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.

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

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

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

Is this such a good idea?

A comparatively balanced article by veteran Eric Wesoff of Greentech Media earlier this year discussed the pros and cons of this approach. One important requirement — as with any government manipulation of the market — is predictability:

Gary Kremen, solar entrepreneur and founder of Clean Power Finance, had this to say on the subject: "FiTs are great if they are a long-term commitment on the part of government and utilities. Off-and-on FITs make planning and the mandatory required financing hard, if not impossible."

Those promoting feed-in tariffs tout the undeniable effectiveness of FiT in promoting solar adoption in Germany. However, as Wesoff notes, that comes at a price:

Germany is experiencing a bit of a feed-in tariff backlash as their citizenry reacts to FiT dollars going to Chinese, rather than German, solar module manufacturers. FiTs can also be construed as a tax -- and that's political poison in the U.S.

In other words, subsidies for inefficient power producers are politically palatable if it creates domestic jobs, but not if it ships domestic funds overseas.

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

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

In particular, it’s design to correct the most egregious errors of the government-set pricing. As Nikki Chandler reported:

Some governments have used fixed-price feed-in tariffs to incentivize renewable energy development. One point of difficulty has been getting the fixed pricing right. If the price is set too low, it does not stimulate the desired level of market activity. If the price is set too high, ratepayers pay unnecessary costs, suppliers throughout the value chain are not encouraged to reduce prices, and the program can lose political support. In contrast, the CPUC program uses competition to establish a price that is both sufficient for project development and protective of ratepayers.

The plan seems to please one group (Interstate Renewable Energy Council) lobbying for a FiT and anger another (the FiT Coalition).

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

A completely different Akeena

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

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

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

Now two different blogs have reported that Akeena is getting out of the installation business to (it claims) avoid competing with dealers. As PV-tech reports:

"Expanding our channels to include authorized dealers in California will accelerate the growth of our distribution business," said Barry Cinnamon, chief executive officer of Westinghouse Solar. "California is the largest state in the country for solar products, accounting for approximately 50 percent of the U.S. market… As we transition to a distribution model in California and sign up new dealers, we will continue to focus on securing new distribution partnerships and adding dealers around the country. We will honor all outstanding installation obligations, and in many cases expect to work with new Westinghouse Solar dealers to take over our remaining backlog of California installation projects."

When GreentechMedia reported on the shift last week, it was generally optimistic. Akeena had already exited installation elsewhere in the US, because it was competing with its installers. However, as it also reported:

A strategic shift like this, however, also means layoffs. Employees said that began today.

Alas, no more sales seminars at the wine bar, and one less large-scale California installer. Some 19 months ago, Borrego Solar got out of residential installation, selling its California and Massachusetts operations to Vermont-based groSolar for an unspecified amount.

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

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

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.