 200 square feet — barely half the size of a small rooftop. Homeowners are then subject to public hearings and could pay up to $500 for a residential solar review. The regulations were adopted by Pitkin County last summer, after a family 15 miles north of Aspen, in Snowmass, complained about a blinding glare reflecting off their neighbor’s panels.

Johnson’s piece continues:

“When I saw pictures, it was really bad,” admitted Mike Tierney, the owner of a local installation company, Aspen Solar. “It would be tough if it was my house and I had to look at it every day.” He said the regulations, which create extra paperwork and expense for his customers, have already taken a toll on his business.

Ending the piece on an optimistic note, Johnson describes new efforts by scientists and architects to make “smarter” solar technology such as solar shingles (a Dow Chemical project) to “make aesthetic problems, like glare, a thing of the past.”

But can this be done in any sort of a cost-effective manner? And if not, what does this say about the resource costs (think emissions) of the whole effort?

This, indeed, is the curse of dilute energy versus the dense energies of oil, gas, and coal. It is the curse of the sun’s (dilute) flow versus the (dense) stock of the sun’s work over the ages.

With the fossil-fuel era still young, on-grid solar might have to wait for another century, if not millennium.

———————–

1. Christopher Flavin, Comments at a conference on the Department of Energy National Energy Modeling System (March 30, 1998, Washington, D.C.). Flavin would prefer distributed solar to distributed natural gas, however. Robert Bradley, “The Increasing Sustainability of Conventional Energy,” April 22, 1999, p. 10 & fn. 41).

“Without these subsidies … ‘On-grid PV,’ would be virtually non-existent. It only exists because the solar industry lobbied government officials to compel citizens to purchase this otherwise non-economic energy source.”

“Included in the list of failed solar companies is Solon of Germany whose corporate slogan was ‘Don’t Leave the Planet to the Stupid.’ Fortunately for taxpayers, it appears Solon will be leaving the planet.”

A recent Wall Street Journal article, Dark Times Fall on Solar Sector(December 27, 2011), surveyed the latest solar industry fallout, as well as overviewed the financial condition of the surviving companies.

But the article seems to mistakenly equate the fallout to viability as if better profits would mean sustainability. The industry is not viable, but this is unrelated to the recent fall-out. The industry was growing and profitable in the recent past and was equally non-viable then. The difference is that with profit-enabling government subsidies intact, many established U.S. and European manufacturers are now competing with China. And they cannot compete.

Risky Business

There is a measure of justice in this recent turn of events. The old adage “he who lives by the sword dies by the sword,” comes to mind. In this case, one might say, “the industry that lives by government intervention dies by government intervention.”

The U.S. solar industry has seen remarkable growth in the past six-to-eight years, principally on the backs of taxpayers and ratepayers who have been forced to shoulder a significant percent of the cost of these solar photovoltaic (PV) systems to make them appear financially viable as on-grid resources.

The solar industry has amassed a ridiculous collection of additive subsidies, which total upwards of 80 to 90% of the total lifecycle cost. They have lobbied every conceivable legislative body to garner special handouts for installing the systems and production subsidies (Net Metering) for operating the systems.

This industry is artificial. Without these subsidies this market segment called “On-grid PV” would be virtually non-existent. It exists only because the solar industry lobbied government officials to compel citizens to purchase this otherwise non-economic energy source.

In fact, they did such a good job of creating an enormous demand, that it attracted the attention of manufacturers and governments around the world, governments whose only subsidy is perhaps favorable lending to those companies that wish to sell into this artificial marketplace.

Global Subsidies, Calls for Protectionism

So now those same solar companies, which lobbied so heavily to plunder the public coffers, are through some grand act of justice being forced out of the business by Chinese manufacturers, who can produce panels at much lower cost. This industry built on government intervention in the marketplace is now dying because of possible Chinese government intervention in the marketplace. I call that just deserts.

So what is the response of the U.S. solar industry? It’s mixed, but continues on the same self-serving path it has followed. Some panel manufacturers are trying to block solar imports from China, which leads me to believe they’re not really that concerned with green house gas emissions after all.

Solar installers are against the restrictions, because the cheaper panel prices are increasing the sales of PV systems and they’re as happy as ever to continue riding the subsidy gravy train. Both segments are guilty of participating in a massive plunder of public and private moneys.

It is almost comical watching manufacturers and installers fight over the import restriction policy. The manufactures want the restrictions so that they won’t have to compete against the low-cost panels from China, and the installers like the low prices so they have more business, thus showing little concern for the U.S. manufacturers who created the subsidies in the first place. Is there no honor among the plunderers?

The oversupply of panel production is the direct result of government subsidies for solar. The article, in part, credits the oil price boom for the investment surge, but solar is not a substitute for oil. Installing solar panels does not reduce our oil imports. Solar PV offsets electricity and only about 1% of our electricity is made from oil, so I can’t believe investors invested in solar in response to high oil prices, nor for the reason of climate concerns, since solar is a very expensive means of reducing GHG emissions.

Reality Check Needed

It is far more reasonable to assume that investors invested simply based on a belief that subsidies and mandates would continue for many years. The subsidies created an artificial demand, which those investing in the industry surely understood was unsustainable. But apparently they did not correctly foresee the competition.

And fortunately for the taxpayers, who were helpless against the massive lobbying efforts of the industry, the Chinese manufacturers have come to the rescue. So if we’re being forced to buy panels, at least we can buy less expensive ones.

The best possible outcome for the U.S. taxpayers at this point is:

1) those companies most responsible for the solar subsidies lose interest because of the competition, and

2) there is a widespread realization that our utility mandates are accomplishing little except supporting the Chinese solar panel manufacturing industry.

Hopefully, these two outcomes will result in a shuttering of the political forces sustaining the subsidies and the subsidies will finally end.

PV Grid Parity: Still Illusory

One other point worth noting about this article is that the cost of PV is finally down to about $1/watt, which is the price many in the industry claimed was the price needed for solar to reach grid parity without subsidies. Well, $1/watt is finally here and solar is still far from grid parity. The truth is even if China could sell panels to installers for 1¢/watt, the systems would still be too expensive. Even with free PV, the cost of installation, mounting structure, inverters, wiring, etc. make the systems financially unsustainable.

The article concludes with the statement that “as technology advances and costs drop, solar-panel makers can supply power without a need for heavy government subsidies.” This leaves the reader some hope that on-grid solar PV will wean the world off fossil fuels, but this is wishful thinking. There is no guarantee that the prices will ever reach the point of grid parity without subsidies.

PV would reach grid parity if the total installed cost plus the net present value (NPV) of the operations and maintenance cost were at or below about $1/watt. But given that the PV panels alone cost $1/watt, and the total system cost for utility scale PV arrays is still $3.75/watt not including the NPV of O&M costs, I don’t see on-grid PV as a rational bet. Unless of course, one gets to bet with other people’s money and can ignore the moral implications.

Perhaps it will someday be necessary to wean ourselves off fossil fuels for reasons of supply limits or environmental issues. If that happens, normal market forces will rebalance both the supply and demand of energy in logical and rational ways. Till then we’ll just have to suffer through yet another economic bubble created by government intervention in markets.

Will we never learn?

As a final note, included in the list of failed solar companies is Solon of Germany whose corporate slogan was “Don’t Leave the Planet to the Stupid.” Fortunately for taxpayers, it appears Solon will be leaving the planet.

——————-

David J. Bergeron is founder and president of SunDanzer of Tucson, Arizona, a leading provider of solar-powered refrigerators and freezers world-wide. He has worked in the refrigeration and aerospace industries for 21 years and holds key refrigeration patents used by his company.

Bergeron graduated with a B.S. in Mechanical Engineering from Texas A&M University cum laude in 1982 and from the University of Houston (Clear Lake) with a Masters in Finance in 1985.

“Solar subsidies are a placebo which is giving the general public a sense of security about our energy future and is robbing the motivation of those entrepreneurs that could actually address our energy problems.”

“In the near term, perhaps our bigger concern than climate change is anthropogenic energy policy.”

In a recent Economist on-line debate, the affirmative motion “This house believes that subsidizing renewable energy is a good way to wean the world off fossil fuels” was surprisingly defeated.

In his closing remarks, the moderator softened his strident opposition to the negative case, even admitting that “subsidizing renewable energy, is wasteful and perhaps inadequate [to address
climate-change concerns].”

Beyond the Climate Debate

The debate, indeed, reopened the question whether anthropogenic greenhouse-gas forcing was a serious planetary environmental concern. But such focus short-changed what I think is the more important question for the Economist. Not only are the renewable-energy subsidies (such as for solar) wasteful and potentially insufficient, they are outright diabolical if indeed there is a looming environmental crisis.

I am not evaluating whether anthropogenic global warming is real and potentially cataclysmic; I’m arguing that if there is a valid concern about the enhanced greenhouse gas effect, not only will the subsidies not solve the problem, but may very well prevent or postpone a legitimate solutions.

Grid Solar: Radically Uneconomic, Intermittent

I’ve written before about why on-grid solar power is absurdly uneconomic and has almost no hope of becoming a viable alternative to current generation technology–or even competitive with other more viable renewable technologies. I’m asking the reader to accept this position for the sake of understanding the potential implication of my claim.

I think it is safe to say that public opinion towards solar is very positive, and there are many in the field claiming that on-grid solar is at or near grid parity.  But it only appears this way because of massive governmental subsidies/ratepayer surcharges for installing and using solar PV.  In reality, it is hopelessly inefficient from an economic sense to be a fix for our CO2 concerns.

The Real Problem of Subsidies

Here is the real problem:  Subsidies make solar appear viable today, so where is the motivation for an entrepreneur to risk money, or even focus on developing real energy alternatives when solar is “almost” there?  How can an inventor justify striving with the effort it takes to really develop something great when he is competing against a straw man technology which can provide power at almost the same cost of traditional power sources today?  But of course it really doesn’t.

The answer is he can’t justify the effort, so the next great thing is not developing, at least not with the sense of urgency it should be.  Why enter a contest when you are competing against someone with an unfair advantage?  You may be the faster swimmer, but your competitor is using flippers.

Solar subsidies are a placebo which is giving the general public a sense of security about our energy future and is robbing the motivation of those entrepreneurs that could actually address our energy problems.  Subsidies are much worse that just wasteful, they’re diabolical. They lull us into thinking we have almost solved the problem and they hinder us from seeking the real solutions.

An Analogy to Leprosy

“Necessity is the mother of invention,” and it’s fairly easy to see this is often the case.  Need is a great motivator.  We need to feel the pain of our situation to really be challenge and change it.

Leprosy maims it’s victims by robbing them of their sense of pain.  The leper can put his hand on a hot surface and not feel the heat.  He can twist an angle and will keep walking.

In the same way, on-grid solar subsidies will allow a homeowner to continue using much more electricity than he can afford (or the planet can sustain) and he will not know it.  If he felt the pain of the real cost, he would use less power.

But he does not feel it, since subsidies hide the pain, like leprosy.

Summary

Subsidies defeat market forces on both sides of the equation.  They reduce potential supply by hindering entrepreneurs from developing new energy supplies, and they increase demand by artificially keeping the price of energy down. There could hardly be a more cleverly disguised means of exasperating a potential climate issue.

If solar PV does not develop into a viable alternative, which I believe it won’t for many decades, not only will we have wasted billions of dollars; far worse, we would have defeated normal protective market forces which would have better prepared us for a potential necessary change in energy use.

In the near term, perhaps our bigger concern than climate change is anthropogenic energy policy.

” The Solyndra technology was far from innovative, much less game-changing. The DOE … failed to quantify the elasticity elasticity of production costs in a highly competitive market where solar panels are a commodity.”

“Given the many other companies with shaky financials that have received loan guarantees, I expect we’ll see more and larger epic fails like Solyndra in the coming years.”

- Robert Peltier, “Epic Fail, POWER, October 2011, p. 6.

The seasoned warnings against politically correct, market incorrect technologies for electric generation by POWER magazine editor-in-chief Robert Peltier are now being vindicated. Peltier did not anticipate the unseemly crony capitalism involved in such cases as Solyndra, but he knew that there was trouble ahead because of the technological problems of converting very dilute, intermittent energy into affordable, dispatchable power flows.

The special insight of Peltier on political solar is worth studying (full article here):

EPIC FAIL

Over the past 18 months, four solar energy equipment companies have closed their doors. Each one blamed poor market conditions for its economic woes, even though each had fundamental weaknesses that went unaddressed….

Solyndra announced on September 2 that it was entering Chapter 11 bankruptcy and immediately released the company’s more than 1,100 employees, with no notice. The company opened a massive $700 million dollar manufacturing facility in Fremont, Calif., earlier this year using cash from a $535 million dollar DOE loan guarantee and reportedly $1 billion in venture capital funding. The Treasury Department’s internal Federal Financing Bank loaned the money, so a loan guarantee in default is lost cash.

Solyndra joined Hopewell Junction, N.Y.–based Spectrawatt Inc. (an Intel Corp. spinoff) and Evergreen Solar of Marlboro, Mass., both of which filed for Chapter 11 bankruptcy in August. BP Solar closed its Frederick, Md., plant in March of last year.

Great Expectations

You may recall that Solyndra was praised by President Obama as a prime example of how green jobs were being created through government backing of promising renewable energy firms. During a well-publicized plant visit on May 26, 2010, the president said, “It’s here, that companies like Solyndra are leading the way toward a brighter, more prosperous future.” He went on to say that “The true engine of economic growth will always be companies like Solyndra” and that their technology was “game-changing.”

The Solyndra technology was far from innovative, much less game-changing. Its plan was to produce tubes lined with thin-film technology solar cells that are mounted in a flat panel-like rack. Solyndra publicized that this design was better than flat panels because the racks can be inexpensively mounted on a flat surface, like a roof, and because reflected solar energy from a light-colored background improves collection efficiency. However, the well-known flaw with this technology is that it is does not scale well—the production costs don’t drop much per unit when produced in large quantities like conventional flat photovoltaic panels. The DOE fell in love with the technology but failed to quantify the elasticity of production costs in a highly competitive market where solar panels are a commodity.

The cracks in Solyndra’s façade began to appear well before the president’s visit. Solyndra floated the idea of a $300 million initial public offering (IPO) in December 2009, after receipt of the loan guarantee in March of that year. The registration statement prepared by the privately owned company was examined by independent accountant PricewaterhouseCoopers. The accountants’ conclusion was that the company’s huge losses and negative cash flow raised “substantial doubt about its ability to continue as a going concern,” even after a $1.5 billion cash infusion. The IPO was withdrawn in June 2010, a month after the president’s visit, and was followed by the founder and CEO’s departure on August 19.

The selection of Solyndra for a loan guarantee is all the more distasteful when you realize that the DOE must have known the product stood little chance of commercialization in the first place. When Solyndra’s original loan guarantee application was submitted in 2006, the company had a couple of dozen employees and technology that the market had already rejected as uneconomic compared with flat panels. By 2009, the company had a couple of hundred employees but was shipping panels sold at about half the cost of production. During those three years, many companies considered investing in Solyndra, but there were few takers. Then Solyndra caught a break. With the loan guarantee in the bag, venture capitalists jumped in with big money, hoping for a bigger score. They believed that they couldn’t fail, especially by investing in a company that proudly wore the president’s personal seal of approval.

Just as irksome to me was the cavalier attitude of the DOE when it learned of Solyndra’s demise. That same day the DOE released a statement on its web site: “We have always recognized that not every one of the innovative companies supported by our loans and loan guarantees would succeed….” In essence, the DOE dismissed the half-billion-dollar loss as the price of doing business, and without any hint any responsibility. Apparently, failures of this magnitude are an acceptable option at the DOE.

More Failures Will Follow

The Solyndra failure highlights the government’s “push-pull-plus” marketing plan for these technologies. The “push” occurs when the government substitutes its judgment of what constitutes a good product for that of the collective free market and then uses public funds to jam the product into an unreceptive market. The “pull” occurs when the government creates artificial market demand, such as state or proposed national renewable energy portfolio standards. The “plus” is the sweetener added to the deals in the form of incentives and tax credits. A marketing plan predicated on the government injecting cash every step of the transaction is unsustainable today.

Solyndra was the first loan guarantee signed off on by the DOE under the American Recovery and Reinvestment Act, but that didn’t save the company from filing for bankruptcy protection. Given the many other companies with shaky financials that have received loan guarantees, I expect we’ll see more and larger epic fails like Solyndra in the coming years.

In Solar Energy Tough Love, I described the perverse impacts of government industrial policy on the solar energy sector in its vainglorious attempt to choose winners and losers.  That policy is failing, Solyndra aside. 

The market gods hate to be trifled with, and they respond with thunderbolts and torment.  Solar’s pain will continue until grid parity is reached. In the meantime, the solar energy sector must purge itself of government subsidies and address its weak financial performance.

So when I read the story in the trade press about SunPower’s wider Q2 losses I decided to get beyond the numbers to look at some of the market factors tormenting the solar business and holding back its true potential.

One key fact is that solar energy demand is up, but so are input costs for solar panels.  Rising demand stimulates rising production and thus excess inventory is a persistent problem and results in falling prices for PV panels.  Then there is the Feed in Tariffs (FiT) fits that cause burps and headaches as governments in Europe no longer able to afford the soaring cost of subsidies regularly adjust the tariffs—usually downward.

Changes in FiT shift demand from market to market as manufacturers adjust and seek to lose less margin on each incremental deal.  Often, as was true in SunPower’s Q2 report, revenue comes in at or close to investor expectation because demand is growing but cost and margin control has proven difficult and can quickly eat away at profits.

Key Factors

• Deal Flow is Up but VC Funding is Down. The consolidation process in solar energy is clearly underway with the mixed news on the solar investment and funding front. While the number of venture capital funded solar deals remained about the same in Q2:2011 as the previous quarter (25 vs 26) the value of those deals fell to $354 million in Q2:2011 from $658 million in Q1:2011.  Even worse, that $354 million in Q2:2011 was down from $948 million in Q2:2010 even though deal flow increased 25 vs 18) according to Mercom Capital Group.

• Bankability is limited, but deal flow schemes are abundant.  There are many vendors eager to sell solar energy systems but few of them are bankable meaning they look like what they are—a big credit risk.  So these solar firms spend much of their time dreaming up schemes to finance their deals.  Pace loans was one of those when upfront costs could be funded through government assessments like sidewalks and sewer lines.

It all sounded so logical and convenient until lien holders began to realize that the PACE loans would get priority ahead of the first mortgage in a bankruptcy since they were government bonds and that was a scheme not even Fannie Mae and Freddie Mac would tolerate.

• One of those schemes is residential solar leasing.  Think about it!   If you are a homeowner and you want to ‘do the right thing’, save the planet and stick it to your utility company.  So you decide to put a solar rooftop system on your house but it costs thousands of dollars and tax credits and subsidies don’t cover all of it.  No problem, the vendor says we will lease you the system with no upfront cost.  This sounds like a great deal until you realize that you are signing a 20 year lease on equipment with rapidly falling prices and in a market of rapidly improving technology.

This is like locking yourself into a 20-year lease on a Chrysler Sebring sitting unbought a dealer’s lot.  This also sound more than a little like the no down payment securitized mortgages that just ate all the equity in our homes.  The trade shows are filled with CEOs of solar companies touting these schemes and assuring us that default rates on solar rooftop system are very low.

This may be technically true today but it is still deceptively wrong and it will surely hit the fan.  That is why many firms are not bankable because bankers have tried every scheme in the book and they know a bad deal when they see it.

• Disruptive technology in the form of solar rooftop shingles is our friend. If these traditional looking roof shingle systems catch on and fall in price as quickly as panels they will further displace the old generation PV panels—and they are much harder to steal too!  That way the transaction is actually honest and bankable since putting on a new roof to replace an old, leaky one is a very practical thing to do and is bankable.  Using shingles that spin your smart meter backward can help mitigate the cost of the new roof, increase the value of the home and allow you to invest in the latest technology not the oldest technology.

The giants like Dow and others that make these new solar shingles have a competitive interest in driving down the price to make the solar shingles competitive with other roofing options. This is disruptive technology at its market best.  That is why more and more established roofing companies are likely to displace many of the fly by night solar panel vendors—and the sooner the better.

• Global competition is scaling Solar Potential.  The solar PV market has been a global one since China decided to commoditize it and suction up as much of the FiT subsidy money governments were willing to throw away by selling lower priced equipment into Spanish, German, Italian, Czech and other markets and a few experiments with FiT in the US.

The current EU problems with FiT volatility and the failure of the industrial policy of raising utility prices to subsidize the development of domestic renewable energy manufacturing proved a failure in the face of China’s export prowess.  So as EU markets are saturated or the FiT subsidy money fades, solar manufacturers are looking for better global markets.

• China adopts its 12th five-year plan with a focus on feeding its insatiable appetite for energy and access to resources to sustain its export growth.  The big push in this new five year plan includes new energy resources including developing unconventional oil and gas potential in China as well as energy to meet military industry, and the environmental remediation needs.  Expanding domestic production of solar technology can be expected not only to feed export growth but also satisfy some of China’s domestic energy needs as well.

• North America is likely to be the market of choice.  Why?  There are millions of sunny rooftops in America and only about 130,000 of them now have solar PV systems installed according to Sungevity CEO Andrew Birch.  California alone has a goal of a million solar roofs and wants 3 million homes using renewable energy. No doubt many of them will target California after Governor Jerry Brown announced his clean energy plan this past week calling for adding 12 gigawatts of renewable electricity by 2020 or enough to power roughly 3 million homes.

That is a lot of rooftop cheese to attract solar roof rats from around the globe. Those solar shingles I mentioned above use thin-film copper indium gallium diselenide (CIGS) cells instead of the older polysilicon.  Dow claims its CIGS solar shingles are over 10% efficient, about 10 to 15% cheaper per watt, easy to install and harder to steal.  If California is going to have a million solar roofs it wants them using the newest technology not the oldest, least efficient stuff.

• Global potential for solar energy is attracting the giants accelerating the technology learning curve process to give the giants competitive advantage over China.  China’s contribution will continue to be commoditizing the older technology and driving down its cost, but that is not the game the giants want to play. They seek scale, market diversity and ongoing business relationships for services and aftermarket solutions. Selling integration solutions that solve business problems for their best Fortune 1000 customers is the value-added proposition most are following.

• Utilities are driven and constrained by regulatory requirements. The most profitable solar projects today are still the utility scale solar farms. But utilities have been reduced to procuring energy and capacity in power purchase agreements to satisfy renewable portfolio standards and emissions reduction goals.

The Grid Parity Imperative

Solar energy is still the only distributed generation technology capable of displacing the central station utility business model.  Achieving that ambitious goal will require grid parity prices to compete with natural gas, improving solar technology efficiency, and bigger scale players with bankable integrated solutions. Consolidation is rapidly weeding out the smaller players in this sector and that is good.

Customer Aggregation will be the distributed energy business model of choice.  We are seeing it first on the commercial and industrial side of the market with vendors offering demand response, energy efficiency and constant energy management to game the net metering and open access rules.  But the menu will expand to include microgrids, combined heat and power, waste heat recovery, energy storage, renewable energy supply options and the expertise to put it all together and manage it to reduce total energy spend.  As customer aggregation catches on it will accelerate the move toward a truly distributed clean energy economy as it wreaks havoc on the traditional utility business model.

But residential rooftop solar with higher efficient solar shingles is a game changer if the combination of better technology, stronger market participants, and customer aggregation as the business model that brings scale and diversity to solar to drive it to grid parity prices.  Customer aggregation designed to scale a portfolio of residential customers across the three interconnected grids will bring customers new bundled solutions, give them a champion to help eek out savings and bring an end to the separate sale of commodity energy thus ending the traditional utility control over the gateway to customers.

Conclusion

Solar energy must flare off its toxic dependence upon subsidies, industrial policy lobbying and political correctness and embrace the full potential of competitive global markets, integrated grid parity-priced solutions and customer engagement to deliver good value, good service, and good outcomes for both customers and the environment.

————————

Related Articles by Gary Hunt

• Solar Energy Tough Love (insightadvisor.wordpress.com)
• Solar FiT Crisis Continues in Spain and Italy (insightadvisor.wordpress.com)
• Lessons from Evergreen Solar (insightadvisor.wordpress.com)
• Is Solar Powered Energy Really Worth Considering (mydecorarticles.com)
• N.J. hits new record for solar energy installations, officials say (nj.com)
• Can you depend on solar energy (wiki.answers.com)
• Solar Leasing Companies Head Eastward. Popsicle Anyone? (huffingtonpost.com)
• The First Solar Powered Town? Residents Push for 30% Renewables by 2015 (Video) (treehugger.com)

“The economic case for grid-tied PV is indeed quite hopeless, and the sooner we stop the misguided subsidies the sooner we can focus on actually addressing our legitimate energy and environmental concerns.”

The U.S. Energy Information Administration (EIA) recently published an excellent report on the projected cost of electricity generated by different technologies: coal, natural gas, nuclear, and various others, including renewables.

Levelized Cost of Energy

Their Levelized Cost of Energy (LCOE) calculation combines upfront cost with recurring cost to estimate the average cost of power produced by these technologies. Here is the EIA cost datafor coal, natural gas, and solar PV.

At first glance, it looks like PV could be competitive with coal or natural gas plants if the PV cost were to drop below 10 cents/kWh. But there is an important difference between PV and the traditional technologies which makes this simple cost comparison invalid.

But first, take a look at the cost of electricity from a coal plant. The total cost is projected to be 9.5 cents/kWh per the EIA study. About 6.5 cents of this is capital cost[1] and about 2.5 cents is the cost of the coal. Looking at the natural gas plant, one can see the capital cost is about 2 cents, and the fuel cost is about 4.5 cents.

Solar has no fuel cost element but significant capital investment.

Intermittency = Backup Required

But here is the rub. If you plan to power a city with PV, it is not sufficient to simply build a large PV array, because PV only produces power during the day. At night and during cloudy weather, a back-up power source is needed since there is no practical way to store the PV energy.

So the city must also build a conventional coal or gas plant, which will sit idle on many sunny days. The real cost of the PV is not just its cost, but also the cost of the back-up plant. Coal and natural gas plants do not need back-up like PV does.

So what is the real value of PV?It is principally the fuel savings which occur when the traditional plant can reduce output during sunny days. Or stated another way, PV is worth avoided fuel cost. The main point is that PV is not competing against the LCOE of coal or natural gas plants; it is competing against the variable operating cost of these plants, which is 2-4.5 cents.

Here in Tucson, we use coal and the fuel avoidance value is less than 3 cents. For PV to actually be cost effective today, it would need to have an LCOE of about 3 cents. Since it is currently about 21 cents, it has a long way to go before it makes sense for the citizens of this city, despite industry propaganda and political pandering.

Zero PV Panel Cost: Solar Still Uneconomic

But to further demonstrate how nonsensical this technology is, even if PV manufacturers drove the cost to $0/watt for PV panels, the cost of the aluminum mounting structure, copper wiring, labor, inverters, and maintenance result in a LCOE around 10 cents.

So even with free PV panels, the total system is still three times too expensive to be viable on-grid . The economic case for grid-tied PV is indeed quite hopeless, and the sooner we stop the misguided subsidies the sooner we can focus on actually addressing our legitimate energy and environmental concerns.

Installing grid-tied PV is not just a waste of time and money, but a waste of copper, aluminum, labor, land, and capital. We are neither ahead nor green. This wasteful activity is unsustainable, mining the materials used in these unnecessary systems is damaging the environment, and the entire endeavor is a burden on the economy. There is hardly a clearer case of special interest run amok, besides perhaps ethanol subsidies.

On-Grid No, Off-Grid, Yes

PV is fantastic for people that live where there is no access to the electric grid, but it is wishful thinking to believe it can replace conventional generation methods or even be cost effective for on-grid application.

Other renewables– geothermal and biomass– will likely become viable before PV because they do not require back-up power. But today, conservation is by far the best way to economically reduce pollution and CO2 emissions.

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[1] EIA includes a 3 percentage point cost of capital increase for coal-fired plants without carbon capture and sequestration equipment to represent the difficulty in getting coal-fired plants permitted today. That 3 percentage point increase in the cost of capital for coal-fired plants makes the capital component larger than that of current coal-fired projects.

“Federal officials, aware that solar power breakthroughs have shined and faded almost as often as the sun, say the Enron project could introduce commercially competitive technology without expensive Government aid.”

Allen Myerson, Solar Power, for Earthly Prices, New York Times, November 15, 1994.

The nation’s largest natural gas company is betting $150 million that it can succeed where the Government has so far failed: producing solar power at rates competitive with those of energy generated from oil, gas and coal.

The Enron Corporation plans to build a plant in the southern Nevada desert that would be the largest operation in the country making electricity directly from sunlight, producing enough to power a city of 100,000 people. It is expected to begin operating in late 1996.

Grand promises in the late 1970′s about the potential of virtually pollution-free, endlessly renewable energy sources like solar energy faded into an embarrassed hush. But several of the nation’s leading solar power experts say Enron’s optimistic goal is probably reachable.

The reason is that during the last decade, the cost of solar power generation has quietly declined by two-thirds. Far from depending on some wondrous breakthrough, the experts say, Enron can offer commercially competitive solar power by inexpensively mass-producing solar panels, and then employing thousands of them in the Nevada desert.

Even the most optimistic supporters of solar power have doubted that they would see commercially competitive production until the next century. The Worldwatch Institute, an environmental group in Washington, said earlier this year that solar cell electricity, now as low as 20 cents a kilowatt-hour, might reach 10 cents by 2000 and 4 cents by 2020.

Yet Enron is pledging to deliver the electricity at 5.5 cents a kilowatt- hour in about two years. That would beat the average cost of 5.8 cents currently paid by the Government for the electricity it uses. The national average retail price is 8 cents.

Several legal and political obstacles remain, and for competitive reasons Enron will describe its technology only in general terms. But solar energy researchers who had consulted with Enron were willing to elaborate on the available technology and the financial calculus.

Enron’s 100-megawatt plant would be more than a dozen times the size of any other that employs photovoltaic, or solar power, cells, which use the energy in sunlight to shake electrons loose from molecules of silicon or other substances. Size is key, according to Sigurd Wagner, a professor of electrical engineering at Princeton University.

“If a good group of people puts a plant of that scale in, it will have a real consequence on costs,” he said. “It’s not going to go down by just a little bit, but by a factor of two.”

To reduce the price further, the company is counting on available tax breaks and inexpensive financing.

As for whether Enron’s goals are realistic, Professor Wagner said, “They’re pushing it, but they’re not far off.”

The company, based in Houston, has already won preliminary backing from the Department of Energy, which tentatively plans to buy Enron’s solar power as long as the rate is truly competitive with the power from conventional sources.

“I’m confident we can make some commitment for a Federal entity to purchase or at least broker some purchase of solar power,” said William H. White, the Deputy Secretary of Energy.

Government officials say Enron’s success will encourage the spread of solar power generation here and abroad.

“If they can do this, they’re going to have lots of business,” said Tony Catalano, director of the Energy Department’s photovoltaic division. “This is going to be very competitive in the U.S. and lots of other places in the world.”

Enron has asked the Government to buy or guarantee a market for its power, with annual increases of 3 percent, for 30 years. It also depends on leasing Government land, receiving Federal tax benefits for renewable energy and financing construction with tax-free industrial development bonds.

Mr. White proposes having the department’s Western Area Power Administration, whose grid connects Hoover Dam and other projects with large public power authorities, buy the power generated by the solar plant. That power would only be available in daylight hours, which are also the hours of peak demand, especially for air-conditioning.

Previous efforts to promote solar power as a clean alternative to fossil fuels have foundered, despite the Government’s spending of hundreds of millions of dollars on solar research. Solar power has remained too expensive, while fossil fuel prices have declined.

While solar cells can economically provide the tiny charges needed by watches and pocket calculators, their larger applications are mostly in remote places beyond the reach of the world’s power grids.

Federal officials, aware that solar power breakthroughs have shined and faded almost as often as the sun, say the Enron project could introduce commercially competitive technology without expensive Government aid.

“This establishes the benchmark we want and restarts a stalled solar industry,’ said Robert H. Annan, the solar energy director in the Department of Energy.

In fact, the solar industry has already grown, with the shipments of solar cells up more than tenfold since 1980, as repeated technological advances have lowered their cost.

Even after Federal officials agree to buy solar power, they will have to formally solicit bids to see if anyone can beat Enron’s offer. Among more than 30 informal proposals so far, no one has.

Enron’s chief strategy officer, Robert C. Kelly, says that producing solar power follows from Enron’s generation of electricity from natural gas, a cleaner fuel than coal or oil. But Enron will not be running a charity. Asked how soon solar power could generate earnings, he said: “Now. We’re a very impatient company in terms of profits.”

Limited production of solar power cells at an adjacent factory, to be run by a partner whom Mr. Kelly would not identify, will keep the $150 million power plant from reaching its full capacity for about a decade.

The necessary technology is on display in Mr. Kelly’s office, where a square glass panel about the size of an art book, its surface shimmering with metallic greens, blues and violets, rests on a gleaming steel rack. He is cautious about saying anything more than that the panel was produced by another company and used what people in the business called a thin-film design.

Silicon has been the film of choice, but several companies are achieving much higher efficiencies, and lower costs, with other substances or more than one silicon layer. A partnership between Energy Conversion Devices Inc. of Troy, Mich., and the Canon electronics company of Japan plans to open the world’s largest thin-film solar cell plant in Newport News, Va., next year. Their cells will have two layers of silicon and one of germanium. The Enron and Canon ventures together would double the nation’s output of solar cells.

Zoltan J. Kiss, the founder of Energy Photovoltaics Inc. of Princeton, N.J., said he had been negotiating with Enron about the production of copper indium diselenide cells, which he said had triple the efficiency of single-layer silicon cells.

Enron, which has built one of the world’s largest gas-fired power plants in Britain, says it can also realize economies in the rest of the solar power plant’s design.

Paul Maycock, a leading solar energy consultant, said a few of the solar cell technologies he had evaluated for Enron could achieve the company’s goals, but only with sufficient production.

“Yes, it can be done,” he said. “It’s the dream we’ve all had: that someone would take the risk of building a very large factory.”

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For politicians looking for good press this was a great opportunity—until reality hit the fan. So what lessons does this failed ‘green’ energy experiment impart for other political jurisdictions eager to create jobs? I offer five.

1. Being green does not mean being sustainable.

Evergreen Solar expanded just as the solar market was reeling from feed-in-tariff (FiT) subsidy cuts in Spain and later Germany, the then hottest markets in the world. Those FiT cuts were caused by rising and unsustainable costs to the Spanish and German governments seeking, just as Massachusetts had done, to prop up local business and create jobs when they were needed most.

2. Solar energy is governed by global markets for commodity prices—and few play that game better than China. So when China saw the luscious FiT subsidy fruit being dangled in Europe, it undercut the prices of local manufacturers for photovoltaic panels and took both market share and FiT subsidy Euros and sent them back to China. The European solar manufacturers were—pardon the pun FiT to be tied—but they were also still screwed because they could not meet or beat the low Chinese prices and saw their business fade away as unsustainable in a market that had become dependent upon unsustainable government subsidies.

These EU PV makers then dumped PV panels on the global commodity market at fire sale prices thus causing a worldwide problem of falling prices that swamped many solar players including Evergreen.

3. Feed-in-Tariffs are Risky Business. The EU story of industrial-policy good intentions gone unfulfilled is also a lesson unfortunately re-learned many times as disappointed results, this time in Massachusetts, remind us that when we seek to build entire new industries on a bed of sand. Our business future (sales, revenue growth, and supply chain channels) can be toppled by tremors in the markets half a world away.

4. Economic Development must be Economic. State governments are running out of our money for tax breaks designed to steal business from other states. A zero sum game, subsidy chasing is never good business.

If a business prospect is not sustainable (read: competitive) without subsidies and tax credits it is unlikely to be sustainable (read: profitable, tax-paying and job creating over time), and no shower of cash from politicians seeking good press will make it so.

5. America’s Sustainable Energy Policy is Reliable. However worthy transforming America’s energy policy by promoting clean renewable energy is, we better not kill off the traditional, conventional, reliable sources of energy until we are certain that the new supplies from these clean renewable sources are sustainably sustainable.

Conclusion

A sobering statistic: the sum of all global solar energy capacity installed to date (8 GW) is slightly more than the amount of coal-fired power generation (5 GW) that the proposed U.S. EPA emissions rules would force into retirement in the Midwest ISO market alone.

The bottom line is our economy needs to create jobs—a lot of jobs to put Americans back to work and grow tax revenues to reduce our deficit.  But the only sustainable way of achieving that goal is to create a globally competitive market environment that will unlock the hoarding of cash so investors are confident, willing, and able to take reasonable risks. States will never be able to spend enough taxpayers money to compete with China or overcome uncompetitive market conditions. Ask Spain, Germany and other EU countries how their feed-in-tariff experience worked out for them.

Industrial policy and economic development incentives by governments almost never works when the focus is picking winners and losers. But it is always easier for politicians than the harder work of assuring reasonable, predictable rules and competitive tax levels so that entrepreneurs can be sustainable in global markets.

Adding insult to injury, Evergreen borrowed money to build a new solar manufacturing plant in China.

‘Clean-Energy’ Investments Up, but Performance Lags

According to Bloomberg New Energy Finance, new global investment in the clean energy sector (including solar) was up 27% to $41.7 billion in Q2:2011 from the prior quarter–and 22% higher than a year ago. This included several very large utility scale solar thermal projects including the BrightSource $2.2b 392-MW Ivanpah project in California, the 100-MW FPL Termosol project in Spain and Eskom’s 100-MW Upington project in South Africa.

Solar energy investment in the U.S. was also up 195% in Q2 to $10.5 billion according to Bloomberg, largely driven by successful financing of the Alta and Ivanpah wind and solar projects in California.

But after lusting for clean energy investment opportunities, the performance of many of those investments is not very satisfying. The WilderHill New Energy Global Innovation Index (NEX), which tracks 98 clean energy shares worldwide, fell 13% in Q2 2011 after a strong first quarter. Bloomberg New Energy Finance says the story is the same in every corner of the global with continued strong interest in investment in clean energy but poor performance has often been the result.

Evergreen blamed falling prices from Chinese competitors for solar panels, reductions in feed-in-tariff subsidies in Europe and the failure of the US to adopt supportive policies.

What!?#$%&! 

Let’s face it, if you can’t make a project go in a market where the state permits the project, mandates that utilities must buy renewable energy even above cost (and where the deals are done typically on long term power purchase agreements that substantially reduce the risk), and where the U.S. government writes you a Treasury Tax Grant check for 30% of the cost, the problem CANNOT BE a lack of policy support.

Let’s go back to the Evergreen example. In its 2009 Annual Report (p. 14) the company reported:

Although solar power can provide a cost-effective alternative for off-grid applications, we believe the principal challenge to widespread adoption of solar power for on-grid applications is reducing manufacturing costs so that the cost of installed solar panels is equal to or less than the cost of grid-generated electricity without impairing product reliability. This concept is known as reaching grid parity.

And (p. 19):

Many of our existing and potential competitors have substantially greater financial, manufacturing and other resources than we currently do. Our competitors’ greater size and, in some cases, longer operating histories provide them with a competitive advantage with respect to manufacturing costs because of their economies of scale, production facilities located in low cost manufacturing regions and their ability to purchase raw materials at lower prices. For example, those of our competitors that also manufacture semiconductors may source both semiconductor grade silicon wafers and solar grade silicon wafers from the same supplier. As a result, such competitors may have stronger bargaining power with the supplier and have an advantage over us in pricing as well as securing silicon wafer supplies at times of shortages.

“We may need to raise significant additional capital in order to continue to grow our business and fund our operations, as planned, which may not be available on acceptable terms or at all.” (page 20)

We must continue to invest significantly in research and development to support our unique wafer technology, and these efforts may not result in continued and necessary improvement in our technology (page 20).

“The success of our business depends on the continuing contributions of our key personnel and our ability to attract and retain new qualified employees, especially in China.” (page 24)

Evergreen Solar thus described its risk position as being unable to assure investors that its business will generate sufficient cash flows from operations, or that future borrowings will be available in amounts sufficient and on terms reasonable to support liquidity needs.

If Evergreen is ever unable to generate sufficient cash flow to service debt obligations, it may need to refinance or restructure debt, including senior convertible notes, sell assets, reduce or delay capital investments, or seek to raise additional capital. It may incur additional indebtedness. If it does so, increased debt service requirements may adversely affect the ability to meet payment obligations on currently outstanding senior convertible notes and otherwise successfully grow and operate the business.

The question is NOT why did Evergreen Solar fail, the question is what were the investors in Evergreen Solar thinking?

Part II tomorrow will examine the sustainability lessons from Evergreen’s demise. 

Carefully analyzed, these projects do little to fund efficient energy production or create permanent jobs. Such largesse is one of many rich targets for immediate deficit reduction in any budget deal.

LPO specifically targets projects that promote clean energy and includes “job creation; reducing dependency on foreign oil; improving our environmental legacy; and enhancing American competitiveness in the global economy of the 21st century.”

Specifically, these loan guarantees promote projects that include biomass, hydrogen, wind and hydropower, advanced fossil energy coal, carbon sequestration practices and technologies, electricity delivery and energy reliability, alternative fuel vehicles, industry energy efficiency projects, pollution control equipment, nuclear, and solar power.

Moreover, support by the LPO is for borrowers in case they default on their financial obligations while the project is constructed. Clearly, this is all about government picking energy winners at the expense of market preferences and forces.

The U.S. Energy Information Administration (EIA) notes that in 2010 only 1% of energy consumption was from solar power. Yet 15 out of the 23 generation LPO projects have been for solar power plants. The cost of these 15 projects has been $16 billion–40 percent of the total cost of all guaranteed projects.

In contast, nuclear power makes up 9 percent of all U.S. energy consumption has received $10.33 billion of support. And it is the one mass carbon-free electrical generation source outside of hydropower.

The benefits of these guarantees are exaggerated. Job creation from these three solar panel projects is estimated to be 1,400 new jobs, which is $3.2 million per job! And many of these jobs are temporary.

A previous $1.6 billion guarantee for a solar panel project, Bright Source Energy, produced 1,000 temporary construction jobs and 86 permanent jobs. That’s $18.6 million per permanent job!

This is a huge taxpayer commitment for an energy source that is already subsidized and supported heavily by the federal government, where the average amount provided by the federal government per kilowatt hour (kWh) in 2007 was $0.24 for solar. In contrast, nuclear was only supported by $0.16 per kWh. Estimated total levelized costs of new generating technologies to produce electricity in 2016 is estimated by EIA to be $0.21 per kWh for solar versus $0.11 for nuclear.

The high cost could be understood if the output of solar powered plants was high, but this is clearly not the case. For example, EIA data indicates that a solar plant’s capacity factor is expected to be 400 percent lower than a nuclear plant.

The lack of benefits and the substantial costs of these solar panel projects not only distort the energy market, but are a waste of tax dollars. The sources of energy we consume most (i.e. petroleum, natural gas, coal, and nuclear) are not on the government’s to-do-list, but they are on the list to phase out and create a less efficient economy in the process. When it comes to increasing energy efficiency and creating jobs, these LPO guaranteed loans are not the answer.

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Vance Ginn, originally from Houston, earned a BBA in Economics and Accounting and minored in Political Science and Mathematics at Texas Tech University. Currently, he is working on his doctorate in Economics and teaches Intermediate Macroeconomics at Texas Tech.

Mr. Ginn is an alumnus of the Institute for Humane Studies, has interned for two U.S. Congressmen from Texas, was an energy-policy intern for the Armstrong Center for Energy & the Environment, and is a Koch Summer Fellow. His areas of interest include individual liberty, the effects of energy prices on the macroeconomy, environmental regulations, fiscal policy, and monetary policy.

In his spare time, Mr. Ginn reads non-fiction books and plays drums with a number of rock bands.