Selling solar futures: The commodity vs. product debate

Solar PPAs are essentially electricity commodity futures, and as such their primary attribute is cheapness — but Paula Mints advises both utilities and end-users that there’s a differentiation in solar electricity beyond the price point.

by Paula Mints, Navigant Consulting

May 11, 2011 – A commodity is a (relatively) undifferentiated good the price for which is determined by the market, and this price is generally low. Commodities are by their nature fungible; however, all commodities are not created equal. Solar electricity, when sold utility-scale as a commodity, is differentiated by being clean, safe, and reliable. The long-term reliability of the technology has been proven, and with advances in system design and topographies that mitigate variability, its hour-by-hour reliability will be proven in time.

Primarily, solar-generated electricity can be differentiated from conventional energy by virtue of being an environmental good. Practically, though, this differentiation is lost when in competition with other renewables (not nuclear), and in the end, cheap is the name of the commodity game. So, in terms of competition with other technologies solar the commodity can compete; in terms of competing with other renewables, the differentiation is less. Panels competing with panels… well, it’s all about getting cheap electricity out, and that is all about cheap components, higher conversion efficiency, strategic and innovative system design, and efficient installation. For installation, this means fast. For system design, this means making the most of the land and the technology. CPV in areas with DNI >7 are a match made in heaven. Thin films in low light conditions (surprisingly, India has a lot of very hazy sunlight) have advantages, and higher efficiency and cheap crystalline technologies are always competitive.

Again though, a primary attribute of a commodity is its cheapness. And if something is a commodity, then a price will be put on its future. In solar, power purchase agreements are solar futures by another name. Smaller customers can hedge against energy price volatility with solar leases. It will take an entity with really big pockets (lots of money) and a huge leap of faith (or calculated risk) to hedge energy prices by selling solar futures, and this will not necessarily be good for energy consumers. With electricity rate volatility a big subject these days, and in California with PG&E looking to pass energy savings on to big users while the little guys pay more, enterprising energy entrepreneurs should continue leaping into the breach.

Before utility-scale solar, customers installing solar systems on their home or business roofs served as a hedge against electricity rate volatility. Once you installed your system you were relatively free from unexpected utility rate hikes provided you had done your research and understood your electricity usage, had access to net metering, correctly sized your system, did not install it under a tree, and had appropriate expectations.

A utility investing in solar as a commodity will want it to be cheap, and as innovation in system design and installation are still new (surprisingly this is true), there is a long learning curve ahead for everyone. Sooner or later investors will begin to bet on solar pricing — and with every surge in the commodity market there will be a correction, and sometimes a crash. All corrections cause pain somewhere to someone. Solar futures are coming.

End-users can benefit from solar as a commodity, but they can also become victims of a system that leaves them out of the loop as they trust professionals to make the right decisions. Utility rate payers in California should remember the energy crisis during the early 2000s that led to bad buying decisions (in those days bad buying decisions were an extreme sport), brownouts, higher rates for all, along with the recall of then Governor Gray Davis and the election of Governor Schwarzenegger. The solar industry was not ready during the last crisis for the size of the deployment necessary. It is ready now.

Here is a hopefully unnecessary word about trusting professionals: derivatives.

Customer-sited and owned solar as a distributed generation hedge against electricity rate volatility may be a mouthful, but it provides true protection against higher rates and true energy independence. For technology manufacturers and installers, it enables true product differentiation and branding, along with better margins. When BIPV finally becomes a viable sub-application it encourages creativity in product design, innovation and system implementation — when solar is the building envelope, green building becomes a reality. For end-users the buying decision is personal; though solar will still have to be less expensive, it will not have to be the cheapest kilowatt on the block.



Paula Mints is principal analyst, PV Services Program, and director in the energy practice at Navigant Consulting. E-mail: pmints@navigantconsulting.com.

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