Selling the Sun

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In December, as bailout negotiations for the auto industry wore on and the U.S. economy continued its downward spiral, the National Renewable Energy Laboratory published a report that examined the history of investment in the solar industry. Its pages are chock-full of encouraging data. One tidbit in particular is a jaw-dropper: from 2000 to 2007, worldwide investment in solar rose from $66 million to $12.4 billion. During the last three years of that time period, investments in the United States alone jumped from $215 million to $3.2 billion -- a whopping compounded annual growth rate of 145 percent. And in just one year, 2006, global private equity investments shot up 476 percent. Historical data won't allay anxieties about solar weathering the current economic crisis, but another report released that same month ought to: the market research firm AltaTerra found that 72 percent of commercial solar installations are now financed with PPAs. AltaTerra analysts David Adams and Jon Guice assert that despite dark financial times, "The next decade is likely to see the solar PPA enter a period of hypergrowth, with PPAs playing a central role in the expansion of solar power as a mainstream part of business energy portfolios in the U.S." 

With the adoption of the PPA model -- Shah's genius -- solar has experienced staggering growth. It's now poised to benefit even more from an oversupply of raw materials. In 2007, polysilicon stockpiles dwindled when solar panel manufacturers churned through more of it than the entire microprocessor industry, an unprecedented event. Because the cost of solar panels is primarily determined by the going rate for polysilicon, the sudden shortage caused panel prices to soar. Major polysilicon manufacturers responded, and within months they had broken ground on new plants around the world dedicated entirely to producing polysilicon for photovoltaic arrays. These facilities are gearing up to full capacity and will double the supply of polysilicon over the next several years. At the same time, semiconductor sales are expected to fall by 6 percent this year, leading to further decreases in the price of polysilicon. 

"All this is happening at a time when the world is going into a heavy economic retrenchment," SunEdison's Culpepper says. "The net effect is a ballooning of supply at a time when demand is not able to keep up with that supply."

Of course, solar companies are not immune to the challenges posed by the economic recession, particularly those firms that signed expensive, long-term supply contracts for polysilicon when prices were high. Though individual companies may fail over the coming years, Cai Steger, a policy analyst for the Center for Market Innovation at the Natural Resources Defense Council (NRDC), remains confident that the industry as a whole will flourish. He says that we are now entering a period that "will be very good for policy makers and consumers, who want to install the cheapest panels possible in the most possible places."

As the price of solar panels drops, companies like SunEdison will see their profit margins widen, and this will allow them to forage for customers in new markets -- states with fewer incentives and rebates, for example, or places where low-cost electricity has made it hard to compete. Among the progressive energy policies that will surely give solar a leg up are state-mandated renewable energy portfolio standards, which require that utilities generate a certain percentage of grid power with renewable technology. So far, these standards have been passed by 26 states, including California, Texas, Pennsylvania, New York, Missouri, Illinois, Maine, Virginia, and North Carolina. 

Solar may get another push from legislation that increases the cost of burning fossil fuels. President Obama has promised to implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions by 80 percent by 2050. If that happens and you're a utility using fossil fuels to generate electricity, you'll have to pay to pollute. And you'll probably pass on those costs to the consumer. In this scenario, grid power from fossil fuels gets more expensive and solar starts looking mighty attractive.

 "Americans believe they have a right to low-cost stuff. So when solar is cheaper than other forms of power, Americans will demand the ability to use it," observes Alisa Gravitz, director of Green America, a nonprofit that promotes sustainability.

At the moment, solar is subsidized: tax incentives and rebates gave Shah the boost he needed to develop a viable business model for SunEdison. But critics complain that solar couldn't survive without subsidies and therefore isn't truly ready to share a seat at the adult energy table. During my dinner with Shah, I bring up the subject, reminding him that a faithful capitalist would eschew taxpayer handouts. "Energy is the most subsidized commodity in the whole world and has never been an open capitalist market," he responds. "The coal industry gets incentives, the oil industry gets incentives. The U.S. government spends billions of dollars each year protecting the Straits of Hormuz and all the oil shipping channels with the U.S. Navy. The nuclear industry has received $66 billion in incentives since the 1960s. Imagine what solar could produce with $66 billion!"

He's right. According to the International Energy Agency, solar received $198 million in subsidies in 2007. In the same year, oil and natural gas collected $2.1 billion; coal got $3.2 billion. Taxpayers have bankrolled fossil fuels for a century, funding research and development and helping dirty energy stay cheap. Remove subsidies, and gasoline would cost at least $8 a gallon.

It may be true that these incentives pad the price discrepancy between solar and conventional grid power today, but industry insiders maintain that solar will outgrow these subsidies. They believe that advances in panel efficiency, low-cost polysilicon, the escalating price of grid power, improved manufacturing techniques, and carbon-cap legislation will make subsidies unnecessary and even potentially harmful. "Industries can get addicted to subsidies," NRDC's Steger says. "Phasing out subsidies forces the industry to innovate and make its systems cheaper to stay competitive."

Analysts will say that scale is far more beneficial to solar than subsidies are. The formula is simple: the more solar is installed, the cheaper it gets; and the cheaper it gets, the more it is installed. "By 2015 it will be a competitive way to generate electricity almost everywhere," Steger says. "We're still learning how to manufacture and install panels as efficiently as possible," he explains, citing studies that show that every time installed solar capacity doubles, costs fall by 18 percent to 23 percent. Gravitz agrees: "Solar will survive without any incentives long before coal or nuclear or natural gas ever can."

First Solar, the largest maker of photovoltaic panels in the United States, proved this to be true for its client Sempra Energy, a California-based utility company. "First Solar priced their Sempra system at 7.5 cents a kilowatt hour, which is better than the U.S. grid price of 9.4 cents...and with no subsidies," energy analyst Mark Bachman wrote in a report for Pacific Crest Securities, an investment bank that funds emerging technologies. One way First Solar was able to cut costs was to improve panel efficiency so installations didn't need expensive tracking mechanisms to synchronize the arrays to the movement of the sun. First Solar achieved what's known in the industry as grid parity, which means generating electricity at rates that are on par with the price of conventional power. In California, where electricity is expensive, solar can outcompete fossil fuel-generated power. The same holds true for Hawaii, where grid power is pricey and sunshine is plentiful. "Every year more and more states become cost-effective," Shah says. "We have already reached grid parity for most of the country when you factor in the cost of building new natural gas, coal, and nuclear plants."  

Steger estimates that solar will reach parity with retail electricity rates nationwide within the next several years. Today solar generates a mere four-tenths of a percent of electricity in the United States, but if the industry's growth continues along its current path, its share of electricity generation could hit 10 percent by 2025. Could we get to 20 percent? "Probably," says Rick Duke, director of NRDC's Center for Market Innovation. "Solar is available for at least six hours a day, at a time when there is also a lot of consumption." To get from 10 percent to 20 percent, we'll need to jump some hurdles. Photovoltaic panels can generate electricity only during the day. They work best when the sun is shining brightly, less well on dark, overcast days. If we could somehow sock away electrons during sunny spells, we could use solar power 24/7. But battery technology at that scale remains ridiculously expensive; stored solar would cost more than $1,000 per kilowatt-hour. 

One solution is to leverage the next generation of plug-in hybrid vehicles as roving storage devices. Think big batteries on wheels. Gravitz explains how this might work: "You drive to the office and plug your car into a solar system, which fills the battery. At the end of the day, you drive home. There's enough solar in your battery to run the lights and computers and televisions in your house. In the morning you drive back to work and do it all over again."

Right now, however, storage isn't a big worry. "You're talking at least 15 to 20 years before we're producing more solar power than we can use on the spot," Steger says. "Until then, storage is not a concern." By the time that happens, the solar power industry will have grown to the point where it has created a much-needed wedge in the fight to stop global warming and diminishing our reliance on foreign energy. Anything beyond that would be gravy. 

The dismal global economy may deliver quite a beating to some solar companies over the next year or two, but what's important is that the industry seems on track to prosper over the long haul. This hardly surprises Shah, whose faith in solar is as unwavering as his confidence in the market to fix our ailing planet, the cure springing not from the MITs of the world but from the MBAs.

"The big area for me has always been to come up with business solutions to address global warming," Shah says. "The thing that people have had a hard time understanding about solar is that it's part of the energy business. While new energy technologies come up all the time, technology is not the driver of the energy industry. The driver is the business model: how you get it financed and how you apply traditional risk-management methods to solar and wind and biomass. That to me is the key to solving global warming."