The cost of German solar policies

Bjørn Lomborg is a controversial PhD political scientist who has questioned the cost effectiveness of various efforts to mitigate global warming.

His Feb. 16 syndicated commentary discusses the implications of Germany’s plans to drastically scale back its feed-in-tariff:

Germany’s Sunshine Daydream
By Bjørn Lomborg

Germany once prided itself on being the “photovoltaic world champion”, doling out generous subsidies – totaling more than $130 billion, according to research from Germany’s Ruhr University – to citizens to invest in solar energy. But now the German government is vowing to cut the subsidies sooner than planned, and to phase out support over the next five years. What went wrong?

There is a fundamental problem with subsidizing inefficient green technology: it is affordable only if it is done in tiny, tokenistic amounts. Using the government’s generous subsidies, Germans installed 7.5 gigawatts of photovoltaic (PV) capacity last year, more than double what the government had deemed “acceptable.” It is estimated that this increase alone will lead to a $260 hike in the average consumer’s annual power bill.
…
On short, overcast winter days, Germany’s 1.1 million solar-power systems can generate no electricity at all. The country is then forced to import considerable amounts of electricity from nuclear power plants in France and the Czech Republic. When the sun failed to shine last winter, one emergency back-up plan powered up an Austrian oil-fired plant to fill the supply gap.

Indeed, despite the massive investment, solar power accounts for only about 0.3% of Germany’s total energy. This is one of the key reasons why Germans now pay the second-highest price for electricity in the developed world (exceeded only by Denmark, which aims to be the “world wind-energy champion”). Germans pay three times more than their American counterpart.
…
Using solar, Germany is paying about $1,000 per ton of CO2 reduced. The current CO2 price in Europe is $8. Germany could have cut 131 times as much CO2 for the same price. Instead, the Germans are wasting more than 99 cents of every euro that they plow into solar panels.

It gets worse: because Germany is part of the European Union Emissions Trading System, the actual effect of extra solar panels in Germany leads to no CO2 reductions, because total emissions are already capped. Instead, the Germans simply allow other parts of the EU to emit more CO2. Germany’s solar panels have only made it cheaper for Portugal or Greece to use coal.
…
In the meantime, Germans have paid about $130 billion for a climate-change policy that has no impact on global warming. They have subsidized Chinese jobs and other European countries’ reliance on dirty energy sources. And they have needlessly burdened their economy. As even many German officials would probably attest, governments elsewhere cannot afford to repeat the same mistake.

Runaway green jobs inflation

Last month, the Brookings Institute published a report entitled “Sizing the Clean Economy” which promises:

The “green” or “clean” or low-carbon economy—defined as the sector of the economy that produces goods and services with an environmental benefit—remains at once a compelling aspiration and an enigma.

The report claims to offer a definition of green jobs, but that was done several years ago by a San Mateo consulting firm working for a Next10, a California advocacy group.

Of more concern is that Brookings is perpetuating — if not magnifying — the use of “green” as a political statement rather than an economic concept. For as reputable a group as Brookings — the most prestigious economic thinktank on the left — this is troubling.

In previous incarnation as a green jobs project director, I decided that the “green” jobs concept seemed like sausages — you didn’t want to see how they were made (calculated) or it would make you squeamish.

An article from the Mackinac Center for Public Policy (in Michigan) shows how we should ignore the command to “pay no attention to that man behind the curtain” — because (as in the movie) he is no wizard. (Yes, Mackinac is trying to unmask the wizard while Toto is just a naïve little dog, but…)

I was aware of one of the problems in the existing definition. Suppose a building contractor switches from installing inefficient windows to energy saving windows? Voilà! We’ve created a green job!

At least that building contractor (or roofer or electrician) is doing something to make the world a greener place by reducing the need for carbon-based fuels. However, what happens if a janitor switches from traditional chemical cleaning solutions to natural ones? Voilà! Another green job!

Jack Spencer of Macinac interviewed one of the authors, Brookings analyst Jonathon Rothwell, and it gets worse.

First, all mass transit jobs are counted. So if we had bus drivers 20 years ago or Pullman porters 75 years ago, they were working in green jobs and they didn’t even know it.

Then there’s the unappealing matter of garbage. As Spencer puts it:

Regarding the matter of waste industry jobs being included as part of the “clean economy,” did the report include everyone from the designer of a landfill to the person who picks up the trash from the curb?

“Yeah, that's pretty much it,” Rothwell said.

In other words, much of what is counted as “green” jobs are jobs that already exist, have existed for decades, and (unless we have gross labor inefficiencies) are not really growth areas of the economy.

If you add up all the bus drivers and trash truck drivers, it certainly dwarves the number of people working in companies that make renewable energy products. It probably even dwarves the people in the building trades installing solar panels, double-pane windows and CFL light bulbs.

Meanwhile, advocates, politicians, and reporters are republishing these estimates without reservation or qualification. The politicians are intentionally misrepresenting the truth — because they want to claim credit for private sector job “creation”. VCs seeking government subsidies also want to exaggerate the benefits of their tiny little companies. I guess (as in other stories) the reporters are merely economically ignorant naïve.

This is not particular to green jobs, but is a problem anywhere politicians get involved. The arguments for attracting sports teams and their stadia are similarly suspect, both because of the “multiplier” effect but also because money visibly spent at a pro football game is money not spent on a college game, movie, or just a 24-pack of beer. (The problem of unseen substitution is exactly as predicted by Frederic Bastiat 160 years ago).

Again in my efforts to develop renewable energy jobs, we found there weren’t all that many in California, and that the perception this was a growth area exacerbated the mismatch of supply and demand by attracting more job seekers than there were jobs.

One of these days people will realize how much fewer jobs have actually been created (as opposed to shifted) by green technologies. I look forward to the day when we measure such jobs the same way we measure IT jobs or aviation jobs — in specific (identified) companies and industries. Certainly that’s the only measure that matters to entrepreneurs, employees, investors and others that have real skin in the game.

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.

US: the once and future PV market

Once upon a time, the global PV market was a US market.

Some 60 years ago, AT&T created the PV market. The industry was sustained during the 60s from military and space applications.

This is not just PV. Meanwhile, during the 1970s energy crisis solar hot water became mainstream (at least temporarily) as Californians replaced water heaters and pool heaters with rooftop collectors. In the 1980s, California created SEGS, the largest facility in the world that once comprised more than 90% of the world’s capacity.

As any reader of this blog knows, the German feed-in-tariff (and similar subsidies in selected other EU countries) has created huge growth and shifted the bulk of the global PV demand to Europe. In 2010, 80+% of the global demand was in Europe — and of that Germany was by far the largest with 8+ GW of capacity added in 2010.

Wednesday at the SolarTech 2011 Solar Leadership Summit, Shayle Kann of GTM Research talked about the growth of US PV demand, based on a state-by-state survey it did in cooperation with SEIA.

First off, Kann said "There is really no such thing as a US market. There’s a loose collection of 50 state markets” or even 3000-utility-specific markets.

In 2010, the US installation of PV reached 878 MW (volts DC, i.e. pre-inverter), up from 290 MW in 2008 and 435 MW in 2009. While US growth has been explosive, so has the US share of the global market , flat at 5-6% over the past six years.

However, GTM is expecting the US market growth will now outpace global sales — continuing to double annually, with global growth only 17-18% per annum. If these trends hold, the US share of the global market could triple to 16% by 2015. With European growth slowing, PV companies are seeking growth elsewhere and Kann said they're targeting the US for that growth.

The top 10 states account for about 85% of the US market. According Kann's data, 2010 was the first year that California did not garner for the majority of the US market: from 50.3% down to 29.5%. NJ remains number two (up to 15.6%), but Nevada (6.9%) and Arizona (6.2%) leapfrogged Colorado (6.2%) within the top 5. Florida fell both in absolute and relative terms (from 8.3% to 4.0%).

One key element of growth will be utility scale systems: 6.4 gigawatts (7 years of demand) of utility scale capacity is contracted — with all of that online by 2015. Another 13.6 GW are announced but do not have a signed PPA.

Interestingly, US manufacturing (per GTM numbers) has remained constant at around 38-40% of the market. While Chinese makers have gained share, it’s been at the expense of Japanese makers rather than US ones.

Still, PV remains a drop in the bucket for US electricity generation: PV to date totals 2 GW peak capacity, whereas 50 US power plants (mostly hydro and nuke) have 2GW capacity each. So, as Kann noted, it will be a while before PV actually has a meaningful impact on US electricity generation.

EVs' dirty clothes

The assumption of those buying, selling and seeking subsidies for EVs is that they are somehow cleaner than existing internal consumption engine cars.

The premise has numerous largely unexamined assumptions. One is that the alternatives are a stationery target — that there’s no progress on competing technologies (e.g. hybrids, diesels, fuel cells, etc.). Another is accounting for the energy cost of creating the batteries and the pollution cost of disposing of them.

And — as with any environmental investment — there is the question of whether this is the most efficient way to spend billions or trillions to save the planet. If (hypothetically) it takes $5 trillion to replace the global transportation infrastructure to not emit carbon but only $1 trillion to sequester carbon, couldn’t that extra $4 trillion be used to cure malaria, provide safe drinking water, or other alternatives that improve the health of the planet and its residents?

However, these are second-order arguments that don’t seem to be getting traction.

A much simpler argument is: is generating (and distributing) the electricity to the new generation of EVs cleaner than currently available gasoline-powered cars?

Increasingly, evidence suggests that the answer is “no”. As I noted last May, outside of New Zealand, few countries have green enough aggregate energy generation to reduce CO2 emissions if you shift from gasoline to grid power.

If you look a little deeper, the US picture is even worse. There are two types of electricity — cheap baseload and expensive (or more variable) peak load, used when lights are on and air conditioners are running. Solar obviously is a daytime peak load source, natural gas (the cleanest fossil fuel) is expensive and used only at peak load, and who knows when wind will be available.

However, smug homeowners with their non-polluting EVs are plugging into the grid at night, when there’s no solar. According to John Petersen (writing at Renewable Energy World) those kilowatt-hours will come from baseload power — which in the US means either coal or nuclear power. His article draws on a 2008 Rand study of the lifecycle comparison of HEVs vs. PHEVs.

The Rand study says that if you use natural gas to generate electricity, a PHEV is cleaner than a HEV but if you use coal it’s dirtier. (What about CNG cars? Petersen doesn’t say). Running coal plants to charge “clean” EVs is obviously somewhat of a contradiction in strategies.
From my analysis of 2008 EIA data, coal accounted for 48.2% of US electricity consumption and nuclear 19.6%. (In California, it’s 57.7% natural gas, 15.6% nuclear but only 1.1% coal.) Of course, shifting transportation from liquid fuels to the grid would require incremental increases in electricity generation — retiring fewer coal plants or even building more of them.

The one gap in Petersen’s analysis is that hydro can be shifted to be used whenever power is needed, so that increased electricity consumption at night could be fed by hydro. Of course, that takes away from its availability at (the more valuable) daytime peak load. More seriously, US hydro is only 6.2% of consumption and pretty much capped in absolute terms.

So this comes back to the fundamental systemic innovation problem: changing our century-old transportation system to be more green is complex and expensive. If we don’t use market forces — or distort the market by favoring one approach over another — there are likely to be suboptimal choices made.

In this case, it appears that it would be better to shift the grid to renewable energy first, and then put cars on the grid, than to add EVs to the grid at a time when renewable energy is a relatively small part (<10%) of our electricity supply. The only encouraging news is that when they spend their own money, consumers are thus far resisting the EV hype machine and going with more economically efficient alternatives.

EVs good on MPG, HPM

A big debate recently on EVs and PHEVs has been how to measure the miles per gallon given that a) sometimes they use no gas at all; and b) electricity is an energy cost, even if it’s not a gallon of gas.

But now I think it’s time to focus on HPM (hype-per-million): misleadingly high press popularity that masks underlying revenue model problems. Electric cars seem to be heavy on the hype — by the vendors, the business press, the general press and even politicians — while sales are barely improved from the first great coming of the EV. (And this time, there’s no one to blame for poor sales but the invisible hand of basic economics.)

An AP report Friday was stark in its assessment:

GM sold 250 to 350 Chevy Volts this month, and Nissan's sales totaled fewer than 10 Leaf sedans in the past two weeks. Production for both is slowly ramping up.

It will be well into 2012 before both the Volt and Leaf are available nationwide. And if you're interested in buying one, you'll need to get behind the 50,000 people already on waiting lists.

It's still unclear just how large the market for electric cars will be once those early adopters are supplied. The base sticker price is $40,280 for the Volt and $32,780 for the Leaf, much higher than most similar-size, gas-powered cars. If those prices rise, it could make them even more of a niche product than predicted. Buyers also are worried that advertised lease deals may not last, and a federal tax rebate of $7,500 could disappear if Congress decides battery-powered cars are no longer a priority.

According to the story, Nissan can build 50,000 Leafs a year while Chevy hopes to sell 10,000 Volts in 2011 and up to 45,000 in 2012.

By comparison, Chevy sells more than 200,000 Malibu sedans a year (for a price that’s half that of the Volt.) Of course, price is everything — now more than ever. And with the new Congress, expansion or even extension of generous Federal subsidies seem less likely than ever.

Edmunds is predicting HEV/PHEV/EV will rise from 2.4% in 2009 to 4.8% in 2013, with EVs only a small fraction. Of the 14-17 million passenger vehicles sold every year in the US, that would be an increase from about 350,000 to 700,000 vehicles a year. Most of those are probably the Prius, which is selling about 400,000 units annually (worldwide).

This is consistent with the November prediction made by Daimler AG CEO:

In 10 years’ time, the overall market share of electric cars is likely to be still in the single-digit percentage range. … In principle it’s similar to President Obama—first, expectations are being raised externally and then people are surprised they don't get fulfilled. From today's perspective it's already clear [that] we won't earn high returns with electric cars in the years to come. And that's the optimistic wording.

Even the 4.8% forecast may be optimistic: selling 70,000 Leafs and Volts would be only 10% of the US market. Given Toyota is driving most of its HEV demand to the Prius, category growth is going to depend on other makers (most likely Honda and Ford) offering their own hit HEV/PHEV/EV models.

Both Honda and Ford have offered credible products, but neither has made much of a dent: even in a good month (October 2010), Honda only sold about 4,000 units in the US. Honda promised to be aggressive in pricing its HEVs and EV models, but the Fit EV (due in 2012) is priced at $30k, only about 10% below the slow-moving Leaf.

So where is the growth going to come from? Yes, $150/barrel oil would increase EV sales (even if it has no direct effect on renewable energy, which instead competes with coal and natural gas.) But that’s not really a business strategy — unless you have the geopolitical connections to arrange a third Arab Oil Embargo.

My own purchase intentions reflect this reality. At one point, I thought my next car would be the $20k Honda Fit Hybrid, until Honda decided not to sell it in the US. Instead, it’s more likely to be $15k for a Ford Fiesta (37mpg), Mazda2 (35mpg) or Honda Fit (33mpg). Ignoring the time value of money, a $15k purchase price differential (vs. a Leaf or Fit EV) buys 5,000 gallons of gas — enough to cover the fuel costs for the entire life of the car. Plus there’s no battery to put in the landfill, or coal-generated electricity to pollute the planet.

The Sputnik fallacy redux

In his speech Monday to the National Press Club, Energy Secretary Steven Chu said that clean energy represents a new "Sputnik” for the US. In this remake of the space rate, the Red Chinese are playing the role of the USSR.

To quote from the official press release:

A New Sputnik Moment
Secretary Chu said that China's investments in clean energy technologies represent both a challenge and an opportunity for the United States. While China's experience with rapid, large scale deployment of technologies makes it an important global testing ground and creates opportunities for scientific partnerships between our two countries, it also means that America cannot afford to take our scientific leadership for granted. Secretary Chu stressed that our economic competitiveness depends on jump-starting the next round of American innovation in clean energy.

Dr. Chu’s slides even more explicitly make the Sputnik analogy, quoting Dwight Eisenhower.

As CNET reported his remarks:

Chu said that the U.S. needs to fund research in clean-energy technologies in order to stay apace and take advantage of the economic opportunity that cleaner energy technologies represent globally.

"America still has the opportunity to lead in a world that will need a new industrial revolution to give us energy we want inexpensively and carbon free," he said during his presentation, which was Webcast. (Click for PDF of slides.) "I think time is running out."
…
He said there are risks in the status quo which were detailed in a report called Business Plan for America's Future which was authored by business leaders including Bill Gates, venture capital investor John Doerr, GE CEO Jeff Immelt, and former Lockheed Martin CEO Norman Augustine.

The report said there are many benefits to moving to a cleaner energy system in the U.S., including public health, protection from climate change, and cleaner air, but none of these are recognized by the free market. Also, the scale of investment required in new energy technologies in beyond the scope of commercial companies, which is why the government should fund research and development.

As I noted six weeks ago, there are two problems with this line of reasoning.

First, the cheap Chinese manufactured goods are helping reduce CO2 outputs even if they take market share from US and German firms: Western leaders have to decide which is more important, saving jobs or saving the planet.

Secondly, the idea that renewable energy policy can be approached like a moonshot is a fallacy that was demolished by three leading innovation economists (who all have strong environmental sympathies). (Official Research Policy article here, working paper here).

Dr. Chu’s answer is to throw more money at federally funded technology development. I realize that Dr. Chu is a scientist who spent years spending DOE R&D money, but the answers are going to found in industry, not federal labs.

Yes, the US is and remains the innovation leader of the PV world. But the problem is not technological innovation, but in business models and manufacturing efficiencies. I don’t know what kind of business advice Chu is getting, although both Doerr and Immelt have shown their priority is to get the government to subsidize their EE/RE bets.

Nothing that Chu suggests will change the fact that China has 4x as many young people and will someday have 4x as many science PhDs as the US. Nor will it change the fact that the cost of capital and land and labor (and energy) is so much cheaper for Chinese manufacturing that none of his proposals would bring back US manufacturing in any significant way.

If the US is not going to be exporting manufactured goods to any significant degree, what can it do? It can try to imitate Germany of a decade ago and sell lots of goods to its domestic market before that market is swamped by imports. Or it can try to export technology, services and other innovations that are not so manufacturing- and cost-sensitive.

An expensive way to not save the planet

In Monday’s Washington Post, Robert Samuelson wrote about administration plans to make a $10.5 billion down payment on a $200 billion cost of constructing 13 high speed rail corridors (including $19 billion for California).

A few choice quotes:

What would we get for this huge investment?

Not much. Here's what we wouldn't get: any meaningful reduction in traffic congestion, greenhouse gas emissions, air travel, oil consumption or imports. Nada, zip. If you can do fourth-grade math, you can understand why.
…
We are prisoners of economic geography. Suburbanization after World War II made most rail travel impractical. …Trip origins and destinations are too dispersed to support most rail service.

Only in places with greater population densities, such as Europe and Asia, is high-speed rail potentially attractive. Even there, most of the existing high-speed trains don't earn "enough revenue to cover both their construction and operating costs," the Congressional Research Service report said. The major exceptions seem to be the Tokyo-Osaka and Paris-Lyon lines.

President Obama calls high-speed rail essential "infrastructure" when it's actually old-fashioned "pork barrel." The interesting question is why it retains its intellectual respectability. The answer, it seems, is willful ignorance. People prefer fashionable make-believe to distasteful realities. They imagine public benefits that don't exist and ignore costs that do.

Samuelson predicts economic disaster for California if it spends $43 billion to build a high-speed rail system it can’t afford to operate. Or rather he predicts that the current economic disaster will get worse.

Apollo metaphor: crash and burn

The Merc’s website (but not the dead tree paper) had a story Thursday afternoon about the California branch of the Apollo Alliance, a lobbying effort by “business, labor, community and environmental leaders” for policies to support cleantech companies and cleantech jobs. The story wasn’t picked up by other outlets because there isn’t much new: the Apollo Alliance is based in San Francisco, already had a rollout effort in California in October 2008, and the group issued a press release three weeks ago supporting AB32 and attacking Prop 23.

The Merc story highlighted the support of cleantech businesses, but the website and the group’s publications suggest that the Apollo Alliance is more of a political group run by an alliance of labor and environmentalists. The New Apollo Program manifesto lists a 14-member board chaired by longtime legislator (later state treasurer) Phil Angelides, and the board also includes the head of three environmental groups, two labor unions and noted environmental activists Van Jones and Robert Redford.

While the Alliance seems intended to win clout through its big name backers, it seems an otherwise unremarkable example of the three factions to lobby for government regulation and spending to support cleantech companies and onshore jobs. For example, the Merc story says:

"We've seen energy policies stall at the federal level, and it makes what's happening in California all the more important," said Cathy Calfo, executive director of the Apollo Alliance. "It's important to have a comprehensive strategy to move toward a clean energy future."

However, there is the matter of the name. To the question of “Why do we call it the Apollo Alliance?” the group’s website says:

Like JFK’s Apollo Project, which put a man on the moon in under a decade, an Apollo project for energy freedom must be big, bold and fast. Here’s the speech President Kennedy gave when he announced his Apollo project at Rice University in Houston, September 12, 1962 …

The problem is, renewable energy or energy efficiency are not suited to an Apollo-like project. That’s not my conclusion, but that of three of the world’s leading innovation economists — David Mowery of Berkeley, Dick Nelson of Columbia and Ben Martin of SPRU — in an article they wrote just to rebut such policy silliness, who share the goals of the Apollo Alliance but explicitly reject its policy metaphor (if not its specific policies).

As they begin:

Many supporters of government action argue that the problem is so great, the need for new environmentally friendly technologies so urgent, and the time remaining for implementation of solutions so limited, that a “Manhattan Project” or an “Apollo Program” is needed.

and then note how the two metaphors have been around for more than a decade. From that, they summarize four reasons why the metaphors not only are wrong, but will lead to policies that won’t work

We emphasize at the outset that we share the broad concern of these authors about the immense risks of global climate change, and we agree that strong, well-resourced government technology policy is part of the solution. However, proposals to model such a policy explicitly on the Manhattan or Apollo projects are, as this paper will argue, wrongheaded, and if adopted could waste resources and limit the prospects for success. Although the prospect of global warming raises technical and economic issues that are, if anything, even more daunting than those posed by a lunar landing or the crash wartime program to develop an atomic bomb, the nature of these challenges is quite different. Most importantly, both the Apollo and Manhattan projects were designed, funded, and managed by federal agencies to achieve a specific technological solution for which the government was effectively the sole “customer”.

By contrast, technological solutions to global climate change must be deployed throughout the world by many different actors, and these deployment decisions will require huge outlays of private as well as public funds. Both the industries developing and producing these solutions and the sectors in which the technologies will be deployed comprise a very heterogeneous group, ranging from wind power to internal combustion and from electric-power generation to dairy farming. …

Another point of contrast between the R&D programs that will be needed to combat global warming and these earlier federal “models” is the relatively high degree of administrative centralization in both the Manhattan and Apollo projects. As we note below, the tension between centralization and decentralization in large-scale R&D programs is an important issue in program design for which broad prescriptions are likely to be unrealistic or vacuous. But government R&D programs to combat global warming will involve numerous organizations, and consequently mechanisms for the coordination of priorities, resource allocation, and performance evaluation will be essential.

Lastly, unlike the development of an atom bomb or of a manned space vehicle, halting or reversing global warming almost certainly cannot be achieved solely through ‘supply-side’ policies and the development of technological ‘solutions’. Indeed, one of the largest dangers created by the Manhattan or Apollo metaphor is that it may be adopted by politicians seeking to avoid the far more painful demand-side policies aimed at changing human behavior and halting the ever growing demand for energy previously regarded as a prerequisite of ‘human progress’.

I can’t possibly summarize a 14,000 word research article in a brief blog post, and I encourage people to read the article in its original — either the official version at the Research Policy or the working paper published by Britain’s equivalent of NSF.

However, this is yet another reminder (as if we needed another one) that innovation policy is too important to be left to politicians or lobbyists, but instead needs to be handled by people who know something about the subject.

End to solar thermal? Not so fast!

September and October have been great months for utility-scale solar thermal projects in California, as the state (with cooperation from the Feds) approved six projects with 2.8 gigawatts of capacity in the Mojave desert. Five of these are proven trough systems, while the sixth plans to use a Sterling engine.

However, Michael Kanellos and Brett Prior of GTM speculate it’s the beginning of the end for solar thermal. Their argument is sound in principle, but I wonder if their timing is premature.

Most of the advantages of the solar trough systems are also its disadvantages: it's low tech, decades-old proven technology that works well at scale. For years, the world’s largest solar facility — and California’s entire utility scale solar capacity — consisted of the nine SEGS sites totaling 354 MW in Eastern Mojave. The GTM argument is that the main solar thermal systems — both trough and tower — are about to lose to PV on cost per watt and LCOE, and that the price of PV technology will continue to improve more rapidly than that for thermal.

I think the latter is certainly true — PV costs have been coming down for decades, while many of the thermal parts are mature and proven. Also, the moving parts on heating water and running turbines guarantee significant operating costs that are not seen by PV, which are essentially semiconductors covered by glass windows that need to be washed.

Has it crossed over yet? I think the crossover is coming, but the fact that all six utility scale systems are thermal rather than PV suggests it’s still a ways off — or at least that PV manufacturers can’t ramp up production capacity quickly enough to generate gigawatt-capacity plants.

While the costs are attractive, PV clearly has more risk in the short term than the proven thermal technology. That (as they argue) other utility scale systems plan to use PV suggests the crossover is coming, but I don’t think we’re there yet.

The other thing about the argument is that it says little about the economic viability of thermal systems either operating or under construction. If utilities have signed a PPA with the RPS gun to their head, they still need the contracted capacity at the agreed-upon price.

In fact, if both Jerry Brown gets (re) elected (even odds) and Prop. 23 fails (it’s outspent 3:1), then utilities are going to need whatever capacity they can get to meet the RPS standard of 33% by 2020. Keeping the 33% requirement will give an extra 2-5 years of life to the solar thermal market (beyond whatever its natural lifespan is) as buyers wait for PV manufacturers to ramp up capacity to meet a global — not just California — demand for renewable energy.

Renewable energy is a capital-intensive commodity business. At some point solar thermal companies will have a hard time competing for the bulk of the market, but for now they can — in best Monty Python fashion — note that “I’m not dead [yet].”

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.

Who needs inefficient solar panels?

The IPO of thin-film solar module maker Trony Solar has been cancelled in the light of a lousy IPO climate that also claimed Solyndra’s IPO hopes. The Chinese firm had hoped to raise $200m.

In her story on the cancelled IPO, Camille Ricketts of VentureBeat notes this is in the context of other declines in the thin-film market, including Applied Materials discontinuing its SunFab thin-film integrated equipment line.

Buried near the bottom of her story is the heart of the matter:

Thin-film cells are generally less efficient than their crystalline silicon peers. Their main saving grace — which motivated a lot of investment in the market two years ago — is that they use less silicon. Back when the material was expensive, this made thin-film a compelling proposition. But silicon prices have since dropped, allowing crystalline silicon panels and the companies who specialize in them, namely SunPower, to remain on top.

This raises the question: if crystalline silicon prices continue to fall — as they have for decades — why would we think that thin film companies have any sort of future?

Low efficiency means greater spending per kWh on balance of system — including installation labor and permitting costs that seem more stubbornly resistant to experience curve efficiencies. There’s also the real estate question — due to the space limitations of a rooftop environment, behind-the-meter applications often have trouble generating enough power to meet local demand as it is.

Yes, solar remains an industry of a thousand niches. Flexible thin-film substrates will have a future in building-integrated photovoltaic and other niche applications where it is competing with no PV — rather than silicon PV.

Still, we’ve known that a shakeout is coming in PV, due not only to the high level of investment in solar startups but also the importance of scale economies to overcome increasing cost pressures. The shakeout is going to be brutal to makers of low-efficiency components and modules.

Green jobs: supply and demand

In a year of anti-incumbent sentiment, the Democrat candidates for governor and senate here are planning on emphasizing their environmental policy and green jobs. The lead story in Friday’s Mercury was about the gubernatorial candidate;

Brown puts focus on green

was the five column headline above the fold. (The online headline was more boring.) The point of the story was that Jerry Brown wants Bay Area voters to know that unlike his GOP opponent, he supports California’s controversial anti-global warming policy:

Brown said the new law would create hundreds of thousands of clean-energy jobs, reclaiming from China leadership of the cleantech economy.

Also on Friday, the local ABC TV station ran a story about the party’s senate candidate touting green jobs:

Sen. Barbara Boxer, D-Calif., is talking up the benefits of stimulus spending. Friday, she was in San Jose at a job training center talking about green tech jobs, saying California is the hub of the clean energy economy for the entire country.

At the Center for Employment Training in San Jose, Boxer watched as students practiced mounting solar panels and solar power irrigation devices.

She told the students they are training for the jobs of the future.

"If we keep focused and we make sure that we don't go backwards we will see these workers here working all over the state putting those roofs on schools on office buildings and on homes," Boxer said.

The CET received $3 million from a stimulus grant. Students are confident their training will pay off.

The story was surprisingly intelligent and balanced for local television, perhaps because reporter Mark Matthews had 2:30 to make his point. The story quoted both blue collar workers hoping to get green jobs, those that have despaired, and Boxer’s GOP opponent as disagreeing with job training subsidies.

The argument for such training is straightforward. It would be nice to rely on the market to identify training needs and supply that that need, but perhaps there would be a lag in responding to that demand — or perhaps in times of tight budgets, firms and non-profits are underinvesting in worker training.

Still, by training workers for a specific industry, the federal government is either reducing the costs for companies in that industry, or shifting demand to the trained workers from whoever the firms were planning on hiring instead. (It’s also possible that by reducing the cost of acquiring new workers, that the government is slightly increasing the demand for such workers.)

However, as one of the TV interviews suggests, some of the workers may be trained for jobs that don’t exist. For example, last year California community colleges were training workers for solar installer jobs just as other installers were laying off workers. This is both a problem with the government picking job training based on environmental policy rather than proven demand, and — more generally — a problem of producing a supply of specialized workers in advance of demand. (In California in the 1960s and 1970s, there were some really bad times to start a 4-year degree in aerospace engineering.)

The linkage of Brown’s policy lever to local jobs was more tenuous than for the direct training model. Opponents of AB 32 say that the measure increases costs (and thus reduces money for workers), particularly with small firms.

The original argument for AB32 was that California needs to take the lead among Americans in reducing carbon emissions to do our part to reduce global warming. However, since the recession, AB32 proponents (like Brown) now say requiring more CO2-efficient technologies will lead to California jobs in creating and delivering such green technologies.

The problem is that the most aggressive and admired demand-side RE stimulation — the model for the global industry — has been Germany. Now, the general consensus is that manufacturing of solar panels is fleeing to China — just like everything else — and that both German buyers and sellers of panels will shift to panels made in China.

That’s the inherent problem with buyer subsidies: they cause people to buy things, but not necessarily things made locally. (Under WTO rules, subsidies for locally-made products are verboten.) So buyer subsidies — or mandates — will shift demand but not necessarily stimulate local employment.

This is not an argument to do nothing, but it is a reminder that the effects of government stimulus (or mandates) may be less than predicted and thus less cost-effective than proponents originally claimed.

Flash: Markets work better than governmental fiat!

When Oregon’s feed-in tariffs sold out in 15 minutes, it unfortunately revived interest in a justifiably discredited approach to promoting adoption of renewable energy.

The issue came up today at the SolarTech-sponsored workshop “Accelerating PV Commercialization,” held next door to the InterSolar trade show in San Francisco. Fortunately for those in the room — if not the broader policy audience — Hal LaFlash of PG&E swatted down the idea as quickly as it came up.

Basically, there are two common ways that government force utilities to purchase of renewable energy that is not cost-competitive with conventional sources of power:

• The feed-in tariff to set a specific price that utilities use to buy RE. This approach was pioneered by Germany and copied with disastrous results by Spain.
• Force utilities (using regulation and penalties) to buy a certain amount of RE, and leave it up to them to figure ut how to do that most efficiently. This is the basis of the California Renewables Portfolio Standard.

As LaFlash pointed out, the latter approach works much better, because the utility has the incentive to buy the power, but at the most cost effective fashion possible. In response to PG&E’s periodic solicitations for proposals, the RE generators state how much they want for their power and the utility runs a reverse auction, picking the most efficient (cheapest) one.

(LaFlash also noted the utility is working to streamline the paperwork process for connecting projects under 20 MW, in which the transaction costs is disproportionate to the project size.)

Stimulating renewable energy generation is about buying a commodity to achieve a policy goal at the most efficient possible price. The problem with feed-in tariffs — as demonstrated by Spain, Oregon and elsewhere — is that they assume a priori analysis or some other state planner can do a better job of setting a price than the market.

That’s what markets do best: set prices. We call it the supply and demand, or capitalism. Despite the delusions of the economically illiterate, that battle was fought and won decades ago. So here it’s California providing a model for how governments can use market forces to achieve environmental goals.

According to Harvard economist Greg Mankiw, the Federal government is apparently in the process of ignoring (or intentionally unlearning) this lesson when it comes to sulfur dioxide emissions and acid rate.

Estimating the cost-benefits of solar energy

The key question of renewable energy is cost-effectively producing commodity electrons. One of the most pressing questions for SolarTech, Silicon Valley’s solar energy trade association, is accurately estimating the financial returns of rooftop PV and other RE systems.

In the Spring 2010, SolarTech commissioned a consulting team of finance students from the Sbona Honors Program to look at the most commonly used tools for calculating solar returns. (I supervised a second team on local permitting, and initiated the cooperation between SolarTech and the SHP for both teams.)

The actual report is available on the SolarTech website and was announced Wednesday in a SolarTech press release, timed to next week’s InterSolar conference in San Francisco. Because it is a building block of the SJSU-SolarTech cooperation, I wrote more about the background and goals of the study in our new Solar Workforce blog.

The short answer: the students think the best alternative (of the four) is the NREL’s Solar Advisor Model. The caveat is that study was mainly on features and usability, and there still needs to be an audit (by subject experts) of the accuracy of the calculated results.

Still, this is a great example of how business schools (and undergraduate students) can be relevant to the emerging renewable energy industry. It also offers some insight to us in business schools how to bring the industry’s real business problems into the classroom.

Efficient vs. inefficient green jobs

At the EconLog blog this morning, Economist David Henderson noted his response to arguments for government subsidies of green jobs. While I don’t agree with all his points, he does bring things back to the core problem often ignored in cleantech policy: as in any other government (or private) policy, more efficient policies should be chosen over less efficient ones.

The arguments were in a monograph called The Economic Benefits of Investing in Clean Energy, available free from its two sponsors: the Center for American Progress (a progressive think tank) and the Political Economic Research Institute, a research project focusing on progressive issues headquartered at the University of Massachusetts Amherst.

In turn, Henderson — who has a part-time appointment at the Hoover Institution — published his review in the Summer 2010 issue of Regulation magazine, from Cato, the leading libertarian think thank. While CAP and Cato might agree on free speech or military spending, when it comes to government regulation and domestic spending, they are continents apart.

Henderson begins provocatively enough:

Suppose that you want to build a house, and you solicit two builders for estimates. Builder A's eight employees can build the house in three months for $300,000. Builder B's four employees can build the same house in the same time for just $150,000. Which builder would you choose?

This is not a trick question. You would choose Builder B, right? But Robert Pollin, James Heintz, and Heidi Garrett-Peltier would select Builder A if they employ the same reasoning they exhibit in their recent monograph The Economic Benefits of Investing in Clean Energy.

In other words, if spending $10 billion on green jobs is good, $20 billion is better. If this weren’t OPM (other people’s money), no one would ever think that way: it would be “how can we best increase consumer welfare by spending $10 billion” or even “what policy will create the most jobs at the lowest cost?”

Really, Henderson could just cite the Frédéric Bastiat and broken window fallacy — which describes much of the waste in government spending today. Maybe Henderson assumes his readers know the story, but the principle is inviolate: money spent fixing broken windows is money not spent on something that would otherwise be a higher priority.

Attempts to abolish the laws of economics have (so far) failed, whether by Marx, Galbraith or EF Schumacher. The price system in free markets sends signals to consumers to make the optimal allocation of their resources, and no better system for decentralized coordination has yet been found. Thus, the efficient use of resources should be just as much a priority in creating “green” jobs as with ordinary jobs.

Every so often, when hiking in a national park or visiting the old downtown of a small city, I find a road, bridge or building built by the Civilian Conservation Corps. Whatever the original cost, the fact that these facilities are in use 70 years later suggests that the expenditure had a productive use, amortized over a long period of time.

Green incentives: incentives vs regulation

While football is my favorite sport, this was one of those years where I watched the Super Bowl more for the ads than the game. (It turned out to be a surprisingly fun game.)

As in previous years, many of the ads turned out to be more entertaining than effective. Our family’s favorite ad — got us all to laugh — was the Budweiser ad that satirized the TV series “Lost” (now in its final season). But no amount of advertising would get me to drink Bud, or my wife or tween to drink beer under any conditions whatsoever.

But an ad that closely linked the message to product — and one that’s stirred a controversy for several days afterwards — is the “Green Police” ad for the Audi A3 TDI turbodiesel. (I originally thought it was for VW, but since they have the same corporate parent and similar powerplants, the confusion was understandable.)

If you happen to have been on Mars, the ad shows teh Green Police busting citizens for various far-fetched environmental transgressions. It was accompanied by a redub of Cheap Trick’s hit “Dream Police” to sing the words “Green Police” to the original music.

USA Today’s green blogger Wendy Koch endorses the ad:

The ad is not just another pot shot at greens. It's an appeal to a new and growing demographic that isn't hard-core environmentalist -- and doesn't particularly like hard-core environmentalists -- but that basically wants to do the right thing. Audi's effort to reach them, however clumsy, is actually a bit ahead of the curve.

While it’s just an ad — and a funny one at that — there’s still something about the satire that hits a little too close to home. As one blogger put it, “it feels eerily like a near-future dystopia.”

The ad was made in San Francisco, which has an actual composting mandate as in the ad. Koch notes that Israel, UK, New York state, Vermont have special police authorities to sanction CO2 emissions or other anti-green crimes.

Whether the green police are real or not, I think there is a broader question of using regulation rather than prices to encourage socially desirable behaviors in a market economy.

In a great triumph of hope over realism, we hoped that centralized command-and-control bureaucracries (ala 1984 and Des Lebens des andres) died with the Berlin Wall in 1989. Alas, the once-free liberal democracies seem to be approaching central planning quicker than the former Soviet republics are approaching free markets.

It’s not that market approaches are unavailable. Most of the problems of the US EE and RE industry — long payoff periods, unpredictable substitute costs, uncertain investment climates — could be solved quickly and simply by tripling or quadrupling the price of fossil fuels via a fixed carbon or extraction tax — and returning the money via individual and corporate income tax cuts. More complex systems (like cap and trade) have proven they are amenable to fraud and political payoffs .

The one minor problem is that any politician voting for such an increase in the cost of gasoline, natural gas, heating oil and electricity would be unemployed at the next election. So those who advocate European-style or Japanese-style oil prices will never see their theories tested.

Solar future not as bright as hoped

Last November, the future of solar power in the US looked bright. Yes, there were some economic problems on the horizon, and the economic contraction pushed down the price of fossil fuels. But still, PV technology has gotten a lot of free publicity and plays nicely to a new social consciousness associated with the new administration, global warming, etc. etc.

On Friday, the snarky “Lex” column of the Financial TImes took a rather dark view of the current situation:

What looked only last year like a shining future for the solar industry has flared into a supernova, incinerating profits and share prices. Demand for photovoltaic panels had been growing at 45 per cent annually from 2000 to 2008, but the industry underwent an aggressive expansion at the wrong time. Finished panel capacity is at about 9,000 megawatts while demand has contracted from about 6,000MW last year to 4,500 in 2009, according to Barclays

The recession is partly to blame, but so is Spain. Accounting for nearly half of global installations last year, Spanish demand is expected to fall from 2,500MW to about 300MW after subsidies were slashed.

WIth a glut of panel production due to last until 2012, Lex predicts a brutal price war that wipes out the less efficient producers.

Lex concluded:

The solar industry’s gold rush mentality and its unhealthy dependence on subsidies are to blame for its travails. The only positive is that private over-investment will make panels cheaper, giving taxpayers who sustain solar power worldwide a better deal.

Whether or not industry officials agree with Lex on the subsidies, “he” is exactly right on the investment. The entire industry’s success will be determined by its ability to drive down the learning curve, both to get manufacturing yields up and production costs down.

The existing firms need to utilize the funding that they already have — from customers, government and investors — to focus on efficiently serving existing pockets of customers that are managing to buy during this economic slowdown.

Good news on PV system trends?

On Friday, the San Francisco Chronicle reported on a new study on how the average cost of installed PV systems changed from 1998 to 2007. (H/t: Cleantech News). The report came from Lawrence Berkeley Labs, until recently the employer of Steven Chu, now Secretary of Energy in the Obama administration.

According to the Chronicle, the cost per watt of systems fell about 28% (presumably in nominal dollars rather than inflation-adjusted real dollars). The prices are approaching but have yet to reach grid partiy.

Small systems in Arizona and California (best in the country) have an installed cost of about $8/watt, while a UC study last year suggested that an installed prices $5/watt would be necessary to be cost-competitive.

Is the glass half-full or half empty? The author of the UC study, Prof. Severin Borenstein of UC Berkeley, argues for the latter

"What we're seeing in small-scale solar are incremental declines, not breakthrough declines," Borenstein said. "And in order for solar to really make sense, we're going to need breakthrough declines."

I don’t know what the appropriate analogies are. Going from the transistor to integrated circuits was a breakthrough, but most of what happened after that was incremental. Analog to digital communications was certainly a breakthrough, but most of what’s happened since has been incremental. And, of course, the nature of breakthroughs is that you usually can’t see them beforehand.

This morning, website BusinessGreen predicts that the price of (silicon-based) solar module prices will fall 30-40% in 2009, with an end to last year’s shortage of polysilicon. Angus McCrone of consultant New Energy Finance is quoted as saying that “massive increase in silicon supplies is coming through at the moment.”

Given that the capacity is coming online when capital is scarce for paying for solar systems, the increased supply and falling prices will either stimulate demand that might otherwise have disappeared, or lead to brutal price wars that weed out less efficient producers.

14¢ solar?

The Cleantech Group posts an interesting article about planned price cuts in PV electricity generation in China:

Solar cell maker … were among the companies that submitted a proposal to the Ministry of Science and Technology to cut the allowance for solar power generation [from $0.584] to $0.146 per kWh in 2012. The government had planned to reduce the allowance to that price in 2015.

The 75-percent price drop by 2015 is feasible, according to the Jiangsu Photovoltaic Industry Association. Industry leaders had predicted last year that it would take until 2020 to reach solar electricity at a cost of $0.146 per kWh.

Part of the reason for the accelerated decline is the price drop for polysilicon, which makes up 70 percent of the cost of silicon solar photovoltaic products. Polysilicon hit a peak of $400 per kilogram in July 2008, falling to less than $100 at the end of the year. Polysilicon is now trading for $30 to $40 per kilogram and is likely to continue dropping.

The 14.6¢ cost is significant because it brings solar in line with fossil-fuel based energy.

If the policy takes effect, this would mark an important milestone on the path to grid parity.

However, I don’t quite know what to make of it: the article is unsigned and no source is given. And from my own research on telecom, when it comes to Chinese industrial policy, there’s always more than meets the eye.