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Advice for Solar Firms from the MIT Energy Conference

A building at MIT
  A building at MIT was photographed for a Boston photo contest.

Entrepreneurial advice from this March’s MIT Energy Conference is still full of insight for members of the solar energy industry a few months later. Key themes throughout the conference included the need for increased innovation, cheaper technology, and greater collaboration between companies, financiers and utilities.

Many of these tips were bolstered by recent publications from the United States Department of Energy (DOE), Nature, Breakthrough Institute, Generate Capital, and SolarCity.

The conference’s keynote speakers included United States Secretary of Energy Ernest Moniz; General Electric’s Senior Executive Director, Colleen Calhoun; and the World Energy Council’s Secretary General, Cristoph Frei.

Why is innovation critical right now?

One theme stood out throughout the two days of discussion: the criticality of innovation and growth among solar firms. In the face of increasing demand for solar power and decreasing prices of raw materials, the industry is in a unique position to implement changes that will help solar remain competitive despite the uncertainties in regulation and falling prices of natural gas and petroleum.

As Secretary Moniz said during his opening remarks, “The Department of Energy’s First Annual National Energy Employment Analysis,” published in March 2016, illustrates unprecedented growth in the solar industry. Increases in capacity installations and employment rates set the stage perfectly for innovations to take hold and be sustained over time, especially among independent solar developers.

DOE reports that the United States solar sector grew over 20 percent in 2014. Importantly, employment is expected to increase by more than 15 percent in 2016.

As shown below, solar installation is responsible for the majority of employment in the solar workforce. The sector has experienced a striking 123-percent employment increase in the past six years. It currently employs more than 200,000 individuals nationwide.

Solar Employment Growth by Business Activity, 2010-2015
       Source: The Department of Energy’s First Annual National Energy Employment Analysis.

How can solar developers capitalize on these opportunities?

In addition to the advantages provided by the falling costs of materials and installation, solar is relatively easy to scale thanks to the plants’ low maintenance costs and support of energy independence, local job creation, and environmental quality. Addressing externalities can help countries meet their COP21 commitments and help politicians fulfill economic and environmental campaign promises.

The third session of the MIT Energy Conference, “The Innovation Roadmap for Solar Energy,” focused strongly on these ideas. The discussion was moderated by Sriram Krishnan, director of Photon Consulting, and featured Shayle Kann, director of research at GTM; Francesco Venturini, CEO and general manager of ENEL Green Power; and Francis O’Sullivan, director of research at MIT Energy Initiative.

Michelangelo has been quoted as saying, “Inside every stone there is a sculpture.” Following this analogy, the panel defined energy innovation as turning new ideas into economically viable alternatives to fossil fuels. In the context of solar, the priority is improving the status quo in the most cost-effective and efficient manner possible.

What challenges is the solar industry facing as it grows?

Kann opened by reminding the audience solar is more relevant now than ever. It has achieved incredible growth in a short period, increasing from only 2 GW of installed capacity in 2010 to nearly 60 GW in 2015. As a result, about 1 percent of total demand in the United States is met by solar generation. Solar power is becoming increasingly attractive as the cost of electricity rises and the costs of installation and panels decrease.

In the face of potential devaluation as distributed solar increases, Kann noted that innovation must focus on the following three areas:

(1)   technology improvements that can make solar systems more efficient

(2)   integration with the grid in ways that can use cheaper and smarter information technology

(3)   storage power that can be dispatched to meet peak demand any time when prices are highest to combat price deflation

In a recent article published in the journal Nature (and recapped by Greentech Media), Kann and his coauthor, Varum Sivaram, said that “As solar’s share of the electricity mix increases, the cost of each new solar project must fall to compete.” This "deflation effect" is a well-known issue throughout the industry but is seldom discussed in practice.  

Government support is essential for helping new, sustainable energy technologies become commercially viable.

How can load shifting make a difference?

Load shifting involves moving power demand to different times of day. In addition to load shifting and energy storage, Kann and Sivaram proposed a mid-century cost target of 25 cents per watt (fully installed), arguing this price is necessary for solar to remain competitive and meet one-third of the world's electricity demand by 2050. Cheaper initial costs will also lead to increased returns over time, even if some deflation does occur.

Although load shifting to peak times, affectionately referred to as “killing the duck (curve),” can be useful, demand management and storage are not enough to sustain solar in the long run.

The panel also emphasized the benefits of adjusting solar’s generation profile to align with total demand. This is accomplished mainly by installing west-facing panels rather than south-facing ones. Despite generating less power overall, west-facing panels will generate more during precious peak hours when cost of electricity is highest.

Of course, storage would provide critical assistance by decreasing the risk of over-generation in the afternoon and mitigating the need for expensive and/or carbon-based fuels during peak evening hours.

How do firms avoid the ‘valleys of death?’

When the discussion turned to the cost of solar, hardware and software were key topics raised. For hardware, modular, highly productive solar systems are critical in developing economies of scale. For example, a 1-MW block that companies can easily replicate throughout the United States would lead to cheaper design and lower installation costs.

The software discussion took an unexpected turn to focus on the importance of systems to track the sun’s position relative to Earth. These technologies could help United States utility-scale developers achieve the greatest return on their investment in solar.

As O’Sullivan noted, as photovoltaic solar becomes increasingly ubiquitous, it is critical that the prices of panels, installation, and complementary technologies (such as tracking systems and storage) continue to fall so solar can continue to compete.

O’Sullivan’s comments also focused on solar photovoltaics as a leading zero-emissions technology and their importance in developing countries, especially in China, Southeast Asia, and Africa. Solar’s maturation in the United States is equally important – last year, more infrastructure was installed to support solar than any other generation source.

That being said, the margins for panel producers and installers remain razor-thin. Only expanded scale can lead to sustainable profits for these firms, helping them to avoid both technological and commercial valleys of death.

The phrase ‘valley of death’ refers to two instances during the innovation cycle where capital can easily run dry – first, when research and development efforts need additional funding to develop a prototype, and second, when developers seek capital to reach scale or engage in commercial demonstration.

Utility-scale solar could be one compelling solution. Power purchase agreement (PPA) prices for utilities are often below 5 cents per kWh, enabling solar to easily compete with natural gas and fossil-fuel generation. However, this means utilities must demonstrate foresight and tolerance for risk by investing in the research, prototype, and commercialization phases of emerging technologies as well as deploying existing solar and storage at scale.

Chart showing the solar valley of death
   Source: Breakthrough Institute.

As noted previously, the role of government investment is also critical during these stages, especially since venture capital, private equity, and debt financing are not available to emerging technologies before they achieve commercial demonstration or reach scale.

How can solar innovators collaborate with other market players?

Panelists discussed the solar as a service (SaaS) model as one option. Another alternative is the infrastructure as a service model, an idea brought to light by the debut of Generate Capital and SolarCity.

Perhaps the best way to define the SaaS model is to consider the solar service agreements (SSAs) or PPAs, during which an independent solar company installs, manages and maintains a solar system on a customer’s residence or business.

The customer typically pays less than she would pay to a traditional utility, but does not have to personally invest capital in installation, maintenance or upkeep costs. John Berger boiled the SSA down to this simple math, which helps illustrate the concept.

SSA = Equipment Loan + ITC/Depreciation + O&M Service Agreement

The infrastructure as a service (IaaS) model was introduced by Generate Capital (co-founded in December 2014 by Scott Jacobs, Matan Friedman, and Jigar Shah). It is meant to provide a higher and more inclusive level of financing for firms dedicated to a broad range of resource-efficient infrastructure.

This model offers tailored financing to portfolio companies that meet the valleys of death described above. It is built to step in when traditional actors such as venture capital investors and banks cannot.

Following Generate Capital’s theme of collaboration between clean energy firms, financial organizations, and infrastructure providers, SolarCity proposed that distributed energy resources be used in collaboration with utility investments to offer a new form of IaaS directly to consumers. Its white paper explains how this nontraditional collaboration can engage and save ratepayers money, increase competition and innovation among suppliers, and guarantee lowest-cost generation.

Innovation, technology and collaboration can help the solar industry continue to accelerate. As industry experts dialogue, they are working out the next steps they need to take individually and collectively.

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