Last month, our CEO Tony Clifford was the Keynote Speaker at the 2014 PV America Conference in Boston, MA. He addressed how much the solar industry has changed over the years and gave insights on what we can expect for the future years. He touched on several important factors highlighting the industry trends that will create opportunities for the solar markets across the board including residential, commercial as well as utility scale solar. Learn more about how we can support the industry and contribute to its growth by checking out his full speech:
The solar industry today is vastly different than when I joined Standard Solar in 2007. While the industry (and Standard Solar) have grown tremendously, solar is by no means mature; and there are plenty of opportunities going forward.
This afternoon I want to talk about industry trends that are going to help create opportunities in the coming years. I’ll also talk about some storm clouds on the horizon that the solar industry has to take very seriously if we are to take advantage of these opportunities.
Going forward, there is tremendous opportunity in residential solar. At the end of Q-1 2014, there more than 480,000 solar systems installed in the US – the vast majority of which are residential PV systems. While this is great progress, the market potential for residential solar has barely been tapped. There are about 80 million single family dwellings in the US and another 50 million multi-family dwellings. While not all those homes are appropriate for solar, the potential residential market going forward remains huge!
The catalyst for rapid residential growth has been 3rd party financing with PPAs and solar leases. In these deals the investors – not the homeowners — get most of the upside. Moreover, these financing structures have made life quite difficult for those local installers who have not been able to partner with national finance firms. Local installers typically rely on their customers to finance their own systems. As banks and other traditional sources of consumer finance become more familiar with solar, the options available to homeowners are continuing to improve. We all know about loan programs now being offered by firms like Admirals Bank and we can expect even better alternatives in the near future.
Just about every financial institution that deals with consumers offers automobile loans. Solar systems now cost less than many automobiles and have much better incentives for purchase. Over the next few years, I expect that local banks, credit unions, finance companies and others will all be offering solar finance products to residential customers.
In 2013 about 70% of residential systems were financed by leases or PPAs. In contrast, last year only 26% of new car purchases were financed via leasing.
As more consumer financial institutions offer solar loan programs, demand will shift away from residential lease and PPA products towards customer-financed cash deals for installers. I am not predicting the demise of leases and PPAs, but the playing field will be a bit more even for the local installer and the homeowner – spurring continuing rapid growth in residential PV. Of course, this is assuming the solar industry successfully deals with the storm clouds on the horizon.
More than 1500 MW of commercial solar is expected to be installed in 2014. While both the hard and soft costs of commercial projects have been reduced dramatically in the past few years, the real push now is on the financing side.
In 2008, when Standard Solar first got into this market, commercial solar projects had a much higher risk profile. As such, the unlevered rates of return that tax equity investors required were then in the range of 14 to 17%. The rates of return have dropped over the past six years as investors became more comfortable with commercial solar. They are now in the range of 8 to 11% unlevered.
Financing costs are continuing to drop and new financing mechanisms are emerging. Several firms have introduced “YieldCos” in the past twelve months. Hannon Armstrong has created a public REIT that can invest in renewable energy projects, and a number of smaller commercial projects are being financed via crowd funding.
While securing tax equity is still a challenge, these new structures are all striving to reduce the cost of financing solar projects. As more and more individual projects are securitized into larger capital pools with standardized paperwork and deal terms, financing costs could be reduced another couple of points, say the 5 to 7% range. By themselves, these lower financing costs will create a dramatic increase in the number of economically viable projects…and Commercial will continue to be a very viable, fast growing solar market. Again with the storm clouds caveat!
In Q-1, 873 MW of utility solar was installed – about 65% of the total installations. However, development of a utility-scale solar project is a multi-year process. Projects currently being installed likely started development in 2011 or earlier. For the next two years, I see solid growth in this sector because of projects already in the pipeline. Beyond that there is a problem. We are fast approaching (or have already passed) the date by which even smaller utility projects can be developed and completed in time to take advantage of the 30% ITC. Going forward, I see a big hole in this market segment — unless the terms of the ITC are changed.
And now I think it is time to discuss the storm clouds on the horizon. As I see it, there are three big ones: the China trade case, the utility role in solar development, and the investment tax credit.
In 2012 I was optimistic that, by the end of 2016, we would have reached a “tipping point” where install costs reached grid parity in a number of states, allowing the industry to take off without dependence on state and federal incentives. Now I am pessimistic.
In the spring of 2012, Tier One silicon modules could be had for about $.80 to $.85/Watt and analysts were forecasting module prices in the $0.55 to $0.60/Watt range by the end of 2014. Today, we are nowhere near $.60/Watt. Current module prices in the USA are more like $0.74 to $.78/Watt and likely going up. However, Standard Solar recently got a quote for Tier 1 Chinese modules delivered to the west coast of Mexico for $0.62/Watt. To me that’s a tariff of $0.12 to $0.16/Watt on the US solar industry as of today — and we still have another trade case ruling to get through later this year!
I am not going to debate the merits of the Solar World case, but I do want to note how truly damaging this continuing dispute is to our industry. Our relentless overall cost reduction drive has been undermined. Modules prices are going up, not down; and the uncertainty confuses the supply chain and the entire industry. While SEIA has been playing the role of honest broker in this dispute, a settlement of this case does not appear likely, and that is really bad news for the solar industry.
Whether or not we can hit a tipping point prior to the end of 2016 is now truly questionable—and I don’t think it would be if we were buying modules at $.62/Watt today. I now fear that, in spite of our years-long, across-the-board efforts to reduce hard and soft costs, the solar industry may wake up on January 1, 2017 with a huge hangover…and a not quite competitive cost model. If we end up where the wind industry is today, I believe the continuing trade war with China will be one of the major underlying causes.
Utilities and Solar
There is a quote from Mahatma Gandhi that I think is quite apropos of the relationship between the solar industry and the utilities.
“First they ignore you, then they ridicule you, then they fight you, and then you win.”
Large segments of the utility industry have ignored and ridiculed the solar industry for decades, but now the fight is on. PV’s rapid price drops have forced utilities to take solar more seriously. The utility wakeup call was the EEI report citing Distributed Generation of PV as a “disruptive challenge to the utility business model.” The call to arms was the recent report that Barclay’s had downgraded the corporate bond market for the entire electric utility sector because of utility industry failure to address the disruptive long-term risk presented by “PV coupled with energy storage.”
The day that Barclay’s report came out, I guarantee you it landed in the inbox of every utility CEO. I’m sure utility CEOs have been galvanized by the EEI report and the decision by Barclay’s.
Responses by individual utilities will vary. Some who are already invested in solar will see these reports as vindication of their earlier decisions. Others that have been on the fence may become more actively involved with solar projects. However, utilities by nature are quite conservative. Most are going to fight to protect their turf and their existing business model.
Most utilities believe that solar is getting a free ride on the backs of non-solar rate payers. We are already seeing attacks on net energy metering in multiple states. Ultimately the “value of solar” will be determined in utility rate hearings. Such hearings will be held utility-by-utility in Public Service Commissions nationwide as utilities request rate increases. To protect our interests, the solar industry needs to be present and well-prepared at such hearing nationwide. Otherwise the utilities will eat our lunch.
Extension of the ITC
As SEIA has been pushing for some time, we need legislation that incorporates “commence construction” language into the existing ITC regulations.
However, in June of 2014, it is becoming increasingly obvious that our industry needs more than commence construction language to reach the tipping point that I discussed earlier. If the solar industry is not cost-competitive when the ITC expires, solar could end up like the wind industry which saw 92% drop in installations and a loss of 30,000 jobs when the PTC expired at the end of 2012.
We are going to need an extension of the ITC for a period of time in order to reach grid parity in a sizable portion of the country. So far, the trade war with China has stalled cost reduction and otherwise distracted the industry for about two years. Thus, at a minimum I think we need an ITC extension through December 2018 – and possibly longer.
These three issues — the trade war, utility rate design and extension of the ITC — impact every solar firm in the country and every firm in their supply chain. From a cost and expertise standpoint, these issues cannot be dealt with successfully by individual companies. They’ve got to be dealt with by our industry association and supported, financially and otherwise, by every firm that counts on solar for a significant portion of their revenue stream.
Right now much of the solar industry is not doing its fair share to support SEIA. There are about 6,000 companies in the solar business and only about a thousand belong to SEIA. For years much of the solar industry has been getting a free ride, relying on SEIA members to fund policy and regulatory initiatives and provide the bodies to lobby and to testify at regulatory hearings. With the challenges the industry faces today, SEIA is going to need a lot more support, financial and otherwise, from those 5,000 missing firms if we are going to be successful.
As I noted earlier, I see a lot of opportunity in solar going forward. However, access to those opportunities will not come for free or without a struggle.
I’ll close with a quote from that famous Boston native – Benjamin Franklin. In exhorting the 13 colonies to jointly declare independence from England, Ben said:
“We must, indeed, all hang together or, most assuredly, we shall all hang separately.”
The same can be said of the solar industry today.
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