December 12, 2016

Notes from the Solar Underground: 2016 – What Just Happened?

2016 was a wild year and not just for solar. Voters seem to be rejecting the status quo in favor of the unknown in many countries. After decades of reliance on government incentives, subsidies and mandates the global solar industry may be inured to unpredictability but the industry as a whole should be wary of global trends.

No matter what and for everyone, 2016 was a heck of a year. Here is a roundup of a few events that rocked and rolled their way through solar’s 2016.

1)    Donald Trump was elected president of the United States: 58.6 percent of eligible voters cast ballots in the 2016 presidential election with Hilary Clinton earning slightly over 48 percent and president elect Donald Trump earning slightly over 41 percent of votes cast. Secretary Clinton won ~2.5-million more votes than president elect Donald Trump but … Donald Trump won the Electoral College. The president elect appears to be committed to undoing many of President Obama’s progress on climate change, immigration and women’s rights.

Trump’s victory revealed a great divide in the US with great anger on either side. This was a populist victory but certainly not a wholehearted one. A nasty campaign kept many voters home and opened the door to drastic changes that over half the country does not seem to really want. This is less a mandate than an object lesson of the danger of voting angry, voting for change simply for the sake of change, and a bored electorate that would rather sink into depression and not vote than cast their ballots on the basis of the issues.

What it means for solar: The ITC is safe, the Clean Power Plan is not safe and the direction of energy policy and the budgets for RE and solar will be at the mercy of a likely climate skeptic energy secretary. This is not the time for infighting on the part of the US renewable energy industry. All technologies and stakeholders including solar and other RE customers need to band together on the issues that unite them. Specific to solar — the industry is big business now contributing to the US economy.

2)    The UK voted to leave the European Union — Brexit: 2016 has certainly not been bereft of surprising election results but Brexit stands out as the first result to catch global attention and shock pretty much everyone. Brexit, like the US presidential election, the failed peace vote in Venezuela, and upcoming elections in Italy and France (among others) is a populist uprising against the status quo. Following the vote to exit the EU many in the UK were shell shocked. The result of Brexit may take years to play out. In the meantime, it may indicate weakness in the EU — an example and a precedent has been set.

What it means for solar: Brexit probably does not mean much for solar — at least yet. Tenders are trending in Europe and replacing incentives. Demand is cooling — demand is not dead, but it has cooled enough for major manufacturers in China to withdraw from the MIP because the market in Europe is no longer strong enough to warrant compromise. Should more countries vote to exit the common currency will no longer be common and this would affect trade for all goods and services.

3)    The global populist movement: The global populist movement did not begin in 2016. It has been rumbling around the globe since the housing crisis and recession of the late 2000s, gaining momentum as job security became a quaint memory, as victims of horrific civil war in the Middle East ran for their lives immigrating en masse to anywhere they could, as terrorism destroyed personal security, as austerity measures in many countries ripped apart cherished livelihoods and seemingly secure futures and as people demanding change got more of the same from leaders. Jobs were lost and many are not coming back. Progressives and conservatives alike demanded change. People felt left out of any economic recovery and revolted with their ballots.

It is worth remembering that throughout history political upheaval has typically come from economic inequality and a feeling of powerlessness. Without a ready and clear solution the outcome of upheaval for upheaval’s sake is, well, historically the French Revolution is a good example. After years of anger and few solutions from leaders, voters all across the globe threw out the status quo and replaced it with a heap of grievances and no plans or solutions.

In 2015 voters in Greece sent a loud message by voting down EU imposed austerity — without a plan.

In 2016 UK voters ushered in an uncertain future by voting to exit the EU — without a plan.

In the US, angry voters surged to Donald Trump’s rallies and succeeded in electing him president — without a plan.

Elsewhere in 2016 voters in Spain, France, Italy, Australia, the Philippines, Venezuela and even Iceland — pretty much every election has been effected by populist anger.

What it means for solar: The populist movement ushered in a president who has historically been a climate change skeptic in the US, potentially isolated the UK from Europe and has rendered trade agreements highly vulnerable — but, the populist movement is not responsible for the solar industry’s vulnerability.

Decades of ignoring margins and celebrating low prices for components and system deployment have done their work. Business models such as the US solar residential lease established no money down and free solar as a standard. Low bidding on tenders and PPAs have left the impression that solar no longer needs subsidies — and maybe this is true … the industry does not needs subsidies it can keep on losing money all on its own.

Here are some suggestions for the solar industry as we segue into the ill-defined populist reality in which we find ourselves:

First, when setting targets and goals for module and system deployment costs remember that these are actually prices. All along the value chain a gross margin sufficient to run an entire business must flow in order for a company and an industry to remain viable. A shout out to SunShot — if it survives — goals are wonderful things, but, insist that margins above 30 percent and ideally above 40 percent are maintained.

Second, stop using LCOE as a standard for progress. It is a highly manipulative model filled with assumptions, biases and supported with very few facts. It is meaningless.

Third, the people who ushered in the populist movements have been displaced. In the US for example, coal workers are out of work and they are suffering. Coal miners are not anti-solar or RE they are just trying to make a living. While the US solar industry has been celebrating job growth it failed to develop a plan to include the displaced. This is an area where SEIA has failed to act and needs to act.

Fourth, the current populist movement was informed primarily by people who felt disenfranchised. There is no reason that a populist movement with a climate change agenda cannot flourish. This movement should involve all renewable energy generating technology sectors and their customers as well as people who benefit from clean air. Solar has traditionally been grass roots and it is time it got back to those roots.

4)    SunEdison finally fails: In 2015 SunEdison was still buying up companies, developing projects, sponsoring conferences and was viewed — though skeptically by some — as an industry leader. Now pieces of the company, including projects in various stages of development, are available for pennies on the dollar.

What it means for solar: For developers and investors looking for a good buy there is a lot available at, again, pennies on the dollar. Not all of SunEdison’s orphaned projects will be developed, and not all will be developed by the buying company, but many will be developed and at the bargain they were acquired may even be profitable.

SunEdison’s failure, one of poor executive decision making and lax, poor oversight, cast good people adrift. Most will find their way back to solar jobs and some will not. The true victims of the SunEdison debacle were its own employees.

5)    SolarCity and Tesla merge their debts and companies: No one should have doubted that Mr. Musk would prevail in the merger of one highly flawed business model and two highly leveraged companies. A SolarCity failure would have had repercussions far beyond those of SunEdison as employees and residential lessees and PPA holders would have been affected. This is not reason enough to cheer bad business, but it is something salvaged.

What it means for solar: As with Tesla’s non-announcement about its non-existent solar roof tiles and its MOU with Panasonic Solar, expect a lot of PR announcements about upcoming product releases as well as a lot of slipped release dates. All this marriage of debt means for solar right now is, basically, nothing.

6)    China’s market soars to a likely 30-GWp: Solar PV deployment in China ballooned in 2016 to double the goals of its government and make no mistake, solar deployment in 2016 would be 15-GWp lower if developers in China had not continued installing systems.

China serves as a perfect example of solar industry behavior for decades. Developers have not been paid the FiT regularly, curtailment is high and yet developers (while complaining of unprofitability) continued installing systems. This is, again, a perfect example of solar industry behavior for decades. 

It is illogical and trying to understand why an entire industry would continue to act against its own self-interest could make a logical person’s head explode.

What it means for solar: The solar industry once again finds itself vulnerable to one big market much as in the mid to late 2000s when Europe consumed over 80 percent of module product. The excess of activity in China could come to an abrupt halt leaving the industry overcapacity and desperate for a new multi-gigawatt market.

It is not too late for the solar industry to change. Growth for unprofitable growth’s sake is not healthy. Some business is not worth doing.

7)    Module prices drop to historic lows: Over 60 percent of global PV cell and module manufacturing is either in China or owned by Chinese manufacturers. At 30-GWp China’s market for PV deployment is over 44 percent of global demand. An illustration of what happened to module prices in 2016 is as follows: A company has one primary customer. This customer buys close to 50 percent of the company’s product. The customer cuts its demand for the company’s products suddenly also indicating that demand the following year will be 50 percent of its current level. The company has several choices: A) sit on inventory, B) find new customers to absorb the excess production, C) sell the product at a significant discount and reduce capacity to serve the current level of demand or D) all of the above.

Late in 2016 China’s government moved to control demand and several gigawatts of product flooded into the market at historically low prices. Manufacturers outside of China and some Chinese manufacturers reduced staff. The rapid drop in price was, as usual, celebrated by some as an example of progress. Figure 1 offers average module prices (ASPs) from 2006 through 2016 as well as the low and high module prices during 2016.

What it means for solar: Prices have already ticked up but full price recovery depends on another record year for solar PV deployment in China. Meanwhile other manufacturers face some tough decisions concerning pricing strategy for 2017. It’s a bad time to be a PV cell and module manufacturer.

8)    Utilities push back on net metering in the US: Blame utility pushback on net metering in part on the US solar residential lease model. Beginning in 2012 demand for residential solar leases accelerated driven primarily by the lure of no-money-down. Eventually utilities pushed back and net metering programs began changing. Hawaii ended its program. Fees were added for homeowners with systems on their roof. In some cases, Nevada for example, initially the changes were applied even to past system owners and lessees. Meanwhile, time-of-use rates also altered the economics for homeowners with solar systems on their roofs.

What it means for solar: The economics have changed in most states for homeowners with solar installations on their roofs. As the economics for lessees and PPA holders were never really in the favor of the homeowner (that pesky escalation charge) leasing a system is significantly less attractive.
There is a moral here and it is one the global PV industry should know well: When you rely on any sort of a government or utility program you’d better be vigilant because it will change.

This is a good time for the US solar industry to pull its customers into its lobbying effort. It is also a good time to change the residential solar lease and PPA business model so that it offers value to all stakeholders. Unfortunately doing so will make this business model even less economically viable for the solar leasing companies.

9)    First Solar changes its strategy more than once: Though First Solar indicated recently that 2017 would be a transition year there is no indication from the company’s behavior in 2016 that it knows where it is going. First Solar has been restructuring since Q1 2016. Early in the year it pulled the plug on TetraSun, shifted focus from its EPC and its O&M businesses to a new strategic focus on module sales and community solar deployment. Recently it leapfrogged over its Series 5 module, which it showcased at the 2016 Solar Power International Trade Show, scrapping it to instead launch its Series 6 module. The company also announced 1600 layoffs.

What this means for solar: Pardon the pun but First Solar would not be the first solar company to fail to read the market and stumble strategically. It is easy to step back and suggest that a focus on module sales in an industry with historically painful price pressure is a mistake and to applaud an implicit admission that expansion via acquisition into crystalline may have been an unnecessary loss of focus from its core competency. The global solar industry is brutally competitive internally — and this is before the competitive effect of cheap natural gas is thrown into the mix. Solar industry participants should hope that this industry pioneer and largest thin film manufacturer globally rights the ship.

10) Ivanpah catches fire and Solana gets fined: In 2016 short cuts taken while installing and operating CSP came to light and yet Solar Reserve still announced a future 2-GWp installation. CSP requires a lot of level land (read perfectly) and a lot of time (read years) for installation. In the volatile solar industry where time is money and where government programs change overnight CSP is at a disadvantage in competition with inexpensive solar PV. Pressure on CSP developers is significant. It is not going to get less intense.

What this means for solar: All solar technologies including CPV contribute to growing the share of solar generated electricity. For CSP the highly visible concerns that were revealed in 2016 offer a lesson; when the choice is to lose money or cut corners, unfortunately losing money should be the only choice.

11) Chinese manufacturers exit the EU MIP: Let’s see, the market in Europe softens a bit more every year while new markets in Latin America and on the continent of Africa emerge and despite the outcome of the US election the US market still offers stability for a few years. Under these circumstances why would Chinese manufacturers agree to continue with an agreement that has little upside for them?

What this means for solar: As there is not enough manufacturing capacity in Europe to fulfill its own demand it means developers and installers will pay more for modules whether they come from Malaysia, Japan, Europe or China. In any negotiation the party that can walk away from the table wins.

12) Stuck in recession, Brazil, one of solar’s most hyped markets, considers austerity: In 2016 Brazil hosted the Olympics, impeached its president, delayed its solar auction more than once and struggled with a historic and deepening recession. Now it faces austerity measures.

What this means for solar: The solar industry should have learned the lesson of Greece, Spain and other countries — austerity measures are market killers. Countries in Latin America have historically volatile economies and governments. Macro and micro economic realities should always be factored into a company’s strategy.

13) Tender bidding in some markets dips below $0.03/kWh: Every day it seems a new low is set in tender bidding. Unfortunately when the new lows are announced details about how heavily these bids are subsidized are lacking as well are picky little details about possible curtailment.

What this means for solar: The solar industry continues to celebrate cheap prices for components and low tender and PPA bids without considering that the result of this ongoing trend is low quality and systems that may either not be built or may be built poorly. Referring back to number 10 about CSP, poor quality will catch up with the developer and the manufacturer and low margins will eventually drive a company out of business.

14) PR driven solar news: William Randolph Hearst said: “News is what people do not want you to print. Everything else is ads.” The news that the solar industry and its observers reads on a daily basis is almost 100 percent PR driven and is not newsworthy. It also lacks enough detail to be useful.

What this means for solar: The more PR driven and biased news people read the less informed they become. Journalism done well will educate and inform and it will also push the reader’s confirmation bias to the limit and perhaps over the limit leading to a better informed industry.

The Tragedy of the Solar Commons

The tragedy of the commons is an economic parable that refers to greed. 

The tragedy of the solar commons refers to continued selling of modules and deployment of projects for market share with the goal of being on a top ten list as the biggest developer, or installer, or the number one manufacturer.

The global solar industry has been low margin all along the value chain for so long that profit has paradoxically become anathema to it. The tragedy of the solar commons is that an industry with the core mandate of ameliorating climate change, bringing electricity to populations far from the grid and providing electricity independence to everyone appears focused on keeping itself unprofitable.

The result of low margins is continued reliance on incentives, subsidies and mandates. The solar industry will continue to hold itself hostage to government intervention as long as it pursues a strategy of being the least expensive source of electricity. This is irony at its best as if subsidies were removed from conventional energy and if the conventional energy infrastructure had to be built anew every time it was deployed … well, the playing field would not be even, it would likely shift to solar and other RE. One reason for this shift is low running costs. The fuel for solar generated electricity is the sun. Solar system components mine the sun.

The argument for shifting to solar as a primary electricity source requires a shift in the electricity buyers understanding of just about everything to do with how they source their electricity.  

The good news is that the trend is towards clean energy and this trend will not abate despite the current political climate. The global solar industry has time to change focus, work together and build a quality, profitable solar industry that offers value to participants and stakeholders all along its value chain.

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