Why Rooftop Solar Is Set to Explode

February 16, 2010 at 5:54 pm
Contributed by: Chris

For last week’s Green Chip Stocks, I outlined some of the pieces falling into place, particularly in the area of financing, that are setting the stage for an explosion of distributed rooftop solar in the U.S.

Why Rooftop Solar Is Set to Explode

Financing Solutions for Distributed Renewable Power

By Chris Nelder
Friday, February 12th, 2010

Distributed generation of renewable energy is off to a rocky start, but it’s finally making some headway.

The research side is looking good. The $28 billion request in the president’s FY 2011 budget for the DOE Office of Energy Efficiency and Renewable Energy includes large increases for programs including wind, weatherization, smart grid technologies and solar, plus $58 million for National Renewable Energy Laboratory (NREL) infrastructure and $50 million to stimulate clean energy education.

An additional $300 million would support the Advanced Research Project Agency – Energy (ARPA-E) initiative. Modeled after the DARPA program that resulted in the Internet, ARPA-E will fund the fundamental research to incubate the energy grid of the future–what Ethernet inventor Bob Metcalfe termed the Enernet.

Grid investment is coming along well, with $75 million allocated to it in the budget request, plus $40 million toward grid storage solutions. It’s a relatively paltry amount, but it should be bolstered soon by major grid reform legislation making its way through Congress.

The production side has become a bit of a buyer’s market, yet manufacturers are still building new capacity in anticipation of the boom ahead. Yes, China is building more capacity in the U.S. than American companies are, but as I have argued previously, that’s fortunate given the urgency of our situation. Solar PV supply is high and prices are as low as they’ve ever been, which is constructive for new installations.

Overall, I would say we’re making progress on the hardware front. But then it’s easy to throw money at hardware.

The real problems now are in finance and policy. The big up-front cost has always been the main hurdle to distributed generation (and rooftop solar in particular), but now several ways to overcome it are available.

10 Million Solar Roofs

At the federal level, we have the “10 Million Solar Roofs and 10 Million Gallons of Solar Water Heating Act of 2010” bill introduced by Sen. Bernie Sanders of Vermont, which was modeled after the California Solar Initiative (Ahnold’s “Million Solar Roofs” program).

A direct rebate of $1.75/watt for PV systems and $1/watt for solar hot water would offset somewhere around a quarter of the project cost. Combined with existing 30% federal investment tax credit (ITC), and state incentives where available, it could bring the end-user’s cost down to 25% of the actual retail price. The $2-3 billion price tag of the bill will be hard to swallow, but if it passes it would be a major shot in the arm for rooftop solar.

The more interesting solutions, however, are at the local level.

PACE

Under a fairly new type of program called property assessed clean energy (PACE), local governments float bond issues secured by real property in their districts and use the proceeds to fund renewable energy and efficiency projects. The property owners then pay back the debt as special assessment included in their property tax bill over 20 years. As an example, $12,000 in financing through the program would translate to roughly $75 a month in payments. If the property is sold, the energy systems and the tax obligation remain with it.

PACE is offered by Oakland-based Renewable Funding and has been implemented in three counties and three cities in California, including San Francisco, Los Angeles, San Diego and Sonoma. A statewide program expected to commence this year. San Francisco’s program was approved this week and will offer $150 million in bonding capacity.

Fifteen states have adopted PACE programs over the last year and a half, and interest continues to grow without discernable opposition. Contributing to the popularity of PACE is that it’s a voluntary program that only affects property owners who choose to participate, and that it applies to a wide range of measures in addition to rooftop solar.

Third-Party Financing

A different approach uses private third-party financing to front the cost of a solar PV system to end-users, who then pay it off over 15-20 years or more.

In the commercial sector, companies like Solar Power Partners (SPP) and SunRun of California assume the initial installation cost and own and operate the systems in exchange for a power purchase agreement (PPA) with the customer.

Power generated by the system is sold back to the customer, typically at or below grid rates. At the end of the PPA term, the customer can buy the system at fair market value or renew their PPA.

SPP’s targets include water districts, wineries, universities, airports, and other large facilities. Their current portfolio stands at about 14 MW, which is tiny compared to a single 500-1,000 MW coal-fired plant, but I see potential for robust growth in such financing options.

Cutting the out-of-pocket expense to zero makes solar PV a no-brainer for any facility that wants to produce some of its own power and lock in fixed power prices (and if they know anything about the future of energy, well they should).

The private capital behind the strategy gets a 5% annual rate of return or better at nearly zero risk, by assuming the 30% ITC and taking ownership of a producing, hard asset.

When lines of credit shrunk or dried up altogether in the Great Credit Drought of 2008-9, solar installation companies turned to private capital as well. Companies like Geoscape Solar of New Jersey and SolarCity of California offer financing options with zero upfront cost under PPAs and lease arrangements to the residential and small commercial market.

FITs

Feed-in tariffs, or FITs, have proved the world’s most effective incentive for rooftop solar and distributed power, typically offering customers three to four times the grid price for kilowatt-hours they generate. FITs are financed by incorporating their cost into grid power prices across the board, resulting in a very modest price increase for all customers.

The FIT in Japan was so successful that it is already being phased out.

The German FIT captured half the world market for solar modules in roughly five years, reached its target early, and is now accelerating its schedule for declining tariffs. Studies have already shown that the program has actually reduced the fully-considered costs of delivering power to the country.

Spain’s FIT was fully subscribed in short order, then fell victim to a federal budget shortfall as Spain descended to become the S in PIIGS–the nations at risk of sovereign default that have been rattling world markets recently.

A new FIT for the UK has just been announced which will pay 41 pence initially–as compared with a standard grid price in the 10-12 pence range–for production from residential-sized generators including PV, wind, micro-hydro and biomass. The tariff depends on the technology and is inflation-indexed.

In the U.S., the failure of the federal government to offer a FIT has prompted states and a few cities to try creating their own equivalents. Unfortunately, it’s a regulatory path fraught with peril, because the Public Utility Regulatory Policies Act (PURPA) of 1978 forbids states from setting tariffs above the “avoided cost” of generation from other sources like conventional natural gas-fired plants.

As the excellent summary by Paul Gipe explains, a new report (actually a long legal opinion) from NREL lays out two legal paths states can take.

One is to lard the tariff over and above the avoided cost with revenue from renewable energy credits (RECs), subsidies and tax credits, which fall outside the Federal Energy Regulatory Commission’s (FERC) jurisdiction.

Alternatively, in the handful of states where ownership of distribution and generation are split, utilities may offer higher tariffs for solar PV voluntarily, but the opportunities under this strategy are few.

The other practical path is for FERC to exempt generators under 20 MW from PURPA. The California Energy Commission has asked the state to seek a clarification from FERC on this point, and it seems likely that other state regulators will join that effort.

Since PURPA was written over three decades ago before the age of renewables began, this seems a reasonable fix to the problem. Rep. Jay Inslee of Washington has proposed the necessary changes to the law, but unfortunately they are tied up in the Waxman-Markey climate change bill, which is going nowhere fast.

The pieces are now–or will soon be–in place to enable an explosion of distributed renewable energy in the U.S. It has the technology, the financial mechanisms, the public sentiment, and the right cost of entry: zero. It will not be stymied by musty regulations, utility opposition or even the recalcitrance of banks.

Solar manufacturers, smart grid players, progressive but risk-averse capital, and most of all the public stand to benefit handsomely.

Until next time,

Chris
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2 Comments

  1. Hi Chris,

    I have read several of your submissions waxing enthusiastic over PV ‘Rooftop Solar’.

    Most of the ‘math’ gravitates around funding and subsidies to ‘get it off the ground’ as it were, a kind of Keynesian approach of ‘priming the pump’ by reallocation of productive output from more successful enterprises to less successful ones, (bureaucracy and regulation being the least ‘successful enterprises’ of all in an economic sense)

    Any funding transferred to renewable energy enterprises is in effect an energy input which was derived from the existing energy base.
    Due to the primacy of energy in the production of every human good and service, it makes no sense to ‘subsidise’ an energy source, and an energy technology which cannot sustain itself in the sense that its own output is sufficient to continually maintain itself as well as produce a viable net output is worse than useless.

    Rooftop Solar PV may well power the lighting, TV, computers and other frivolous devices, but don’t expect to cook the family dinner and bath the kids, let alone maintain a bearable indoor temperature in more challenging climes in existing structures to which these panels are to be fitted.

    I have examined what is available in the real world, made some measurements and did some simple arithmetic.
    With the best panels I could locate, with full dual axis tracking, at midday in summer with clear skies in sunny South Africa, about 36 square meters (387 sq. ft) of panels would be required to bring a single kettle of 1.5liter (2 quarts) to the boil in 3 minutes.
    This is a trickle in relation to the consumption of western civilisation, and persons curtailed to such daily energy flows would be considered ‘poor’.

    The average Australian consumes 33Kwh of electricity per day, equivalent (by my measurements) to 66 square meters of solar panels per capita,( working 8hr per day under continuously ideal conditions) for a population of some 21 million, which is only about one sixth of total, all up consumption, including liquid fuel equivalents.

    ‘Renewable” energy advocates continuously dodge the energy density issue by insisting that the solution lies in a ‘mix’ of technologies, but once the fossil inputs are removed, the millions of years of solar concentration and consequent energy density are gone, and cannot be gotten back, because incoming solar is harvested dynamically.

    We are only here in such numbers in the first place because the energy derived from the multiple oxidative states carbon became available.
    The advent of unprecedented human population growth and the advent of fossil energy exploitation is no coincidence, and even the increased agricultural output, which is also the ‘renewable’ dynamic harvesting of solar energy through photosynthesis, increased in step with increased energy input in the form of fixed nitrogen (derived from hydrocarbons via the Haber Bosch process), albeit with diminishing returns.

    The actinides, a kind of remaining ‘Big Bang’ fossil, are the only materials which realistically have the potential, by way of fundamental physics and thermodynamics, to realise a massively increased and reasonably sustainable energy density, way above that of current chemical energy systems.

    That same fundamental physics and thermodynamics constrains what can be realised by ‘renewable’ systems in absolute terms, not a lack of research, Federal funding or political will.
    What most regard as human ‘progress’ and desirable increases in affluence and welfare, (as opposed to poverty) have always been marked by an increase in energy consumption, a migration from a lower energy density base to a higher one.
    A reversal of these fortunes will quickly disperse any objections to nuclear energy as the day to day realities imposed by decreasing energy flows start to bite.
    We may nevertheless still fall into the ‘Olduvai Gorge’ without realising its potential, but that will be because of intransigence and stupidity rather than because of the inescapable and inevitable of some apocalyptic vision.

    I like PV panels, so long as my neighbour does not expect his installation to subsidised at public expense, or the manufacturer expect his business to be likewise propped up with other peoples money.

    Comment by Perry Curling-Hope — November 21, 2010 @ 8:26 am

  2. You make some good points, Perry.

    Regarding rooftop solar PV: I spent three years in that business, designing and selling rooftop systems for customers in the San Francisco Bay Area, where the solar insolation is in the same range as what you have in South Africa (1500 kWh/m2 or higher). I know that in most cases, with an unshaded south-facing roof or yard, its straightfoward to design a PV system that generates 100% of the house’s electricity needs, as averaged on an annual basis with a grid-connected system. The systems I designed have performed as expected and produced that amount of power in the real world. With a few solar thermal modules, it’s also possible to heat nearly all the domestic hot water. (Heating and cooling the house as well requires more power, and depends heavily on how well-constructed and insulated the house is.)

    As to the issue of subsidies, there are effectively no energy sources of any kind that are not, at some level, subsidized. Oil and gas have been subsidized with an array of direct incentives, tax credits, accelerated depreciation schedules, and so on for 150 years now, and are STILL subsidized to the tune of hundreds of billions of dollars a year. Coal is heavily subsidized by allowing the vast majority of its real-world costs (air pollution, mercury permeating the environment, acid rain, the environmental damage from mining, and so on) to be externalized and not priced in to the commodity–a massive unrecognized subsidy. Large hydro plants are always subsidized with federal money and loan guarantees. Nuclear plants are heavily subsidized by federal loan guarantees (the nuclear industry in America is currently seeking $100 billion in federal loan guarantees), liability limitations, pushing the cost of waste handling and cleanup onto the public, externalizing the costs of nuclear fuel mining, processing, and upgrading, and so on.

    In short, there is no such thing as an unsubsidized energy source. All of it is, at one level or another, built using “other people’s money.”

    As for cost: I have spent hundreds of hours attempting to find good, current, accurate, inclusive data on the real cost of building, operating, and decommissioning nuclear fission plants, in order to make an apples-to-apples comparison with renewables like solar and wind. Pity the fool who would attempt to find such data! Most of it is horribly outdated (from the pre-2005 era, when all commodity prices began to march upward relentlessly) and the analyses of nuclear costs invariably leave out massive chunks of the real world costs. However, inasmuch as I have been able to locate reasonably contemporary data, and adjust it for comparison to the current, all-inclusive data on renewables, it appears to me that solar and wind are now cost-competitive with nuclear plants…and if you plot some reasonable cost curves for renewables and nuclear plants, the renewables become considerably cheaper 20-30 years in the future (because the fuel is free and the maintenance is minimal). This is a horribly complicated subject, however, and the devil is very much in the details. There are very few good studies in this area, unfortunately.

    For another view of the economics of nuclear power vs. renewables, see this July 2010 article in the New York Times on a recent academic study showing that when costs are properly accounted for, solar PV is now cheaper than nuclear power: “Nuclear Energy Loses Cost Advantage.”

    As we approach the peak and decline of all traditional primary energy sources, the questions increasingly become practical ones: How can we generate kWh in an affordable, scalable, deployable fashion? I have concluded that it’s easier (and a whole lot faster) to round up the capital to build rooftop solar generation than it is to build nuclear plants, with the latter’s immense capital costs and extremely long lead times. Distributed generation also offers a grid resiliency benefit that I believe will become increasingly important going forward. This is why I conclude that all energy sources we might hope to exploit in the future face serious scaling challenges–nuclear energy is absolutely no exception to this. We must do it all–and if my calculations are correct, we will still far short of what projected demand will be. As the saying goes, there are no silver bullets, only silver BBs.

    Comment by Chris — November 21, 2010 @ 12:02 pm

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