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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.

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