Throughout its history, dating to the 1970s, the terrestrial PV industry has faced unreliable incentives, skeptical government support and unsuccessful market manipulation, utility antipathy to changing the status quo, entrenched reliance on conventional energy and protracted periods of aggressive pricing. These factors have led to a specific market behavior on the part of participants.

Driven by incentives, in particular the European-style Feed in Tariff, the market for PV systems grew at a compound average rate of 38% from 2009 through 2014. In 2009, the market for PV deployment was dominated by Europe at 83% of total demand, a situation that was not sustainable. In 2014, the market for PV deployment is more diversified, still primarily incentive driven and dominated by the markets in a few countries and thus remains highly vulnerable.

Entrenched behavior, such as a rush to install prior to a change in an incentive have resulted in acceleration of deployment at sometimes questionable quality, acceptance of power purchase agreement prices and tender bidding at rates too low to ensure long term profitability among other unhealthy market behaviors. Business models have sprung up to take advantage of incentives that perpetuate unhealthy market behavior.

  • Unreliable incentives: Incentives such as feed in tariffs and also capacity based incentives such as rebates stimulate out-of-control market behavior in that deployment overshoots the original intent of the incentive.  Typically, these incentives are developed with few controls and little understanding of market behavior. Anticipating a decrease in the incentive, market behavior accelerates leading to incentive budget shortfalls and electricity ratepayer anger over increasing utility bills. Globally, governments have reacted with retroactive changes to incentive rules and remuneration, rapid decreases in tariffs and rebate levels and the abrupt cessation of incentive activity. In recent years utilities have sought new fees for PV system owners, curtailment of production and alterations to net metering schemes.
  • Skeptical Government Support and Unsuccessful Market Manipulation: Though it would seem as if climate change should be sufficient reason for governments to begin shifting energy production away from fossil fuels and to renewable technologies, unfortunately climate change action remains captive to well-funded special interest groups.  Even in China, where air pollution is responsible for the deaths of thousands of people a year, coal continues to drive close to 80% of electricity production. Achieving government support tends to depend on the strength of the solar lobbying function.  In Germany the solar lobbying function has traditionally been strong. In the US the solar lobbying function on a federal level has not achieved significant success in driving federal policy though the state SEIA’s (which are not divisions of the federal SEIA) have had differing levels of success.Government mandates for achieving a percentage of electricity production from renewable technologies often fall into the category of unenforceable goals and are vulnerable to changes in administration (governance). Incentive programs are often overrun by high priced consultants with the result that efforts are often shortsighted as to methods of achieving goals in a controlled fashion.  As to the latter, Germany’s FiT and the California Solar Initiative (CSI) were successful, for the most part, at stimulating the market for solar deployment while also controlling it. Government goals for deployment often fall victim to utility pushback and rate payer (voter) anger over higher electricity bills.  As strong markets for PV deployment were flooded with low priced imports and domestic manufacturers struggled to compete and finally began failing, governments in the US, Europe, Canada, India, instead of implementing positive measures to incentivize domestic content (cells, modules and balance of systems) governments in the EU and US stepped in too late with punitive measures that did little to restore domestic manufacturing.
  • Utility Antipathy to Changing the Status Quo: Deployment of distributed generation (DG) photovoltaic installations, particularly the residential application), takes a direct hit on utility revenue model. This is particularly true for the investor owned utilities (IOUs) in the US and for monopolistic utilities in other countries. The utility business model will need to change, becoming smaller and leaner while focusing on local populations to make a necessary change to a more distributed model that supports a future driven by renewable energy technologies. Globally utilities are loath to change the status quo and as deployment of DG PV accelerates are instituting changes to and controls of net metering as well as adding fees to electricity bills of residential and small commercial PV system owners.  The lobbying function of large utilities is significantly stronger than that of renewable technologies in genera,l and specifically that of the solar lobbying effort. Often utilities lay the reason for their reluctance to switch to renewable technologies at the feet of variability (availability of the sun or wind resource) and in the US point to the Duck Curve (the difference between forecasted load and production from renewable technologies and ensuing ramping problems) to shore up reluctance.
  • Entrenched Conventional Energy: While the lobbying function of large utilities is significant it is dwarfed by that of conventional energy producers of oil, coal and natural gas. Natural gas has successfully rebranded itself as a ‘relatively’ clean energy source that is immune to variability concerns. Coal, oil and natural gas have well-funded lobbying efforts and it is in their interest to keep electricity consumers from conservation and from switching to renewable energy technologies. End users in industrialized countries are vulnerable to the public relations efforts from conventional energy producers.
  •  Aggressive Pricing: In the late 2000s, manufacturers from China benefiting from grants, loans and other subsidies ramped capacity and began pricing competitively. In a relatively short period of time manufacturers in Europe and the US found themselves in an uncompetitive position.  Unfortunately, low margin pricing was celebrated by the PV industry as progress and expectations were set in the minds of end users that pricing would continue decreasing from an already unsustainably low level. It is now almost impossible for prices to increase to the point where a comfortable margin would be possible. The best that can be hoped for is a cessation in price decreases.  Manufacturers in Japan are now facing price and margin pressure similar to that experienced by manufacturers in Europe and the US.
  • Business Models: In the US, the Solar Lease Business model, now spreading to other countries, entices residential and small commercial customers with promises of free solar.  This means that the installation is provided at no charge and maintenance is included. This model includes an annual escalation fee on the order of 3% that is based on the assumption that utility generated electricity will increase by 3% a year.  Promised maintenance is often not performed and the sales function is highly aggressive.  In the end solar lease customers pay far more for their installation than they would if they bought the system using reasonable financing.

 

In general … the Liability/Asset ratio should be low — the higher the ratio the more likely it indicates potential solvency concerns.  Inventory turnover in general should be high, indicating an efficient use of inventory.

Manufacturer Liability/Asset 2014 Inventory Turnover 2014
First Solar 25% 29.34
Gintech 40% 10.82
Solartech 40% 12.31
SunEdison 41% 6.88
NeoSolar 42% 13.49
JA Solar 62% 5.99
SunPower 63% 14.51
Trina Solar 69% 6.51
SolarWorld 74% 3.85
Jinko Solar 74% 5.28
Motech 89% 8.09
Renesola 92% 4.37
Yingli Solar 95% 1.64
Canadian Solar 101% 6.85

The global solar industry and all of its technologies (flat plate PV c-Si and thin film technologies, CSP and CPV) is and always has been innovative. That it has often been an unprofitable industry beset by unrealistic expectations for cost and price has trapped it between the need to continue innovating and the expectation that it do so cheaply.

Innovation begins with an idea or a spark or an inspiration or an epiphany.

The leap from idea to concept takes time, thought and research.

Research takes time, thought and requires a careful almost to the point of plodding methodology.

The road from concept to prototype takes research, experimentation, trial and error, more innovation, more thought, retrenching to step one and a careful, painfully conservative methodology that along the way takes into consideration more epiphanies, inspirations, sparks and ideas.

The journey from the prototype that proves the concept and embodies the ideas, inspiration, epiphanies, research, experimentation, trial and error and back-to-the-drawing board frustrations is long and fraught with data gathering, testing, retesting, more data gathering, plotting the new data, returning to the drawing board, realizing when a direction is wrong, tramping back up the research path to rethink things, more experimentation, more data gathering and plotting until finally, the idea that became a concept that became a prototype becomes a product.

Production of high quality products require an understanding of the time, expertise and inputs from idea through to commercialization and understands that a reasonable value must be established for the product. This value, or price, will continue to support necessary ongoing innovation.

Unfortunately, the global PV industry has placed itself in the position of innovating on a shoestring budget and at the speed of light.

The Invasion of Free Solar

The installation side of the solar industry is also pressured by the need to install systems faster and some of these pressures come from within. The promise of free solar, a marketing pitch, typically used to market the residential solar lease, has set unreasonable expectations of cost/price that all participants are forced to market against.

Marketing slogans that is, catch phrases developed to seize the buying public’s imagination, should not be mistaken for truth, wisdom or anything other than the means to sell a product or service.

Currently popular among residential solar lease providers, the term “free solar” refers to the ability to have a PV system installed at a homeowner’s domicile without the homeowner paying for the installation. This means that the installation charge is avoided up front and applied to the back end. That is, the installation cost is recouped over time by the lease provider via the monthly rental of the installation as well as through the annual escalation of the initial monthly lease payment. Typically ~3%, the escalation charge means that eventually the lifetime cost of leasing the PV system will be greater than the cost of buying the installation at a reasonable (and static) interest rate.

All buyers of all economic strata seek the best deal and the best deal is free. That free is an illusion is not the point. A free good can come at the cost of quality meaning that a poorly functioning free good will likely cost more in repairs and eventual replacement than a good that is acquired at a price that approaches its true value. A price set at free obscures the cost of developing the good or service and creates the illusion that the research, development, manufacturing and selling of the good was, in the worst case, free itself.

An offer of free solar commoditizes the residential installation, shores up the assumption that the cost of manufacturing a PV panel is approaching zero and undermines the true value of owning a residential PV system.

The true value of owning a residential PV system, aside from the benefits to the environment, is energy independence on a personal level. Never mind (for a moment) the ongoing attacks directed at net metering from utilities, an appropriately sized PV system gives the electricity consumer control over how much electricity is bought from the utility at retail rates. Pardon the pun, there is a power switch from utility as electricity landlord to end user – and, this is where it should be. Leasing a residential PV system does not imbue the lessee with the same power; simply put, it means that the electricity lessee potentially serves two masters, the utility and the solar lease company. Finally, the true value of independence is obscured and the value of the product (PV generated electricity) is undervalued. This is not what Adam Smith meant by the invisible hand. In the case of the solar lease, the invisible hand would seem to be implying that the value of the PV installation is zero.

The marketing phrase, Free Solar, undermines the true value of personal energy independence, obscures the true costs and benefits of PV system ownership, shores up false expectations of ever cheaper PV modules and installations, and undercuts the need of an innovative industry to continue innovating by eviscerating the revenue stream that pays for research and development, not to mention, strategic planning, marketing and sales.

LCOE – levelized cost of electricity – is an unstandardized model used by governments, companies, consultants and others to make an economic assessment of the cost of generating electricity from a specific source.  LCOE models are often filled with assumptions (what people believe) instead of field data and even when field data is used, the forecasts generated are based on assumptions (beliefs) that typically skew towards the amorphous phrase: grid parity.

The LCOE calculation typically includes a variety of inputs, all of which are susceptible to the modelers experience and or bias for the future direction of the energy technology being modeled.  Typical inputs include: the cost of the installation (components, labor), financing costs, capacity factor, cost of O&M, system production, and so on.  The strongest models use data from field experience (an actual system).  LCOE models based on systems that have been in the field for a number of years are the most robust, however, when the model is used to forecast the future, the bias of the modeler can and sometimes does insinuate itself into the results.

The major flaws of LCOE models are:

  1. The use of assumptions instead of data
  2. Using data that supports the modeler’s goal (that is, assuming too low costs for hardware or O&M) and too high production values
  3. Adjusting model inputs to make a particular point
  4. The assumption of that cost and price are synonymous

Concerning number 1, assumptions about the cost of components or financing (instead of data), using estimates for O&M that are lower than the actual cost of O&M, forecasting down from an assumption about cost that is already too low, assuming system production that is too high and assuming that the comparative energy technology will continue to increase in cost can lead to misleading results.

Concerning number 2, it is not good practice to select the lowest available value and then forecast down from that point.

At this point, there are as many proprietary LCOE models as there are developers, manufacturers and consultants.  The word proprietary does not necessarily confer excellence on the model in question; all it does is state ownership of IP.

When filled with hard data from systems operating in the field LCOE models can be good tools to observe trends overtime. The older an LCOE model gets (provided it is consistently updated with real data from an installation) the better it is as tool for learning. Overtime such a model can become a superior forecasting tool as long as the modeler remains focused on developing an unbiased tool.

As a forecasting tool LCOE models are highly vulnerable to bias. Types of bias include the belief that the cost or price of one energy source will continue decreasing and perhaps accelerate, while the cost or price of the competing energy source will continue increasing.  The behavior of prices for any good or service (including electricity) is variable, that is, prices do not typically increase or decrease in a straight line. LCOE models can be vulnerable to the belief of the modeler that prices for conventional energy will continue increasing while prices for solar generated electricity will continue decreasing.

Assumptions are a form of bias. For example, the assumption that operations and maintenance costs (O&M), which are currently undervalued, will continue decreasing from a point that is already too low, could insinuate bias into an LCOE model, leading to misleading results.

Mistakes in assumptions made around inputs such as the price of modules and other components institute bias.  Assuming that replacement parts will be inexpensive in the future adds bias.  Incorrect assumptions about the running life of a system or its production (output) add bias.  Developing blanket generalizations based on closely held beliefs adds bias.

Unfortunately, LCOE models are highly vulnerable to manipulation to prove whatever point is the goal of the manipulator.  As a sales tool, these models can (and often are) adjusted to make an impression.  As a forecasting tool, these models can (and often are) adjusted to make a point.  Once bias and assumptions in place of data make their way into any model robustness and usefulness suffer and learning is lost. This is truly unfortunate because as deployment of solar continues, the industry needs all the learning it can get. The upfront cost of solar and the time to recover the investment should not be the point. Unlike conventional energy, once the hardware is installed the fuel for a solar installation is free and the system itself typically requires minimal maintenance depending on where the system is installed, size of the system, etc.  Use of solar has a significant role to play in the fight to save our climate and it is far less expensive to install solar now than to fix (after the fact) the damage done to our environment due to climate change.

The extraordinarily strong growth of the grid connected application officially began in 1997, when the German 100,000 Solar Roof Program and zero interest financing, Japan’s residential rooftop rebate and subsidy and California’s rebate drove industry drove 234% growth over 1996 to >39-MWp. Multi-gigawatt demand for grid connected installations over the past 10 years (2004 – 2014) is a direct result of the EU feed-in-tariff model and subsequent FiT-like incentives. The FiT incentive model is also directly responsible for driving the success of the multi-megawatt (utility scale in the US, solar farms in Europe) sub-segment of the commercial application. Without large investor interest, the multi-megawatt installation segment would not have proliferated to the point that the industry is dominated by it.

In the beginning, the FiT gave investors the expectation of a stable, reliable, return on investment for ~20 years. Unfortunately, though the market reaction to this generous incentive should have been expected, it was not. Initially, the FiT was envisioned as a driver for distributed generation solar. For better or worse installations in FiT-countries was almost immediately dominated by multi-megawatt installations. The popularity of this incentive led to investment in solar manu-facturing capacity and created a significant number of jobs. Incentives must also be supported, and the expense of supporting gigawatts of recently installed solar has led to abrupt changes in program design, or, cessation of these programs, and much lower incentive rates. As a result, the FiT is no longer seen as an unchangeable, government promise, and investor confidence in this investment vehicle has been shaken.

The FiT is slowly though dramatically (for participants) being replaced by bidding processes to set the rates at which electricity is sold. Unfortunately, bidding processes are typically rife with par-ties that underbid, and the very process of underbidding (even the awareness of the possibility of it) tends to influence all parties in the exercise. As these low bids are seen as reflective of the true cost of installation (including labor), the process tends to hold margins for all participants hostage to expectations of ever lower bids. The price paid for tight margins may well be the quality control function at all points along the value chain and ironically, this may lead to less productive (in terms of kilowatts out) installations.

Unlike other low incentive periods the photovoltaic industry is hampered by significantly high levels of manufacturing capacity and government intervention, which has taken the shape of quotas, price floors and tariffs on modules from China and Taiwan. This government intervention was an attempt to right size domestic content, however, as >70% of manufacturing capacity resides in China and Taiwan, the result is the illusion of a supply constrained industry. This illusory supply constraint is leading to higher prices for module products, which, while a welcome change from previous low margins, has not been corrective, and instead is driving margin pressure for demand side participants (installers, system integrators, EPC, et al).

The grid-connected photovoltaic industry has starkly divided itself into the multi-megawatt (utility scale) applications with installations that are removed from the load and rates are set by bid, distributed generation residential and commercial systems (roof and ground) visible to the populations that are served, and off grid installations, in specific, remote habitation and remote industrial. Multi-megawatt (utility scale) installations effectively commoditize the electricity sold and it is very hard to climb back up that slippery slope, it is difficult to feel a personal attachment to a commodity. DG (distributed generation) residential and commercial installations, near the load and either owned or leased involve the community in its energy present and future and are typically not commodities. Unfortunately, the residential lease and power selling (PPA) business models are contributing to the commoditization of photovoltaic systems by removing the need for the end user, on whose house the PV system is installed, to participate in, understand and be responsible for the electricity generating equipment on their roof. Off grid installation also involve the served communities and are not commodities.

 When I was a ten years old, summers meant long lazy and sometimes boring days with nothing to do but explore, read and get into unscheduled adventures.  Things have changed since then, and if I were a kid today I would be driven from activity to activity with little time left over for where boredom might lead me.  I’m in favor of a little unscheduled boredom from time to time as well as for the adventures and misadventures that can arise from ennui (a lovely word for boredom). 

We did not have air-conditioning when I grew up in Hayward, California, a smallish bedroom community in the East Bay Area.  So, with my father away at work in San Francisco from early morning to dinnertime and my mother cleaning, napping, shopping or insisting that I get some reading done in advance of school in the fall, I was relatively free to wander around unencumbered.

These were still the days when kid gangs were free to spring up all over the neighborhood and where popularity was both defined and amorphous.  We formed small and sometimes cruel archetypes of adulthood where one week you were in the group and the next you were suddenly adrift, culled out from the herd by that week’s leader. 

During my weeks as the outsider I alternated between reading in the back yard of our small house on Regal Avenue (when my mother chased me out of my bedroom to get some fresh air) and a game that I believed was my own invention: the penny hike. 

The rules of the penny hike were simple.  I walked out my front door and flipped a penny, heads I turned left, tails I turned right.  At each corner I flipped the coin again.  After a few hikes I began carrying paper and a pencil in the pocket of my shorts and writing down how many times the coin came up heads and how many times it came up tails and therefore how many rights and lefts I took.  I noted how many times I ended up circling the block and how many blocks I ended up traveling until the penny arbitrarily led me home. Sometimes I was gone all day and in those glorious unencumbered, long, hot boring days of summer no one was particularly worried unless I missed lunch or dinner.  As my mother’s choice of lunch was usually the dreaded pimento cheese sandwich on white bread and a Twinkie (I preferred Hostess Chocolate Cupcakes) I generally preferred the punishment to lunch, particularly as punishment meant staying in my room and reading a book. 

Towards the end of my first penny hike summer, well before teenage-hood, a longing for boys and a wish to leap over adolescence headlong into adulthood took over, I had a notebook filled with penny-patterns, which I tried to interpret.  I became fascinated with where chance would lead me. How many times would I arrive home faster than I anticipated, after which the rules of penny hike demanded that I stay at home reading. How many times would I get lost and how many times would I discover something interesting when I did get lost?  My notebook was filled with patterns that I was fascinated with but could not decipher. 

My mother never asked me what I did on my long days wandering the neighborhood, but in those days mothers did not ask those sorts of things being happy to have their children out from underfoot for several hours a day.  My only obligation in those years was to take swimming lessons for two weeks at the beginning of the summer so that I would know how to swim in case, as my father said, I ever fell into the ocean and no one heard me screaming for help.  Despite the odds against this ever happening in landlocked Hayward, I took swimming lessons very seriously and dutifully walked the ten blocks to the high school pool where they took place wearing my one piece blue bathing suit, carrying my towel and wearing the ever-embarrassing white bathing cap with my long brown hair shoved up inside of it. 

I sometimes managed to sneak in a penny hike after swim lessons by inventing a rule; if a penny were discovered on the sidewalk on the way home I was required to begin a penny hike with it.  As this happened more often that I would have anticipated I began noting the times a penny was discovered on my walk home on my pad of paper. 

As fall and thus the beginning of school approached that first penny hike summer I became bored with the aimless and self-imposed rules and began fudging the results of the coin flip.  If something interesting beckoned from the right and the penny directed me to go left, I would continue to flip the coin until it agreed with my choice.  I dutifully entered these altered outcomes in my notebook, including how many times I needed to flip the coin until my preferred direction was presented. 

The summer I was ten years old was the summer I fell in love with research, though I did not know it at the time.  I did not realize that I was observing chance, as well as observing the effect of bias on the outcome of an experiment. This observance of bias at an early stage in my life helped make me stalwart in the pursuit of neutrality.

I do know that those long, lazy, hot, sticky, mostly unsupervised summers unencumbered with schedules (other than swim lessons) led my imagination to invent the penny hike game and allowed me time to follow it wherever it might lead also leading to a lifelong love of exploration for exploration’s sake.  More than the kid-gangs, games of tag, hide and go seek, visits to the dime store with my weekly allowance, ad hoc clubs, mischief, alternating best friends and crushes on this or that boy, I remember the penny hike game and long for its simplicity.

The summer I was ten years old was the first time I practiced pure research, learned to love exploration, observe trends, statistics and sought to understand it all.  Even today when I need to remind myself about the joy of research for the sake of discovery as well as reminding myself of the dangers of bias, I dig out my old penny hike notebooks and observe the trends in the data.

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