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Thursday, September 23, 2010

Innovative technology, commodity electrons

One of the points I make when teaching about solar energy — as I did for three classes this week — is that the economics of renewable energy are fundamentally different from that of IT, biotech, or earlier technology-based industries.

The challenge facing renewable energy entrepreneurs is that no matter how innovative a company’s technology, in the end it’s going to be used to produce commodity electrons. And even if the government has a policy that aggressively favors “green” energy over all others, makers of flat silicon panels have to compete with thin film CdTe, CIGS, CPV, solar thermal as well as wind, small hydro and anything else that comes along.

So in the end, really cool technology is going to be judged on cost and reliability during the long life of an expensive capital good. PCs may be thrown away after 3 or 5 years, but solar panels are expected to run 20 years or more. This means that high-volume, high-repeatability, low-cost manufacturing is usually more important than some great advance in science (unless of course that advance cuts costs or improves efficiency more than it raises costs).

Attacking this point is Thursday’s column in GreentechSolar by Tuan Pham, an energy analyst (and HelioVolt biz dev consultant) turned solar investment fund manager. The column’s subtitle says it all: “Considering the implications of the fact that solar is really an energy industry, not a technology industry.”

Some of his points are familiar: commodity electrons, the unsuitability of VCs to invest in capital-intensive projects, and unrealistic growth expectations. Others should be familiar, including the near-commoditization of high insolation land intended for solar farms:
Because we can site solar nearly anywhere the sun shines — solar resources at any given location have been studied for decades by NASA and the National Weather Service — our projects are much easier to develop than other energy projects. … Why would property owners expect to charge significant premiums for land if the sunlight is the same 50 miles down a transmission line?
Other points are more contrarian, including this:
Yet, despite all of the tech money that has flooded into solar in recent years, technological advances have not lived up to expectations. In fact, most of the "technology" that is being funded in solar projects is relatively old. Crystalline-silicon (c-Si) cells were invented at Bell Labs in 1954 and since c-Si efficiencies hit 14% in the 1960s, not very much has changed with the technology. Likewise, the other pieces (balance of systems) that go into a solar generating system involve fairly uncomplicated electrical work and few moving parts. These well-known and reliable generating assets, not an elusive magic technology bullet, are what energy and project investors will fund.
While some of Pham’s conclusions will create heartburn among solar activists, the nudge towards increasing accountability should not. Pham singles out “Pretend PPAs,” in which Purchase Power Agreements are quoted with unrealistic prices and costs that will eventually become obvious.

The recommended antidote for regulators and utilities being compelled to buy renewable energy:
  • Increase and enforce penalties on non-fulfillment of projects
  • Shorten execution time frames (at least for PV).
  • Enforce stiffer penalties on projects that are late.
  • Require bigger proposal deposits.
  • Expedite the interconnection process.
Accountability is good and necessary for buyers, sellers, investors and society. A lack of accurate information and accountability creates market distortions that lead to bubbles and crashes.

The solar industry is approaching a shakeout period, with the strong consolidating the weak. Many venture investors supporting a company with more than $100 million of equity funding will eventually seek other exits if the firms are unable to IPO in the next 18-24 months. (Don’t ask me which ones will go first — my Ouija board is on the fritz.)

Let’s hope that more accurate information leads to the survival of the most efficient and best run firms, rather than those who were lucky at the VC roulette wheel but who lack the resources and capabilities necessary for long-term survival in this competitive industry.

Thursday, September 16, 2010

Feed-in tariffs: an idea whose time still has not come

A group of renewable energy activists have been pushing for the US to emulate Germany by instituting a feed-in-tariff. The idea is that the more generous payment to RE generators would increase the installation of RE generating capacity.

The California Public Utilities Commission has been flirting with idea for years, with trial efforts at a smaller scale, and hosting a symposium endorsing the idea last year. The CPUC reportedly endorsed a FiT for systems from 1-20 MW in size, although the F-phrase doesn’t appear anywhere in its recent news.

Is this such a good idea?

A comparatively balanced article by veteran Eric Wesoff of Greentech Media earlier this year discussed the pros and cons of this approach. One important requirement — as with any government manipulation of the market — is predictability:
Gary Kremen, solar entrepreneur and founder of Clean Power Finance, had this to say on the subject: "FiTs are great if they are a long-term commitment on the part of government and utilities. Off-and-on FITs make planning and the mandatory required financing hard, if not impossible."
Those promoting feed-in tariffs tout the undeniable effectiveness of FiT in promoting solar adoption in Germany. However, as Wesoff notes, that comes at a price:
Germany is experiencing a bit of a feed-in tariff backlash as their citizenry reacts to FiT dollars going to Chinese, rather than German, solar module manufacturers. FiTs can also be construed as a tax -- and that's political poison in the U.S.
In other words, subsidies for inefficient power producers are politically palatable if it creates domestic jobs, but not if it ships domestic funds overseas.

The big disaster of FiT is that it doesn’t set prices right, because it uses government fiat rather than the market to match supply and demands. The €15+ billion fiasco in Spain is Exhibit A. Because they are expensive, even some progressive consumer groups oppose their use.

For more than a year, the state has been toying with a modified FiT that it now calls a renewable auction mechanism. The Aug. 24 CPUC decision to create this mechanism seems to be a compromise that pleases everyone and no one.

In particular, it’s design to correct the most egregious errors of the government-set pricing. As Nikki Chandler reported:
Some governments have used fixed-price feed-in tariffs to incentivize renewable energy development. One point of difficulty has been getting the fixed pricing right. If the price is set too low, it does not stimulate the desired level of market activity. If the price is set too high, ratepayers pay unnecessary costs, suppliers throughout the value chain are not encouraged to reduce prices, and the program can lose political support. In contrast, the CPUC program uses competition to establish a price that is both sufficient for project development and protective of ratepayers.
The plan seems to please one group (Interstate Renewable Energy Council) lobbying for a FiT and anger another (the FiT Coalition).

If the supporters are right, the RAM will increase solar adoption in California without paying too much (and also not violating federal restrictions on cross-subsidies issued in July by the Federal Energy Regulatory Commission.) If RAM opponents (or hard-core FiT supporters) are right, the market-oriented tariff won’t be enough to stimulate a supply of renewable power. I guess (as in Spain and Germany), time will tell.

Monday, September 13, 2010

A completely different Akeena

Anyone who lives in the South Bay has probably seen or heard from Akeena. The company occupies a former car dealership in Los Gatos, and has been aggressively promoting sales workshops at our local wine bar. I kept telling my wife we should go, but apparently now it’s too late.

Last May, Akeena agreed to effectively become an arm of Westinghouse, which didn’t actually have to put up any money to buy the company. Instead of selling “Akeena” solar panels, the company agreed to sell its future panels under the Westinghouse brand, including those it’s already selling at the Lowe’s home improvement warehouses. Akeena Solar, Inc. is now doing business as (d/b/a) Westinghouse Solar.

(Akeena’s already-distressed stock has drifted off into penny-stock land, which will allow Westinghouse to eventually buy the company for less than 5% of what it was worth at its peak.)

Now two different blogs have reported that Akeena is getting out of the installation business to (it claims) avoid competing with dealers. As PV-tech reports:
"Expanding our channels to include authorized dealers in California will accelerate the growth of our distribution business," said Barry Cinnamon, chief executive officer of Westinghouse Solar. "California is the largest state in the country for solar products, accounting for approximately 50 percent of the U.S. market… As we transition to a distribution model in California and sign up new dealers, we will continue to focus on securing new distribution partnerships and adding dealers around the country. We will honor all outstanding installation obligations, and in many cases expect to work with new Westinghouse Solar dealers to take over our remaining backlog of California installation projects."
When GreentechMedia reported on the shift last week, it was generally optimistic. Akeena had already exited installation elsewhere in the US, because it was competing with its installers. However, as it also reported:
A strategic shift like this, however, also means layoffs. Employees said that began today.
Alas, no more sales seminars at the wine bar, and one less large-scale California installer. Some 19 months ago, Borrego Solar got out of residential installation, selling its California and Massachusetts operations to Vermont-based groSolar for an unspecified amount.

So according to a 2009 analysis, that’s two of the four largest California residential installers changing hands in the past two years. Only SolarCity and REC Solar are bigger in the state: while I’d like to say that’s the end of it, clearly more consolidation is coming to the installation industry — not just to panel manufacturing.

Update, Sept 14: Akeena later sold their installation backlog to Real Goods Solar.