An ‘Exciting’ Transition Year for Solar
First Solar was, well, first, in 2009, to point out a multi-year transition from scarcity through oversupply and ‘parity’ with conventional electricity sources in an unsubsidized environment. The company had already chosen a ‘go slow’ approach to expanding European capacity, already a wise decision. Despite a very strong mid-2010, the industry again faces the prospect of declining subsidies and expanding supply during 2011. Eventually, the Law of Tough Comparisons may snare the group, but the underlying shifts bode very well for 2012 and beyond (a) 10+%/year cost reduction toward ‘grid parity,’ (b) new markets such as China, US, growing rapidly from a small base, (c) the sector has yet to significantly penetrate markets where the sun actually works FOR the customer, (d) the most compelling application of solar is in new electrification and solar for oil applications, which are Yet to Happen. Yes, it is true that true solar (and wind) economics should be considered as part of integrated (with gas-fired) power projects but, even there, the net cost of Carbon Footprint Reduction is falling. Finally, while the unlinked (to oil) cost of natural gas works against US solar economics, gas is much more linked to oil elsewhere and, as crude nears $100/barrel, we are reminded of the likely correlation of solar stocks with the oil price – partly justified in Europe, the Middle East, North Africa, and Asia. One understandable counterargument to the ‘grid-parity-like’ economics of wind and, eventually, solar, is that a more complete analysis must consider the capital and cost of backup power necessary to assure consistent electricity during windless or cloudy periods. However, we note that the average utilization rate of power backlash comment from renewables skeptics (and I am sometimes in that camp), neglect the excess incremental capacity already available for backup purposes. For instance, the average utilization of CCGT (combined cycle gas turbine) capacity is about 45 % – it’s 85% in Germany. It could be years before, on a macro scale, significant backup capacity is necessary (regional exceptions apply). And, by then, renewable-only power costs could be meaningfully lower than forecast hydrocarbon costs, especially as/if oil and gas prices move up (even in tandem), from $90 and $4.50, respectively.
Renewable Subsidies – Does India have a Better Way?? Subsidies are the bane and boost for renewable energy. An ‘ideal subsidy program’ would encourage enough demand allow the supply infrastructure to expand, using scale economics to reach a practical potential business model. it would assure responsible suppliers (throughout the chain) a reasonable return, force lower costs by sun-setting over time, and drive growth toward scale economics. However, this is not easy. Political interests rarely match the needs of all the steps of the supply chain, and regional market differences can skew the incentives/returns within a country. The German FIT (feed in tariff) has several favorable characteristics – sun-setting rebates which vary with applications, and extra rebate reductions in an effort to track cost trends. This has led to dramatic demand – half the world’s installations (2010), despite relatively weak solar insolation. The failure of the policy is that it is open ended – no cap – and efforts to manage the cap to a reasonable fraction of the grid have met with political (jobs-related) resistance. German manufacturers have lost significant share to Chinese imports, a negative trade account from this green jobs program. France, after only a few years, is trimming its program, and working toward a tender/award program to replace its current free-for-all subsidy. Italy’s modification seems rational – perhaps conservative – as project returns will remain over 20% for most opportunities, and installations will double-triple this year. In general, the subsidies have raised demand, led to oversupply, and shifted a silicon bottleneck downstream to other bottlenecks – wafers, inverters, installation expertise, etc. And the programmed FIT decline has not been fast enough to offset cost reductions – a good thing. After strong growth and a mid course correction for 2011, Italian solar projects still offer 20+ percent IRRs. Even German returns, at low double digits, are quite attractive. It has been a hope that the late followers – India, China, and much of the higher-insolation markets (Brazil, Africa, Middle East, Pacific Rim) would implement more predictable, consistent, programs which would lead to more visible growth for the industry. China is still ‘tinkering’ with a few rebate structures, and may increasingly come under pressure to preserve its own green jobs – probably half of he world’s solar workers. India, however, is on the verge of a two step process which has promise. The government will select locations for large projects, and solicit bids to develop the projects – low bid within a rebate range should squeeze the vendors in a generally oversupplied market.