Temporary pause in policy schizophrenia

On Wednesday, the California Energy Commission approved the 250MW Beacon solar plant . This 2000 acre project about 17 miles north of Edwards Air Force base is in Kern County, at the West edge of the Mojave Desert.

The plan is the first utility-scale solar thermal project approved in California since 1990, and when complete would nearly double the 350 MW of solar thermal capacity near Kramer Junction.

On the one hand, I’d like to be encouraged. The CEC claims to care about greenhouse gasses, renewable energy, keeping generating capacity (and operating jobs) in state, etc. etc.

On the other hand, it’s far easier for a government agency to say “no” in our litigious, regulation-driven society. Whether it be the impact of wind generation on luxury home views or migrating birds, competing values often are used to sabotage reasonable efforts to create long-term green energy infrastructure.

The CEC is hardly done, as there are many other projects planned for the Mojave, with ideal insolation due to low humidity and low latitudes, and located near the demand (and transmission facilities) of the LA metropolis.

Even if the CEC is reasonable, there is still the threat of federal regulators (or politicians) making land use decisions to rule out these ideal locations for what should become gigawatts of RE capacity.

So this week's outcome is a step in the right direction. But it’s only one step of many.

Making money without relying on politicians

Rob Day of Cleantech Investing raises the exact point that I’ve been making for years:

Now that Harry "Lucy" Reid has pulled the climate legislation football away at the last minute, cleantech investors can be forgiven for taking a big sigh and forgetting about climate policy for a while. After all, until a couple of years ago most cleantech VCs were adamant about purposefully ignoring policy efforts and effects, because of the randomness factor it would imply for their investments.

With Obama’s election, I think some cleantech investors and entrepreneurs assumed that Cap-N-Trade, a carbon tax or some other policy change would come along that would make their businesses more profitable.

Like any other special interest, these businesses are certainly free (at least for now) in advocating policies that support their special interest. But then they’re special interests and not real businesses.

I think it’s rational to plan a business based on existing policies that are unlikely to change. In California, RPS is the law of the land and even a Republican governor is unlikely to roll them back.

On the other hand, AB 32 (or the Prop 23 that would repeal it) is a measure that has passionate supporters, passionate opponents and a fairly large middle group that could go either way. So while I don’t agree with Rob Day that Prop 23 passing would be a disaster, I certainly agree firms for the next 90 days have to make long-term investing decisions based on the possibility that it might.

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.

San Diego's biofuels effort

One of the two proposals to win the maximum $4 million grant from the Green Innovation Challenge was the San Diego Biofuels Initiatives, a partnership headquartered at UCSD. While I was in San Diego earlier this month, I was fortunate to meet with Prof. Stephen Mayfield of UCSD, one of the prime movers behind the initiative as well as development of San Diego’s nascent biofuel industry.

In addition to being a chaired professor in the biology department, Dr. Mayfield also is the cofounder and scientific advisor for Sapphire Energy, one of the region’s major biofuel startups. (The other major local firm is Synthetic Genomics, which has a famed genomics pioneer as a cofounder and Exxon Mobil as a major joint venture partner.).

Most importantly, Dr. Mayfield is director of the San Diego Center for Algae Biotechnology, which is the hub of the state-funded GIC project. The SD-CAB itself is a partnership of UCSD, Scripps Institute of Oceanography†, the Salk Institute and San Diego State. († Not to be confused with Scripps Clinic or Mayfield’s former employer, the Scripps Research Institute).

Three things stand out from the San Diego project and Mayfield's vision.

First, San Diego already has leading academic research, a nascent industry and strong ties between the two. The biofuels effort builds on the established biotech infrastructure — even more than solar PV builds on the semiconductor infrastructure. The local trade association, Biocom, established a subgroup to help support biofuel collaboration.

The biotech industry has deep roots in San Diego, beginning with the 1978 founding of the pioneering startup Hybritech. The biotech industry was largely a UCSD spinoff, and is responsible for the emergence of a local venture capital industry. (My own study of the parallel telecom cluster suggests that it is smaller and less durable than biotech).

The region’s efforts to become a biofuel hub are well along. At almost the same time that the state funded the worker training project, the SD-CAB got another $9 million in US Department of Energy funding for biofuel research — one of three projects funded nationwide by $24 million in Federal algae fuel research.

The second unusual point is that the project has an integrated educational strategy that combines efforts of three institutions of higher learning:

• Biomass certificate: an AA at Miracosta College for those involved in growing biofuels
• Biotech certificate: BS at San Diego State
• Crop management: BS (biology) at UCSD
• Professional master's at UCSD for entry-level researchers

and also possibly a bachelor’s degree for chemical engineers who work in biofuel refining. While UCSD is working closely with local industry, these graduates will also go to work at refineries and biofuel farms across the Southwest.

Finally, the goal of this effort is not to train some students over a two year period. It also goes beyond the necessary task of creating a curriculum and degree programs. Instead, the goal is to create a permanent educational infrastructure that supports industry needs in San Diego and elsewhere. As Mayfield told me:

We're not training 500 people, we're building a program that can train 50-100/year indefinitely, and can scale. We're building a program that can train for years.

Dr. Mayfield is quite optimistic about the pace of the science, the business and the fuel production. The DOE “National Algal Biofuels Technology Roadmap” is perhaps more cautious, listing challenges in scaling up cultivation, processing and refining.

Still, liquid fuels have the advantage of leveraging an existing distribution infrastructure to meet existing demand. The algae biofuels do not have the problems of ethanol absorbing water or being too corrosive for existing pipelines, tanks and vehicles.

Even more importantly, the algae-based biofuels avoid the problem of substituting fuel for food that our current ethanol subsidy policy engenders.

Applied Materials curtails thin film business

Update 2:30pm. In response to a reader’s feedback, I’ve corrected the story.

The Merc this morning had a rather ambiguous story about the layoffs at Applied Materials that mark a retrenchment of its diversification from integrated circuits into PV.

GreenBeat (at VentureBeat) has a much clearer and more complete story that explains how the company is scaling back providing equipment to thin-film silicon manufacturers. (The Merc’s GMSV morning blog even acknowledges the superior VentureBeat coverage). PV-Tech also has a more precise story than the abbreviated Applied press release.

(Update: The press release itself says that Applied will no longer sell its SunFab integrated lines for manufacturing thin-film solar panels, but still plans to sell tools for thin film manufacturers. My original title “exits thin film business” was not true, but it’s hard to find what’s really happening behind the AMAT euphemisms.)

The VentureBeat story argues that Applied’s losses are just a matter of a bad bet, placing too many eggs on the future of thin-film amorphous silicon. The story predicts a cascade effect for two local PV manufacturers:

This is bad news for companies like First Solar and of course NanoSolar, which have both invested heavily in thin-film technology. Applied’s decision to migrate away from amorphous panels is yet another blow, a move that could raise the alarm among investors looking for smart, more capital-efficient investments in solar.

However, I think the GMSV commentary raises the broader and more important questions:

Others bring up that Applied CEO Mike Splinter indicated a few months ago that the U.S. solar industry was losing to China, which is building cheaper solar panels, and that the company’s latest move is symbolic of a broader problem for the U.S. energy tech industry. China is now the world’s largest exporter of solar panels, the Wall Street Journal says.

This seems to be one of the well-understood but little-remarked problems with America’s so-called “green jobs” strategy.

Consistent with the Vernon product life cycle thesis, in most tech industries the early production and manufacturing are in the developed home country, and it’s only later in the maturation of the industry that the production is moved offshore. Intel took 40 years to move manufacturing out of Silicon Valley, and similarly the software industry had a good run of several decades before penny-pinching American firms discovered Bangalore.

Today, even before American startups ramp up to meet domestic demand, they are shifting production (or contracting for production) to offshore locations. This not only has implications for the production workers, but also for the startup companies themselves: if the materials and production are offshore, is their value-add strong enough to preserve a permanent source of competitive advantage?

Of course, Apple successfully moved to contract PC manufacturing more than a decade ago — a pattern extended to the iPhone and iPad — and continues to post record sales and earnings. However, Apple is one-of-a-kind in the PC and cellphone industries, so it’s hard to say this is a feasible path to profitability for many companies.

The reality is that PV companies are producing technology-intensive, capital-intensive capital goods that produce commodity electrons. Because the substitutes — conventional electricity generation — are so cheap, they face commodity price pressures far earlier than in most tech industries.

So I think the GMSV concern is warranted: even if the irradiance and cost trends assure that California and the American Southwest will be powered by solar energy in 20 years, that doesn’t mean the profits for this infrastructure buildout will accrue to American firms. (NB: The $1.45b loan guarantee for a Spanish solar thermal producer.)

Perhaps it is my college-educated, college-teaching bias, but I also don’t think having American workers install foreign-made panels is the same as having US firms creating export-oriented manufacturing jobs in renewable energy.

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.