Commodity competition: good for buyers, bad for sellers

Except for those favoring symbolic consumption, electricity is by definition a commodity. For most intents and purposes, the sale of equipment that produces electricity is also commoditized.

Through technology improvements, manufacturing improvements, scale economies and good old fashion competition, prices are getting lower — bad for sellers, good for buyers.

One data point on wind comes from a GE executive, speaking Tuesday at the Renewable Energy Finance Forum-Wall Street. The quote comes from Kevin Walsh, who the GE website says is “Managing Director and Leader of Power and Renewable Energy at GE Energy Financial Services” — in reality the GE spokesman for its RE businesses, part of the $18b/year “Ecomagination” line of products and services.

The quote was in a Renewable Energy World Twitter tweet:

@REWorld: "Cost of wind down 40% in the past 3 years. Call it grid parity -- it's happening folks and that's exciting. " Kevin Walsh of GE #reffws

I looked for RE World to post a real story but so far it hasn’t happened. Still, 40% in 3 years is pretty impressive: not quite Moore’s law (50% in 2 years), but (at 80% every decade) well ahead of the historic PV trend of 50% a decade.

Still, on an annualized basis, PV can top that — both for the past month and the past three years. Prices plunged recently for the upstream supply of crystalline silicon, at least according to Bloomberg New Energy Finance:

The June issue of the Bloomberg New Energy Finance Solar Value Chain Index shows that the spot price of solar grade silicon fell by 28% month-on-month to $53.4/kg, relieving some pressure on downstream manufacturers of wafers and solar cells.

The price of 6" multicrystalline silicon wafers dropped by 23% in June to a record low of $2.39/piece. At the next point in the production chain, multicrystalline silicon cell prices were down 15% in June to $0.92 per Watt.

Module prices are also falling, though at a slower rate, with a 6.5% decline in June bringing crystalline silicon modules to $1.68/W. Chinese manufacturers are offering modules at significant discounts, with prices at $1.49/W, while modules manufactured outside of China are still priced higher, at $1.79/W. Prices for solar modules are now 58% lower than in the third quarter of 2008.

The “June” results are based on a survey conducted between June 2-8; “The Solar Value Chain Index started in May 2009 and the Module Price Index was launched in November 2010.”

Why the precipitous fall?

Martin Simonek, solar analyst at Bloomberg New Energy Finance, said: “Currently the markets are oversupplied with modules, as manufacturers seek to reduce their inventories in markets that are demanding cheap modules because of reductions in subsidies. Producers are preparing for a painful consolidation that could see several players exit the solar industry.”

Naturally, price cuts are a double-edged sword for the industry: lower prices spur adoption and total industry volume, but hurt (or kill) profits.

Or as another speaker at the REFF Wall Street conference remarked this morning:

@REWorld: Solar system costs cut by 1/3, now they don't like the stocks. People still aren't happy but we'll get there. -- Amy Smith #reffws

Note: I interviewed Simonek today for additional clarification. More in my next post.

Rational non-adoption of PV

On Monday, Matt Hunter of CNBC asked provocatively “Does the Solar Industry Have a PR Problem?” The story was based on a fall study done by students at the SJSU Sbona Honors Program, and as someone who helped mentor the students, I was proud to see it published.

However, the conclusions reported by CNBC were different than those of the March webinar that discussed the report. To quote from Hunter’s report:

Jim Nelson, CEO of solar manufacturer Solar3D, says that, true to the perception, solar technology is not quite ready for prime time.

The problem, says Nelson, is that solar is generally still not price competitive with fossil fuels for energy generation, says Nelson. Paradoxically, government efforts to subsidize the purchase of solar panels actually slow down the adoption of innovation that should ultimately make renewable energy more affordable.

By encouraging consumers to buy immature and inferior solar technology right now, government subsidies risk locking people into solar systems that are inefficient, expensive, and may or may not ultimately pay off to the consumer. “They’re encouraging people to use things that don’t work,” he says.

At current kilowatt-per-hour rates, solar energy costs about 4 times more than power drawn from the grid, says Nelson. (Energy Secretary Steven Chu aims to bring down the cost by 70 percent to 75 percent by 2020.)

Reduce that by another quarter, and solar becomes attractive for both residential and industrial customers. (10 cents a kilowatt hour is the average cost of electricity in the U.S.)

Hunter quoted another expert that noted the payback period for residential PV is normally 10 years or more.

The reality is that today, solar makes economic sense for some people but not for others. (As Hunter notes, some people who are affluent or “passionate about green energy” may buy it even if it doesn’t pencil out.)

There are five things that drive the economics o PV adoption:

1. cost of the system
2. subsidy for the system
3. amount of sun
4. cost of capital to finance the system
5. the price of the substitute (grid power)

The press tends to focus on the first three. However, in talking to people in industry, the real action is where electric rates are high: with PG&E’s tiered rate structure, running an air conditioner in the Central Valley is prohibitively expensive and thus even an expensive PV system looks attractive.

Certainly the “grid parity” curves on PPT decks for the past decade assumed increasing fossil fuel prices (which may be a false assumption). In places like the Central Valley — or especially Hawai‘i — the substitutes are already expensive enough to make solar cost-competitive.

As it turns out, on Monday I had a farewell lunch with one of my coworkers, Gita Mathur of the SJSU College of Business. Gita noted that her 1985 first doctorate (of two) was on GaAs photocells, and the lab efficiencies she was demonstrating 25 years ago were almost the same as those for commercial products today. In her view, the subsequent innovation was mainly in the packaging — reducing the balance of system costs (including labor) to get those cells installed and available to generate power. This is certainly the area where industry continues to make strides, and in fact the basis of the low cost (and low efficiency) thin film startups.

Green vs. Green

USA Today updates the rest of the USA today on the fight in the Mojave between the supporters of Tortoises for Global Warming™ and the anti-AGW environmentalists.

The headline and the first paragraph say it all:

Solar plans pit green vs. green
By Keith Matheny

Plans to create huge solar energy plants in the deserts of California, Arizona, Nevada and elsewhere in the West are pitting one green point of view vs. another.

The There’s really nothing new for those who have followed the controversy for the past two years, but the article does update the score: 9 projects approved and 2 pending (plus 2 approved in Nevada). It also mentions “More than a dozen other utility-scale solar projects are in the permitting pipeline in California, Nevada and Arizona.”

The article does briefly mention the controversy over Ivanpah — as well as its $1.37b in Federal loan guarantees — but not the planned IPO of its intended operator, BrightSource.

I’d commend Matheny (of the Palm Springs Desert Sun) for bringing this to a national audience, but Ivanpah alone has been covered a few dozen times in the New York Times. Still, any publicity on the issue is good for the public policy debate over the serious tradeoffs here between the predicted (although not provable) impacts on AGW or certain endangered species.