In 2006, California enacted the California Solar Initiative. The goal of the initiative was to install 3,000 megawatts (MW) of generation capacity and to establish a self-sufficient solar industry in which solar energy systems are a viable mainstream option for both homes and businesses within 10 years. This goal raises an interesting question about the definition of a self-sufficient solar industry — and who defines it. It also provides an opportunity for the industry to think about and plan for its future. In California, one of the assessments that will be made about the California Solar Initiative will be whether or not the goals of the program were met. It will be important for the industry to be involved in the definition of a self-sufficient solar industry.
When CALSEIA testified at a hearing before the Assembly Energy and Natural Resources Committee in December 2007, it raised this issue and provided some initial thoughts and suggestions about this very question. Here is an excerpt from that testimony where we provided a “vision” of the future to provoke some thoughts about what the companies might look like and how California’s permitting and regulatory infrastructure will be equipped to facilitate solar installations:
In 2018, we have brought down the installed cost of solar electric systems to prices that provide a reasonable payback to customers.
We’ve blown past 3,000 MW by 2018.
The systems were installed with craftsmanship and there is a high degree of customer satisfaction.
The systems are interconnected the moment the installation is complete.
New warehouses, offices, and retail stores are always built with solar.
Building departments issue permits online in less than 5 minutes.
Homeowners’ Associations are begging for solar because they see that homes with solar have higher resale values and they feel left out.
We see solar companies located in every community in California. Your local solar electric service company that can provide a service technician this week to check your system to make sure everything is working great. This company will be there when you re-roof to remove and reinstall the panels. If there are warranty issues, the company will help coordinate this with the manufacturer of the products.
All of these local companies also have a sales force. They are selling enough systems to ensure that all of the employees are paid good wages and benefits.
All of the companies who are here today are here in 2018.
New homes and commercial buildings are being built with solar as a standard feature. Homebuyers wouldn’t think of buying a home without a solar electric and solar water heating system.
Utilities love solar and they see these installations as a benefit to them in that they provide reliable and affordable energy to their customers. They buy the excess power generated by their customers.
CALSEIA is working hard to ensure that many, if not all, of these projections become a reality.
Different Business Models for Solar Companies
Solar companies in California have different ideas about what a self-sufficient solar industry will look like. Some believe that the industry will consolidate and there will be fewer solar companies. Other companies believe that there will always be small solar companies dispersed throughout California’s many communities.
One business model emphasizes large purchases of modules to negotiate better prices from the manufacturers. Smaller businesses must use just-in-time inventory practices because they lack the financial resources to negotiate large purchases. Larger companies could have either lower installation prices or higher profit margins and smaller companies could have higher installed costs or lower profit margins.
Another business model is that of a company that both manufacturers and installs. Yet one more possibility might be no solar specialty companies at all with electrical companies installing photovoltaic (PV) systems.
Solar Financing Models Are Being Explored
Another important factor in a self-sufficient solar industry is a reasonable way to pay for the costs of solar. One model being explored is power purchase agreements (PPAs). PPAs have been popular for some time in the commercial solar market because they overcome the first-cost barrier to installing solar. In the model, a system is installed on a host site. PPA investors own the system while the host site enjoys the benefits of solar energy, paying a fixed cost for the power to the PPA. PPAs rely on a package of incentives and/or market rules, such as federal tax credits, depreciation, state incentives, net metering, and renewable energy certificates in order to make them attractive to investors and attractive to building owners who do not have the capital to purchase a solar energy system. Some companies are now offering PPAs in the residential solar market.
A new market model in the residential market is a leased system. This is similar to a PPA but may or may not rely on all of the incentives and/or market rules.
Another new program currently in development by a few California local governments gives a city the right to create special assessment districts to allow site owners to repay long-term loans through their property tax assessments. There are statutory rules and administrative issues that need to be addressed before these can be proven viable and good work is underway in California to examine the issues before the program is introduced.
The motivation for financing, PPAs, and leasing strategies is simple: they are a method to overcome the initial cost barrier when a customer cannot afford to buy a system outright.
Since most of these business and financing models co-exist now in California, some people speculate that there will be a “winner” among these approaches. CALSEIA’s mission is to expand the use of all solar technologies in California so it will not take a position on any particular business strategy — although CALSEIA will seek to ensure that state policies foster quality installations, system that perform, and customer satisfaction so that the industry can experience long-term sustained growth. Industry consolidation may present challenges for customer service and support, which may reflect on the reputation of the industry. It goes without saying that the industry’s reputation is important for long-term sustained growth!
What the future will look like is uncertain but the discussion is important because of the tremendous pressure on the industry to make solar competitive with retail electricity. The conundrum then is how to lower costs while investing in research and development and simultaneously testing and perfecting various ways of doing business. Installed cost may not drop as quickly as policymakers would like while these important investments and business- and financing-model strategies are being explored.
CALSEIA and Rate Cases
More important than the installed cost of solar is the retail price for electricity. CALSEIA and other organizations are now actively participating in California’s rate cases. Rate cases are critical because retail electricity rates affect the solar value proposition. California has a tiered electricity rate structure that may eventually move to real-time pricing. In California during the electricity crisis of the 90’s the state enacted price controls to keep the rates low for the lowest tier electricity rates (as applied to investor-owned utilities, not municipal utilities). Because of the price control law, the higher tiers represent one of the places where utilities can recover their costs so these rates are becoming disproportionately higher than the lower tiers. At current prices, it is the high-tier customers who are the best candidates for PV systems, particularly when you factor in time-of-use rates and net metering.
Notwithstanding the current rate structures and retail rates for electricity, a important focus should be on ensuring that solar is compared to real costs for new generation, transmission, distribution, peak energy demand, transmission congestion, fuel costs, environmental impacts and greenhouse gas emissions rather than average electric costs. (California generates nearly half of its electricity from natural gas, but the fuel-resource mix varies significantly from state to state so what may be true in California may not be true in other states). More analysis is needed by experts to help frame this debate.
Utility-Scale Solar, Energy Efficiency and Solar Thermal
There are tremendous opportunities develop utility-scale solar that should be mentioned because we are seeing a major increase in this area. Distributed solar (placed in proximity to where the electricity is needed either on the retail side or utility side of the meter) and large solar farms (utility side of the meter, placed in remote locations) are both needed, therefore it is not an “either/or” proposition for these two approaches for using solar energy. CALSEIA would encourage proponents of either approach to recognize that California needs both.
Last, it is important to start thinking hard about energy efficiency and solar thermal. Energy efficiency and solar thermal should be on the PV industry’s radar for lowering its installed costs. Energy efficiency and solar water heating (for electric water heating) can help decrease the overall site demand for electricity. Both present opportunities for increasing the use of PV systems. Perhaps the real winning model will be the business that takes this approach to serving a customer’s energy needs.
So, what is your definition of a self sufficient solar industry? And more importantly, how do we get there?