US Solar Market Outlook
A panel of solar industry CEOs and one utility executive shared insights about the US solar market at the Solar Power International 2014 convention in Las Vegas in late October. The following is an edited transcript. The panelists are Lyndon Rive, CEO of SolarCity, Ryan Creamer, CEO of sPower, Michael Silvestrini, CEO of Greenskies Renewable Energy, Paul Nahi, CEO of Enphase Energy, and Stacey Kusters, vice president for renewable energy and origination at Nevada utility NV Energy. The moderator is Keith Martin with Chadbourne in Washington.
MR. MARTIN: The International Energy Agency in Paris predicted last month that solar will be the dominant energy source by 2050. It is currently 0.85% of generating capacity worldwide and 0.3% in the United States. Lyndon Rive, from where you sit, does the IEA forecast seem realistic?
MR. RIVE: It will be a big lift to meet that number. However, we have no choice. Renewable energy must be the dominant source of energy by 2050 to address global warming. Solar energy is the one application that can be applied almost everywhere. The industry has a very high growth rate currently. It will be harder to maintain that growth rate as solar becomes a larger share of generating capacity, but I think we can get there.
MR. MARTIN: Lyndon is optimistic by nature. Mike Silvestrini, does the IEA forecast seem feasible?
MR. SILVESTRINI: Yes. I do not know the date when solar will pass natural gas as a primary energy source, but it has to happen. The figure 0.3% for the United States is discouraging considering how much momentum there is today, but once we get past that 1% Mendoza line, things will move faster. I think it is achievable.
MR. MARTIN: Stacey Kusters, how far in advance does NV Energy do resource planning for generating capacity?
MS. KUSTERS: We look out 30 years, but, not surprisingly, our most intense focus is on the next five to 10 years. We are looking during the next five years at replacing 812 megawatts of coal with 550 megawatts of base-load resources and 300 megawatts of renewable energy. We have a request currently in front of the public utility commission for 215 megawatts of solar, 200 of which is the Tava project that RES Americas is developing and another 15 megawatts is a project that SunPower plans at Nellis Air Force base. We are planning to purchase two existing gas-fired power plants. We are replacing coal in a manner that gives us sustainable fuel diversity.
MR. MARTIN: What percentage of your generating capacity currently is solar?
MS. KUSTERS: Approximately 10%.
MR. MARTIN: Where will you be in 10 years?
MS. KUSTERS: We hope to be significantly farther along. We also have to consider the rate implications and look for fuel diversity.
MR. MARTIN: I think you said backstage that the 10% today will grow to about 15% when the near-term projects you mentioned are in service.
MR. MARTIN: Whitewater kayakers are experts at reading rivers. They can tell where the breaks are in the rapids ahead. Successful CEOs must be experts at reading markets. Ryan Creamer, where do you see the opportunities in the next two to five years?
MR. CREAMER: The opportunities are really broad. As I told Keith backstage, he inspired me at a conference in San Diego three years ago when he said there are opportunities in solar. I jumped into the industry in 2012 after having worked in the nuclear and coal services businesses. It has been an amazing ride in just two years. We have good relationships with utilities. The amount of capital pouring into the sector will help to propel us forward.
MR. MARTIN: Paul Nahi, where do you see the opportunities in the next two to five years?
MR. NAHI: The dynamics that are making solar as powerful as it is today are doing nothing but getting better. Retail electricity rates continue to increase, while the cost of solar energy is falling. That dynamic alone will open enormous possibilities in the commercial, residential and utility-scale scale sectors for solar, not just in the United States but also in other countries.
As distributed generation is adopted more widely, we will see the solar companies move beyond pure generation into energy management. New technologies are coming to market that will allow homeowners to store electricity and optimize energy usage by drawing from the solar system, a storage device or the grid at different times of day. The potential cost savings for consumers will make distributed solar even more attractive.
MR. MARTIN: You are already putting your money to work where you see the opportunity. Your company makes micro inverters that are part of each solar panel. You make software that collects data that helps better manage systems. You just announced development of a new plug-and-play battery. Mike Silvestrini, where are the opportunities in the next two to five years?
MR. SILVESTRINI: We see a two-step process to getting the industry to a point where it will really take off. The first step is to reduce costs. When we started installing solar rooftop systems, the installed cost was about $8 a watt. Things like net metering and storage were not part of the strategy at that time. Our entire effort was directed at reducing the costs, weaning ourselves from incentives and building a more sustainable platform for growth. In a lot of ways, we are still in step one. We still have a way to go to reduce costs.
The next step after that will be grid integration, the challenges of storage, and the challenges of working with an existing system that never contemplated widespread adoption of distributed generation.
The conversation is starting to move toward that second phase of storage and complex technical aspects, but we cannot take our eyes off the ball and the need to keep driving down costs. We need to make sure we tick the cost-reduction box within the next couple years.
MR. MARTIN: You see challenges to get where you want to go. Lyndon Rive, you are a visionary. You try all sorts of new things. Where is the biggest opportunity?
MR. RIVE: For the next two years, the industry’s focus should be on cost reduction. We need to look at the balance-of-system costs to see where savings are possible. Look upstream; we are making an aggressive decision to go into panel manufacturing to help reduce our costs and achieve higher efficiency.
We will hit a cliff when the industry moves from a 30% investment tax credit to only a 10% tax credit. We must reduce costs in the next two years by more than the reduction in the tax credit for the industry to continue past 2016. We are facing a two-year sprint.
Great strides are being made in storage. We are already deploying storage systems. We are deploying hundreds of them, but we are not yet doing so in the tens of thousands. You will probably see more storage deployed next year and then every year more and more. Storage will be deployed first in states with the highest retail electricity rates, so expect to see it first in Hawaii and then in places like California.
People often mistake the value of storage. It is not a backup. The primary value is for large-scale grid integration. It will make the grid more stable to be able to manage peak loads so that thousands of micro-power generators can supply electricity to the grid and, in the process, help firm up the grid. These benefits of storage are likely to be achieved over the next five to eight years. Within that time period, we will reach a point where each solar system will have a storage device attached to it.
MR. NAHI: I could not agree more with the point about reducing costs. However, the focus should be on cost per kilowatt hour and not cost per kilowatt.
Far too little attention is being paid to long-term O&M. We know how to manage a coal-fired power plant. We know how manage a gas-fired power plant. We do not know how to manage 10,000, 100,000 or 10 million roofs each with its own power plant. There needs to be an O&M protocol: a process by which we can sustainably monitor and upgrade and manage 10 to 20 million individual micro-power plants.
MR. MARTIN: Lyndon Rive says bring the costs down, and storage is a big opportunity. Paul Nahi you say that having 10 to 20 million individual rooftop solar installations with storage is a management challenge.
Let’s drill down on storage. How will the market change when storage is widely adopted, and what is standing in the way of that widespread adoption? Lyndon Rive, you said you are able to put in only hundreds rather than thousands of batteries today. Is the fact there is not wider adoption today due more to technology issues or economics?
MR. RIVE: Cost is probably the biggest factor preventing deployment of thousands of systems today. The cost is coming down at an aggressive pace. I think you will see a lot more deployed next year, and the number will climb year after year. As Paul Nahi said, the key as we deploy storage on a large scale is to have a control system in place. We are investing heavily already in resources to allow our customers and the distribution system operator to manage when the battery charges and discharges and to allow a lot more services besides electricity — for example, voltage control — to be brought to the grid.
MR. MARTIN: Mike Silvestrini, are you planning to add batteries to your commercial and industrial rooftop systems?
MR. SILVESTRINI: We have a laser focus for now on cost reduction before we start tackling the technical challenges of grid stability.
MR. MARTIN: So storage adds to cost.
MR. SILVESTRINI: Yes. We need for now to reduce the cost, period. Until that mission is accomplished, we cannot move to these other challenges, as great as it is to see others already trying to address them.
MR. RIVE: I would like to add to that. We certainly see traction in commercial, but not necessarily in the residential side. In commercial, you have demand fees. When you have demand fees, depending on the utility, you can install a solar system with a battery today and the incremental cost of the battery is more than offset by the savings on demand fees.
MR. MARTIN: Ryan Creamer, are you adding storage to your commercial and small utility-scale projects?
MR. CREAMER: We spend a lot of time looking into different technologies, but I agree with the main points made by the other panelists. Our focus in the near term has to be on reducing costs. I agree with Paul Nahi that the focus should be on the cost per kilowatt hour rather than per kilowatt. Distributed generation grows in places where it can have the greatest impact on people’s utility bills. In some utility service territories, demand and time-of-use premiums are as large a factor as the actual electricity used. We continue to evaluate the different storage technologies — everything from mechanical to chemical — for use in these markets. The smart money is moving into storage. There will eventually be tremendous opportunity to pair storage with electricity generation at a price point that makes it economic.
MR. NAHI: Government policy will play a huge role in this. It can change the economics of storage almost overnight. We have a very large presence in Australia. In Australia today in the residential market, storage pencils because of certain requirements in areas like Queensland.
MR. MARTIN: What is the policy change that would make storage work in the United States?
MR. NAHI: It depends on the region. As an example in Australia, the view is that there is a tremendous amount of solar concentration in some areas so the utilities do not want you to export solar, but, at the same time, they want to encourage you to use solar. The only way to solve those two problems is to add storage to the solar facility such that when you are not using the energy, instead of sending out to the grid, you store it. There are economic incentives to make that happen. In areas like Hawaii, as Lyndon mentioned, the technical challenges could be resolved through policies such as I just
MR. MARTIN: Fair enough. Lyndon Rive, you said recently that one reason SolarCity bought its own solar panel manufacturer is that you expect there to be panel shortages by 2016. That would be a stunning turnaround for the solar panel manufacturers from where they were just a couple years ago. The US Department of Energy just said that solar rooftop systems dropped 12% to 19% in cost in 2013 and a further 3% to 12% reduction in cost is expected in 2014. This does not sound like a market that is headed for panel shortages. What is the evidence?
MR. RIVE: I am not sure where the year 2016 came from. I do see a panel shortage in the future, but we will face other shortages before panels become an issue.
MR. MARTIN: Such as?
MR. RIVE: In 2016, the biggest challenges will be operations and capital. You have a cliff around the corner. Everybody is going to start to go solar. Everybody who has been on the fence is going to think, “I better do it now before the ITC expires.” So the operational capacity of all the solar companies will be maxed out. The capital capacity — people’s working capital and people’s financing capabilities — will be maxed out. All of this will be maxed out. I think shortages of these items, rather than a shortage of solar panels, will be the biggest constraint in 2016. There will eventually be a panels shortage if the industry continues to grow the way it is. I see that closer to late 2017 or 2018. Of course, the significant wild card is what happens in Japan and China and whether they continue to encourage widespread adoption of solar. I see the constraint among tier 1 suppliers of solar panels, not for solar panel supply in the market as a whole, but solar panels that you can finance and persuade someone to take a 30-year risk on the asset.
MR. NAHI: I respectfully disagree. If you look at the capital expenditures that are being made currently by many of the module manufacturers, there may be some intermittent and arguably not even noticeable shortages, but I think there will be plenty of capacity from quality manufacturers in 2017 and 2018.
MR. MARTIN: Ryan Creamer, we have two things on the table — a solar panel shortage perhaps by 2017, and a shortage of operating capacity and capital when people may be rushing to install in 2016 before the 30% investment tax credit expires. Do you agree?
MR. CREAMER: The ITC cliff will create a spike in demand. I think there will be a heavy push. I can see shortages in supply not only of panels and resources in the field, but also of EPC capacity, transformers and inverters. We will all be making a dash to the finish line. We have a couple hundred megawatts in the ground now and would like to have a gigawatt in by the end of 2016.
Another potential shortage will be tax equity, which I view as the longest pole in the tent, as you will have so many projects coming on line by late 2016 and the problem solar faces, unlike other renewables, is that tax equity has to be in the deal before the project is finished or shortly thereafter. It does not work like wind and other renewables that claim production tax credits where the tax equity can come in at any time after the project is already operating.
MR. MARTIN: Mike Silvestrini, are you having trouble finding capital? You are a smaller developer than SolarCity.
MR. SILVESTRINI: Not right now. It feels like there is a lot of capital for this type of product. The technology is considered proven. A lot of hurdles we used to have to overcome in order to close on financing have been removed. It really comes down to the quality of the portfolio. We focus on customers with high-quality credit. I look around the space, though, and not everybody has been able to put together that type of portfolio. The challenges of raising financing increase the more mixed and varied the portfolio.
MR. CREAMER: Can I ask Lyndon a question? SolarCity recently launched a debt product where you are offering low-cost financing to customers who want to buy systems. When you say you think capital will be in short supply, are you talking about tax equity, debt or both?
MR. RIVE: I am referring to all the capital needs of a company. The challenges could vary dramatically from company to company. If you are running a business in which you are expecting 30% growth in 2016, then the challenge may not be so dramatic. But I think most of you should be planning on 100% growth in 2016. It is the time for massive growth. [Audience cheers.]
MS. KUSTERS: Those are your fans.
MR. RIVE: I believe everybody should be staying with 100% growth in 2016. When any company is growing at this rate, there will be constraints on its ability to do that, and one of the big constraints will be working capital. Another is tax equity. Another will be straight-forward debt financing on top of these assets. You have to go out and create all these relationships with new investors, and if you did not build that foundation in 2014 and 2015, then you will be constrained in 2016.
Let’s assume you solve the capital constraints. How then do you actually get the stuff installed? What type of investments are you making now to ramp up? Those investments have to be made in 2014 and 2015 to achieve these growth rates in 2016. It may be a little easier for a large utility-scale developer, but there are challenges on the residential side. Growth will not magically happen without laying a foundation in 2014 and 2015.
MR. MARTIN: How much capital do you have to raise a year?
MR. RIVE: For next year, we are going to have to raise probably close to $3 billion.
MR. MARTIN: What is the capital structure of your company: what percentage debt, what percentage equity, what percentage tax equity?
MR. RIVE: Tax equity accounts for around 35% to 40% of our total capital. Debt is 30% to 35%. The rest is equity.
MR. MARTIN: Ryan Creamer, what is Power’s capital structure by percentage?
MR. CREAMER: If you are asking about capital structure at the project level, it is probably 55% balance-sheet equity and 45% tax equity.
MR. MARTIN: Mike Silvestrini?
MR. SILVESTRINI: Our capital stack is similar to what Lyndon just described. A year ago, I would have said a third equity, third debt and third tax equity, but it has been shifting in the last year as we see better terms on offer for both debt and tax equity so that each of them now accounts for more than a little over a third of our total capital. The effort is obviously to reduce the percentage of true equity, since that is the most expensive type of capital.
MR. MARTIN: Stacey Kusters, what does the capital stack look like for a big utility like NV Energy: how much debt and how much true equity? I assume the utility has its own tax base and does not have to use tax equity.
MS. KUSTERS: There is no tax equity. It is 52% debt and 48% equity.
MR. MARTIN: Paul Nahi, you are not financing at the project level, so I imagine you are heavily equity and maybe some debt.
MR. NAHI: Exactly. We do not do projects. We are a technology company.
US Import Duties
MR. MARTIN: At a breakfast this morning, Tony Clifford, CEO of Standard Solar, commented on the effect US import duties on solar modules from China and Taiwan are having on the market. He said solar panels would cost perhaps 55¢ a watt if it were not for the tariffs. Instead, panels cost currently something like 72¢ a watt. Lyndon Rive, do these numbers sound correct?
MR. RIVE: I do not think the cost has gone up. The biggest effect is that the cost did not go down. The fact that module prices have hit a plateau in the 70¢ range has created a balancing system where everybody asks for the same pricing. It does not create a naturally competitive downward slope. If it were not for the tariffs, I am not sure module prices would be 55¢, as that is pretty low, but the price definitely would be below 70¢.
MR. MARTIN: Ryan Creamer, have US import duties had an effect on your company?
MR. CREAMER: Absolutely. We probably spent an extra $15 to $20 million this year on panels due to the tariffs. It is wasted money. It is not helping anybody. It is affecting the ratepayers.
MR. MARTIN: That is $15 to $20 million more on panels this year out of a total budget for panels of how much?
MR. CREAMER: We estimate that the Chinese trade case will increase panel prices by about 15%. Our total panels budget this year is north of $100 million.
MR. MARTIN: Mike Silvestrini, what effect have US import duties had on you?
MR. SILVESTRINI: It is tragic because we have been working on system improvements like putting string and burrs on racks in our warehouse in order to save time on installation and shave 2/10ths of a penny off the installed cost of solar systems, and then we lose 20¢ a watt on a tariff. It is the opposite cost trajectory that our industry needs, and it is continuing to make it challenging for us to wean ourselves off government incentives.
MR. MARTIN: We have an audience question from John Eber, head of tax equity investments at JPMorgan Capital Corporation.
Investment Tax Credit
MR. EBER: Listening to all the comments about 2016 concerns made me wonder whether our panelists feel the 30% investment tax credit should be extended.
MR. RIVE: The best thing for Congress to do would be to tax pollution. [Audience applause.] The challenge of taxing pollution is that those who are polluting are extremely influential so it would be a huge lift. The alternative, if you are not going to tax those who pollute, is to incentivize those who do not. The idea that we are going to have a reduction in something that is solving the world’s biggest problem is mind blowing to me. If we fast forward 20 or 30 years from now, our kids will say, “You had the technology, you had the solution, you had everything you needed to solve our biggest problem and decided to stop. What the hell were you thinking?” So we have to extend it. Extend it until you can tax pollution. [Audience cheers.]
MR. MARTIN: We are two weeks from election day in the United States. It is clear from the audience that Lyndon could be elected. [Laughter.]
Stacey Kusters, how much rooftop solar penetration is there in the NV Energy service territory?
MS. KUSTERS: Approximately 1%. However, we are receiving multiple applications. We have probably received more applications in the last two months than in the last 10 years combined. I agree with Lyndon’s comment that our ability to keep the pace on installing rooftop solar between now and the end of 2016 will be a challenge not just for the installers, but also for the utilities who must inspect each system and authorize parallel operation before the system can be used.
MR. MARTIN: Do you see the growth of rooftop solar in your service territory as more threat or opportunity?
MS. KUSTERS: We see rooftop solar as something that our customers want. Our goal is to ensure that there is price transparency about the cost to the customer. We are looking for a distributed generation tariff that takes into account not just the cost of distribution, transmission and generation, but also the value of solar coming back onto the grid. Transparency is good for consumers. They will also be better off if the utility can participate in that space alongside third parties. At the end of the day, we all want what is best for customers: competition in the sector with transparency on costs.
MR. MARTIN: Here is my last question for each of you. Someone once said, “No mistakes, no experience, no experience, no wisdom.” Each of you has been in business for a while. What hard-won lessons have you learned along the way? Paul Nahi?
MR. NAHI: I think we underestimated how complex the technology must be in order to support reliable, sustainable distributed generation, not just at the site, but also the requirements to integrate with the grid. The big data management, big data monitoring, the communications technology is a far, far more complex technology problem than we anticipated.
MR. MARTIN: Mike Silvestrini, seven years ago, you were in the Peace Corps in Mali, and here you are just a few years later running a company. What hard-won lesson did you learn along the way?
MR. SILVESTRINI: It was that you really have to keep control over the construction and quality of your installations. You have to be intimate with that process from the design all the way through operations and maintenance. You cannot step back and be a financial participant. We have had to learn to love the construction aspect as much as the financing aspect.
MR. RIVE: We have learned many lessons along the way, but one in particular that stands out is the need to put more effort into engaging with the government on policy. Policy debates may feel like a distraction. The effort cannot be quantified in terms of a return on investment. But you can actually make a difference. So over the years, we have come to realize that you must invest in policy and to do so on a large scale. To all our solar leaders, although the industry is under a tight budget, look at the budget, think what the industry would be like if the policy was wrong, make the investment, go deep, make the investment in policy. If we all work together, we can get solar to 50% by 2050, but we cannot get there if we do not engage with the government. We will have policy work against us, and we will still live in a fossil fuel-based environment, which would be a catastrophe for our children. [Audience applause.]
MS. KUSTERS: Never assume you know what the customers want. Always make sure you remain in front of the customers asking what they want or need so that you can design it, whether it is the right tariffs or the right policy to meet customers’ needs.
MR. CREAMER: We learn from every project. We need to continue working to increase the level of trust, increase the transparency and strive as an industry to produce the highest quality product.