Solar and the Law of Unintended Consequences

Sociologist Robert K. Merton once defined the law of unintended consequences using ignorance, error, imperious immediacy of interest, basic values, and self-defeating prediction. Nagivant Consulting’s Paula Mints ties each of these themes to the PV industry with some cold hard truths.

September 7, 2011 – In 1936, American Sociologist Robert K. Merton wrote about the law of unintended consequences using the following five sources to define this phenomenon: Ignorance, error, imperious immediacy of interest, basic values, and self-defeating prediction.

Here are a few pertinent unintended consequences:

  1. Aggressive pricing for share might end up being the status quo, keeping margins low.

  2. Governments may perceive aggressive pricing as 100% correlated with manufacturing costs when in some cases the two are mutually exclusive with the outcome of lower incentives.

  3. Promising grid parity is translated to without incentives for solar, leaving the industry to complete with conventional energy, which continues to enjoy subsidies.

  4. Promising that the industry can get along without incentives and subsidies means, well, it may have to do so.

The cold hard truth is that demand for grid-connected solar is 100% driven by incentives of some type — so it has always been, but so it may not always be. The feed-in tariff model of incentives has proven to be the best tool for stimulating demand. Before FiTs, capacity based incentives (primarily rebates) drove demand from low megawatts to >100MWp by 1997; the FiT drove demand in the solar industry to multi-gigawatt levels. The solar industry promised FiT government sponsors that grid parity would soon follow, and that solar would become affordable to all. Governments assumed that FiTs would drive strong domestic markets with healthy growth in domestic supply (manufacturing) and demand (consumption). In the few years since Germany’s FiT was announced, demand has soared (along with prices for a brief period), jobs have been created, money invested, and prices were artificially depressed downward — while governments found support of the newly developed markets onerous, to say the least. (For the remainder of this article the focus will be on PV.)


Figure 1: PV industry history from 1975-2010.


Ignorance

For most of its history, the PV industry has been forced to go begging for the incentives that are necessary to drive demand into the grid-connected application. Frankly, the industry was forced into this position by short-sighted energy consumers (all of us, basically), including utilities, politicians, et al. who, satisfied with the seaming ease of conventional energy, could neither conceive of the side effects of energy gluttony nor were particularly interested in paying for changing the paradigm. PV technologies are expensive to develop and deploy; even with today’s low prices the high upfront capital cost to install remains.

The mid-1990s brought capacity-based incentives (rebates). Note the slow and steady increase in demand in Figure 1. In the mid-2000’s the FiT (Germany is the parent of the modern feed-in tariff) began to stimulate stronger demand. As other countries in Europe added FiT programs, demand accelerated, as did prices. In 2004, technology manufacturers broke even for the first time and enjoyed profits. Meanwhile, China (not yet a strong provider of PV technology) announced plans to dominate from raw material production to distribution.

From the outside, the construction of vital and flawed FiT market instruments seemed to ignore the potential that market participants might just misbehave, bubbles might develop, or things in general might go badly awry. The original goal of developing a vibrant market for distributed generation (rooftop, or, simply near the load) was swamped by multi-megawatt installations and investors who entered with little understanding of the technology or industry. Meanwhile, China built a robust export industry to serve the new profitable markets, while the governments that sponsored the FiTs in the first place looked the other way.


Table 1: PV technology shipments (in MWp), 2005-2010.


Concerning the market domination by China (and Taiwan): The government in China created a landscape where technology development could thrive — support that would be welcomed by any technology developer. It takes a lot of time and a lot of money to get from idea through R&D through pilot scale to commercialization. Table 1 above presents the change in regional supply control over time; Figure 2 shows the 2010 supply/demand picture.



Figure 2: 2010 Supply and demand.



Error

FiTs rapidly became uncontrollable because no true controls were put in place when they were constructed. Instead –and erroneously — the assumption appears to have been that markets would behave in an orderly fashion. Most programs instituted planned yearly degressions, which caused markets to overheat in anticipation of the decrease in the tariff rate. Too rapid building led to poorly constructed (sometimes scandalously so) installations. Before the global recession, which was not caused by the solar industry, investors did not care about performance guarantees. In some markets (notably Spain) speculation became commonplace and eventually considered the cost of doing business. Ontario’s domestic content requirement was developed with no real understanding of how it could be policed; put simply, it cannot be policed. Attempts to control out-of-control markets (e.g., Spain, the Czech Republic, the UK) chilled the hearts and wallets of investors. Rule number one should be: Never scare the money.

Imperious immediacy of interest: The ends justify the means

Unfortunately, the designers of the FiT apparently failed to consider how an incentive-driven industry would behave in the face of a generous incentive. New players entered with little industry understanding from 2004-2008; prices increased monthly seemingly indicating price elasticity. In 2009, aggressive share-seeking Chinese/Taiwanese manufacturers drove prices down ~40% in a matter of months. Governments assumed that this indicted rapid learning that the new price levels allowed reasonable margins, and that prices would continue to decrease rapidly while still leaving room for innovation. Meanwhile, despite degressions, markets continued to overheat and prices continued to decrease. Now, unfortunately, with solar electricity firmly established as a commodity, there is no way to justify a healthy increase in prices, one that would allow for comfortable margins and a healthy industry.

Basic values

As prices were being forced uncomfortably down, manufacturing capacity increased, as did inventories (standing at ~3GWp currently). The rush to install every more gigawatts in ever-larger system configurations has changed the PV industry, likely forever. Part of the industry is an impersonal commodity business now, while much of it continues to struggle to survive and innovate. Multi-megawatt installations are not great art — it’s all about getting it to ground cheaply, efficiently, encouraging ever lower technology prices, and constraining lower margins. Many people invested in the promise of solar without understanding the industry or its technologies — and many IPOs and misunderstandings later, the industry is trapped with too much capacity and too low prices. During the heady initial days of the FiT, new companies were created that simply may not survive in the current atmosphere. During the early days of the FiTs, many gigawatts were created while some of the original values were forgotten, at least for a time.


Figure 3: PV manufacturing capacity, 2000-2010.


Self-defeating prediction

Fears of overheated solar markets have driven some odd changes, such as the UK system size limitations. Paradoxically, rapid changes in FiT rates along with annual degressions actually lead to market over-activity — the very situation that the changes seek to avoid. Attempts to curb multi-megawatt installations and steer the market back to small/medium ground and rooftop, along with a future BIPV market, lead to continued building at unhealthily low prices and business failures. Companies that ramped up in anticipation of FiT-driven markets now must find a way to survive in a solar world with too much capacity. In the near term, much of this excess capacity will simply be installed at a loss.

All is not lost

The solar industry — back to all of its technologies — is changing, for better or worse and whether it likes it or not. In many cases, the changes will be painful. There is no market support for higher prices (at least currently), so margins will continue to be constrained. The utility scale (or multi-megawatt application) forces solar to compete as a commodity, and that means cheap. The promise of grid parity keeps margins constrained and ignores other competitive factors such as substitutes. As a concept, grid parity makes for great press; however, the reality is likely to prove disappointing. The promise of the FiT came true — the solar (primarily PV) industry is a multi-gigawatt industry now.

There will be fall out, there will be failures, but the industry will adjust and it will stick with its roots and continuing to develop paradigm changing technologies. But it will never be an easy road for an industry used to struggle. The basic values — which were overshadowed for a time by too much free money and too generous incentives — are still at the bedrock of solar: technology and business innovation, tapping into a clean endless energy source, the potential of providing electricity for the ~1.6 billion people in the world without access to it, and the jobs that will be created and employ future generations. All is not lost, it is just tough — or, business as usual for solar.


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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