Putting Competition to the Test in Renewable Energy

One of the solar’s largest trade shows is being held in San Francisco July 9-12, 2012.  The Intersolar North America exhibition and conference for solar professionals to exchange information and develop business opportunities in the U.S. solar market may turn into a large job fair.  The problem is like the solar industry itself there may be an oversupply of people looking for solar work.  It has been tough year for the solar industry. The theme of the conference reflects that new reality—come to Intersolar to learn more about how to “reduce cost, increase yields and further drive the competitiveness of solar power.”

The question on the mind of every Intersolar delegate is—can we see the bottom yet?

Intersolar North America 2012 expects about 850 exhibitors and more than 22,000 registered visitors from more than 80 countries.  There is both good news and bad in that.  The good news is the solar industry is global with many markets.  The bad news is the solar industry is global and oversupply of PV panels and other equipment, falling prices, and Chinese domination from its success in suctioning up feed-in-tariffs and other subsidies to growth global market share is a problem everywhere.

The conference participants are eager to hear good news, but the buzz is mostly bad:

  • PV module supply is twice demand and prices will keep falling until balance is restored mostly from shuttering production facilities, according to GTM Research.
  • GE is delaying its proposed Aurora CO thin film production facilities for at least 18 months and refocusing on improving its technology to better compete in the falling price market.
  • Abound Solar filed for bankruptcy taking with it part of the US Federal loan guarantee it received just in time to be the next Solyndra profiled in the Fall political campaign ads.
  • Germany will again cut its feed-in-tariff risking more dumping of panels on an already oversupplied market.
  • A shakeout of solar inverter manufacturers is also underway as oversupply abounds.  Expectations are that the giants like Siemens and Schneider will survive and most of the rest will be acquired or fail.

On the positive side, solar firms that successfully modified their business model from manufacturing to sales, installation and service are doing better.  Customers are attracted to solar lease deals and falling prices. US solar tax credits don’t expire until 2016 unlike wind which expires at the end of 2012.  Utility procurement of solar projects remains driven by regulatory requirement for renewable portfolio standards, but more projects are switching technologies to PV as prices fall.

We’ve actually seen this movie before.

It is part of the boom and bust cycle that has driven or plagued the energy industry since its inception.  In the 1980’s and 1990’s we saw it play out with “exempt wholesale generators” or independent power producers as the Energy Policy Act and FERC rules were adopted in response the inflation-driven, regulatory cost overruns of building nuclear power plants.  Wholesale competition for power generation was seen as the way to control costs and utilities were ordered by regulators to procure incremental energy requirements rather than build their own power plants.

As division president at Global Energy Decisions, we did an independent analysis of the impact of utility divestment of power generation in a study called “Putting Competitive Power Markets to the Test” that found that divested power plants—even old, dirty coal plants—were cleaned up, fixed up and made better by competing for a place in the supply stack in wholesale markets.  How much better?  Our study found that the improved efficiency and output from these retrofitted coal plants was enough to supply the power needs of 25 million typical homes for a year.  Divested nuclear power plants efficiency improved enough to serve 10 million typical households for one year.

Competition worked much better than traditional rate-based regulation of new power plants at controlling costs, and it can work again to clean up the act of the renewable energy industry. But the wind and solar industry will be harder to fix because it is too subsidy dependent, entwined in regulations and the markets have been jury-rigged to produce a specific outcome regardless of the cost to ratepayers or taxpayers.  Feed in tariffs and other subsidies have stoked supply so much that it is now twice global demand.  We have to sweat a lot of fat out of the system to get to the Biggest Loser.

Subsidies and renewable portfolio standards have also rewarded quantity over quality.  By that I mean subsidies induced manufacturers to commoditize the product to drive down the price, but China has proven better at the commodity manufacturing game and used the subsidies to grow global market share and scale its domestic manufacturing capacity to support its export driven business model.  But the US and EU became addicted to subsidies and failed to recognize that competing with China with the oldest, least efficient PV technology was a fool’s game.

Our Federal government also squandered vast fortunes of our money in politically correct industrial policy games of picking winners and losers and retail subsidies of Chinese imports.  Instead, we would be much better off today had the Federal Government stuck to funding basic research and focused its “investments” in development of the next generation of renewable technologies with efficiencies an order of magnitude or better than China’s low price commodities.  Better efficiencies with better technology would have reduced the solar footprint and made technologies like utility-scale solar thermal more viable thus advancing both high solar efficiency and energy storage.

Is there sunlight at the bottom of this green hole?  Yes, but we must sweat the fat of oversupply out of the system and force the survivors to compete without subsidies, renewable portfolio standard mandates, or politically driven industrial policies for a place on the winner’s stand as the biggest loser.