Solyndra as Icarus

Copia's Preposterous

Solar Photovoltaic (PV) technology has shown impressive price reductions over the last 20 years, and the outlook for the coming years is even brighter, with the potential for further generation cost decline of 50% by 2020. But already today, PV electricity is cheaper than many people think. In the coming years, the technology will become even more cost-effective and competitive — a vital part of Europe’s energy future.”—-European Photovoltaic Industry Association (EPIA)

That spam arrived in my email inbox on the same day the news that highly praised and politically connected Solyndra of Fremont, California had filed for bankruptcy and laid off its 1,100 employees. Not even George Kaiser’s fundraising relationship with President Obama and $535 million US DOE loan guarantee was enough to make up for the continued downward trends in solar PV prices made possible by oversupply in a market over-stimulated by FiTs, subsidies and Federal loan guarantees.

Competitive markets are ruthlessly efficient at weeding out excess cost, weaker players and excess inventory.  The challenges facing solar energy today are that global competitive markets for commodity products which is what photovoltaic panels have become defy the aspirations of politicians to choose local winners at the expense of distant competitors.

Few play the export commodity products game of ‘lower, always lower prices’ better than the Chinese and both EU and American renewable energy companies are finding it tough to catch the falling knives of lower prices.

To its credit, Solyndra’s technology was tubular instead of flat panels easier able to track the sun and thus improve their efficiency.  But manufacturing costs in Fremont, California are higher than in any place in China.  Solyndra investors hope to reduce their losses by selling their patents and technology to other.  Perhaps China will buy them and commoditize them as well.

What are the lessons in Solyndra’s failure?

Like Evergreen Solar before it, Solyndra sought to use newer, non-commoditized technology in an effort to distinguish itself from the commodity producers in China. But its product efficiency was not THAT much better than the older commodity PV panels and both the price and the cost to make it were higher.  This does not mean that others should not attempt the same strategy—only that they must focus on quantum not incremental leaps of improvement in efficiency and cost to produce to compete with China. That is a goal worthy of Federal loan guarantees, but should taxpayers really try to be venture capitalists when the venture capitalists pass on a deal as too risky?

In Greek mythology, Icarus sought to escape from Crete using wings that his father Daedalus made from feathers and wax. But he fell to his death when he ignored instructions not to fly too close to the sun.

Flying close to the political sun as Solyndra and Evergreen did does not assure success.  It is always good to have friends and allies in a new venture.  Business has proven the wisdom of partnering. But timing, global market competition and the nasty habit of competitors to—well, compete—made it tough for either Solyndra and Evergreen to improve the learning curve of their products fast enough to avoid one of those falling knives of falling prices hitting them in the chest.

Just because the government mandates something does not mean the markets will accept it.  Investors have a ruthlessly effective habit of shunning markets, rules and players that try to cram down their throats a business deal not worth having.  Many states adopted renewable portfolio standards to encourage the diversification of energy supply and support investment in new technologies like wind and solar energy.  The previously closed ‘good old utilities’ club with its central station coal and nuclear generation baseload resource portfolio was a tough one to break into.  Wholesale competition in the power generation sector proved itself worthy of the hassle to get there.  Competition from merchant generators drove down energy prices, improved the efficiency of the power fleet, and created a much more liquid and transparent market paving the way for renewable energy technologies like wind and solar.

Today many of the states are reaching their RPS goals of typically 20% of energy consumed from renewable resources.  My own state, California, always willing to risk other people’s money has set a 33% RPS target.  The question is whether these RPS targets are doing more harm than good to the sustainability of wind and solar generation?  The states are indeed getting more wind and solar energy projects to meet their RPS goals—-but they are getting the oldest, least efficient technology NOT the best stuff or the cutting edge stuff.  The big players in the wind and solar energy spaces are saving that ‘good stuff’ for themselves until after the glut of low price PV panels has been exhausted and can no longer be gamed by China.

Heresy, you say!

The seductive combination of RPS targets by the states, the willingness of state regulators to pay above market prices for renewable resources to meet those targets through devices like feed-in-tariffs, the availability of Federal production tax credits, investment tax credits, Treasury Tax Grants, Federal loan guarantees and more has attracted many players—-including the Chinese who did what they do best.  China adapted the technology for mass production and built an export capability to fuel its own economy by suctioning up the government subsidies and market share from EU and US markets thus creating this global competitive market they now control.

What happened to the wind and solar industry players?

Darwin was right!  In a survival of the fittest global market environment both wind and solar industries have rapidly consolidated with the mom and pop players selling out or going under.  The bigger players with deeper pockets were only too happy to buy cheap commodity products from China and use them to grow market share and wallet share of their own while they invest quietly in new technology to spring on the market when the glut of PV oversupply has been consumed.

Today’s wild west days of booming growth for wind and solar will give way to a more mature and sustainable renewable energy business dominated by giants who will use their new proprietary technologies to scale the size and improve the efficiency of the next generation of clean energy supply from wind and solar.  But first they must endure the glut and willingness of government to spend other people’s money subsidizing the oldest, least efficient wind and solar technology.

The lesson is when the subsidies end then the innovation will begin anew in wind and solar energy.  As John Rowe once said, “when the mouse smells cheese, the mouse pursues cheese.”  Cheese today is the perceived low hanging fruit of subsidies and RPS targets—not innovation.  It tastes good at first but it is like crack cocaine.  It has diverted the players from innovation and efficiency improvements to gain sustainable competitive advantage to chasing their tail in pursuit of the next ‘fix’ of Federal or state subsidies.