Reshaping Solar: Growth Expected Despite Economy

Outside the doors of the San Diego Convention Hall the world economy was falling apart, inside Aaron Hall, chief executive of California’s Borrego Solar Systems, was describing the rapid growth of his solar electric contracting firm. Revenue was US $7 million in 2005, $12 million in 2006, and $30 million in 2007. For 2008, Hall projected revenue of $60 million, and possibly $80 million. ‘With the government passing the extension of the solar investment tax credits, we anticipate that 2009 will be another phenomenal year for Borrego and the entire solar industry’, he said

Hall’s words – coming in October just after the stock market’s record crash and the tumbling of major merchant banks – underscored the rarified business climate renewable energy currently enjoys in the US. Attendance at Solar Power International 2008 spoke volumes about the perceived health of the industry, with more than 22,000 people – at least twice as many as last year.

Figure 1. US solar installation forecasts 2009–2016
source: navigant consulting, inc.

As the US stock market sags, the solar industry appears to be surging. Solar has grown for the past several years, but it received a major boost in October when President Bush signed into law an eight-year extension to the solar investment tax credit (ITC). With the incentive in place, the industry expects to add 19 GW of solar energy from 2009–2016, equivalent to a $232 billion investment, according to the Navigant Consulting report ‘Economic Impacts of Extending Federal Solar Tax Credits’. Most striking, the report forecasts the addition of 440,000 jobs at a time when employment is shrinking in many sectors.

Solar is seeing ‘more action than some of the action movies out there’, said California Governor Arnold Schwarzenegger at the conference. Rhone Resch, president of the Solar Energy Industries Association (SEIA), added that solar has moved from a cottage industry ‘to not only an economic engine, but a political force.’

Figure 2. Total US solar related investment from 2009–2016 (2008 $ million)
source: navigant consulting, inc.

 But the industry isn’t immune to the economic downturn, and solar insiders aren’t pretending to be worry free. The ailing credit market may not punch solar as hard other industries, but some hit is likely, they say. In addition to government incentives, solar companies rely on financing from banks now in peril and a credit industry now stingy about lending. ‘You are all part of Wall Street, whether you like it or not’, John Jacobs, executive vice president at Nasdaq warned conference-goers.

Solar advocates are particularly concerned about the fate of third-party financing, also known as solar power purchase agreements, in which solar service providers offer long-term contracts to help customers avoid high upfront costs associated with solar. The agreements depend upon investors with a strong tax appetite, often large banks. The banks cover the cost of solar system equipment and installation; customers pay only a monthly electricity bill, much as they do if they buy power from a utility company. The agreements have led to an explosion of new installations. With banks in trouble, solar companies are in search of new investors in a stagnant economy. Lyndon Rive, CEO of California’s SolarCity, said investors can be found, but ‘it is just getting harder.’

Figure 3. 2016 solar direct, indirect and induced employment: 400,000 jobs
source: navigant consulting, inc.

Another worry is that renewable energy relies heavily on support from state governments, and they too have been hit hard by the financial crisis with more than half of the states now facing large financial deficits. ‘How is the market going to develop around that? What does the future look like? The dire message is that historically, with respect to an impact, a shock, like we’ve just experienced here, it takes about four years for things to settle down,’ said Matt Cheney, CEO of MMA Renewable Energy. ‘The credit crunch will hurt us like everyone else’, added Resch. ‘But I think we will get through it quickly, and you will see more solar installed in 2009’.

Friend or Foe?

One trend creating hope – but also trepidation – is the new entry of utilities into the solar market. For years, utilities have been largely indifferent and sometimes even obstructed solar development. Now several states have created policies to nudge utilities to pursue renewables. More significantly, the federal government will for the first time let utilities use the federal tax credit, a benefit they were denied until the recent passage of its eight-year extension.

‘Traditionally, utilities saw solar as a threat. Now they see it as an opportunity’, said Julia Hamm, executive director of Solar Electric Power Association (SEPA), which works to encourage utilities to adopt solar programmes. Meanwhile, Mike Ahearn, CEO of First Solar, an Arizona-based manufacturer, said he envisions a possible industry shift from the solar service provider’s third-party financing model to a mix of that model and utility-owned solar generation.

In any case, utilities are expected to take advantage of the tax credit and move into solar in a big way. It is not clear yet whether this will boost or slow business for the independent companies that form the core of the industry, and which have often been at odds with utilities. David Mohler, chief technology officer at North Carolina-based Duke Energy, now envisions partnerships between utilities and independents with plenty of opportunity for all. Still, some independents worry that large utilities may nudge them aside.

Duke is one of several utilities that recently announced plans to move aggressively into solar. Mohler sees pursuit of solar as a wise resource strategy for utilities. The shaky economy may drive down demand for power, which in turn will delay construction of costly baseload power plants. This opens a window for utilities to make smaller, more targeted additions with solar installations.

Among other things, Duke has requested regulatory permission to invest $50 million in small-scale solar, and has committed to purchase 16 MW under a 20-year agreement with SunEdison, which is developing a project in Davidson County, North Carolina.

Borrego’s Hall and other independent solar companies say they favour industry-utility partnerships of the kind Duke has struck with SunEdison. Such partnerships could benefit both the utilities and the smaller independent businesses. But the independent contractors are wary of competing head-to-head with utilities, given that utilities enjoy cost recovery and a regulated rate of return unavailable to them. While Duke intends to occasionally form partnerships with independent solar companies, it also may get into the nitty-gritty work of the industry and send utility employees up on roofs to install panels (work typically done by independent installers currently). In taking on such work, Duke might be able to streamline the process and reduce costs, according to Mohler. He also cited the cost advantages utilities bring because of their strong financial position. ‘We have lower costs of operations than most of the players in this space. We have a much longer investment horizon, and we have the ability to extract system value out the assets. We do think we have a place to play’, he says.

However, Duke acquiesced somewhat to the concerns of solar companies, and in late October chopped what was originally a $100 million solar programme with 850 installations to a $50 million programme with 450 installations. Paige Sheehan, Duke Energy spokeswoman, said that the company decided to reduce the programme after solar companies complained that the initial plans were too aggressive and would shut out competitors in the state.

Whatever their relationship to solar companies, utilities are clearly abandoning their ‘pace of molasses’ and moving full tilt into solar energy, according to Hamm, whose organization this year began ranking utilities based on their solar installations. In the past, only a handful of utilities have played in the solar market, although their involvement has been large, with 10 utilities integrating 97% of all grid-connected solar capacity. ‘There are over 3300 electric utilities in this country, but 10 of them have dominated the solar landscape. In addition, a single utility, Pacific Gas and Electric Company (PG&E), has within its service territory more than 50% of all grid-connected PV systems in the country. PG&E should be commended and encouraged to continue as a solar leader, but other utilities around the country must quickly begin to close this gap’, Hamm said.

SEPA’s rankings may look very different next year, Hamm says, given the rapid-fire announcements by utilities. Interestingly, it appears that a small municipal utility in Florida may outdistance the rest. Lakeland Electric, with 112,000 customers, could achieve a higher solar capacity, measured in Watts per customer, than Southern California Edison because of a 24 MW deal struck with SunEdison, which will finance, build, own, operate, monitor and maintain ground-mounted and rooftop solar energy systems for Lakeland Electric. The deal will give Lakeland 214 W of solar per metered customer, dwarfing Southern California Edison, the current number one with 86 W per customer.

Tagging solar thermal

The tiny utility Lakeland Electric, has made a name for itself before in the world of solar. It is known for its solar hot water heating programme, and for being the first company to convert solar thermal to renewable energy certificates or ‘green tags’. While photovoltaic solar energy is commonly translated into the tags, solar hot water is not because it is often viewed more as a demand-side reduction than a renewable energy input. Nonetheless, Lakeland has sold voluntary green tags to Keys Energy Services of Key West and the Democratic National Convention.

Lakeland is also looking toward expansion of its nationally-recognized hot water heating programme, but with a wary eye toward pending renewable energy portfolio regulations being prepared in Florida. Not all states let solar hot water generate green tags that can be used to meet RPS standards, and solar hot water advocates are concerned Florida may become one of them. Utilities meet the RPS requirement by generating or purchasing the tags, also known as RECs. Florida is stipulating that 5% of energy sales come from renewables by 2017, rising to 20% by 2041.

The Utility Solar Water Heating Initiative (USH₂O), a coalition of utilities and the solar industry, says that solar hot water can meet 80% of a Florida homeowner’s water heating needs. ‘The net impact of a solar water heater on the electrical grid, when offsetting the consumption of electricity, is virtually indistinguishable from that of a renewable distributed resource that generates electricity’, the group said in a letter to the Florida Public Service Commission.

Many states already allow utilities to count solar hot water toward meeting the RPS, among them Hawaii, Pennsylvania, Arizona, Texas, Vermont, Delaware, Ohio, Illinois, New Hampshire and North Carolina. Florida, which has the largest amount of hot water solar in the continental United States, has few other choices beyond solar hot water and photovoltaics to meet the RPS, according to Jeff Curry, Lakeland Electric’s alternate energy coordinator. ‘I think solar water heaters can come to the rescue in the state of Florida. We have no wind, we have no geothermal, we have no hydro’, he said.

The PSC must propose an RPS rule by 1 February 2009 and the legislature is expected to vote on the rule in the spring.

Whatever move utilities make – and however states treat solar hot water – the new tax credit is expected to open the door for a solar energy market in almost every state. Given the national market expansion, California-based Borrego has moved shop across the country and set up a second office in Massachusetts, where Governor Deval Patrick has set strong solar energy goals and increased the RPS. At one point Borrego said its Massachusetts office was generating more leads than its California HQ. Meanwhile, the largest utilities in Massachusetts – National Grid, NStar and Northeast Utilities – all say they are moving into solar too.

What is next for solar in the US? SEPA’s Hamm pictures a burst of innovation to make it easier and cheaper for customers to purchase solar power. She points to Berkeley FIRST, a solar financing programme begining this year through the city of Berkeley, California. Property owners can borrow money from the city to install PV systems and pay it back over 20 years through an annual special tax attached to property tax bills. The tax is paid only by Berkeley property owners who choose to participate in the programme and the financing costs compare to a traditional equity line or mortgage. If the owner sells the property, the payment obligation is transferred to the next owner.

On the national level, with the solar credit intact for eight years, the industry is now expected to push for a national renewable energy portfolio standard, national standards for interconnection, and better job training programmes, according SEIA’s Resch. The industry will also push for much-needed transmission construction to move solar energy from the south-western US to the Midwest and even the east of the country.

Finally, Resch sees his organization encouraging favourable treatment of solar energy in any climate change legislation that Congress takes up. The climate change debate, however, is likely to be postponed until at least the second half of 2009 because lawmakers will be busy early in the session dealing with the financial crisis, according to US Senator Maria Cantwell, a Democrat from Washington state. Ultimately, the financial crisis could spur more consumer interest in solar energy, according to SolarCity’s Rive. With money tight, homeowners are looking ‘at every single penny’ to reduce their operating expenses. ‘If they can cut their utility bill by 10 or 20%, they are highly motivated’, Rive says.

With a harsh credit sector and a promising long-term tax credit, the industry seems destined to take a new shape. The ‘status quo won’t cut’, Hamm said. ‘We are operating in a time that is very different. Be bold. Be innovative. Be strategic’.

Elisa Wood is US correspondent for Renewable Energy World. Research assistant Corey Haga contributed to this article.
e-mail: rew-us@pennwell.com