Rooftop Solar Generation - Ready for Primetime?

California’s ambitious goal of obtaining a third of its electricity from renewable sources by 2020 has spawned a green energy boom with thousands of megawatts of solar, wind, and biomass power plants planned for ... the middle of nowhere.
And therein lies the elephant in the green room: transmission. Connecting solar farms and geothermal plants in the Mojave Desert and wind farms in the Tehachapis to coastal metropolises means building a massive new transmission system. The cost for 13 major new power lines would top $15.7 billion, according to a report released in August by the state’s Renewable Energy Transmission Initiative.

The initiative, called RETI, is an attempt to build a statewide green grid in an environmentally sensitive way that will avoid the years-long legal battles that have short-circuited past transmission projects.

But the rapidly evolving solar photovoltaic market may moot the need for some of those expensive and contentious transmission lines, requiring transmission planners to rethink their long-term plans, according to Black & Veatch, the giant consulting and engineering firm that does economic analysis for RETI.

In short, solar panel prices have plummeted so much as to make viable the prospect of generating gigawatts of electricity from rooftops and photovoltaic farms built near cities.

“This has pretty significant implications in terms of transmission planning,” Ryan Pletka, Black & Veatch’s renewable energy project manager, told me last week. “What we thought would happen in a five-year time frame has happened in one year.”

That’s prompted Pletka to radically revise the potential for so-called distributed generation—solar systems that can plug into the existing grid without the construction of new transmission lines—to contribute to California’s need for 60,000 gigawatt hours of renewable electricity by 2020.

When Black & Veatch did its initial analysis last year, it predicted that photovoltaic solar could contribute 2,000 gigawatt hours, given the high cost of conventional solar modules and the fact that a next-generation technology, thin-film solar, had yet to make a big commercial breakthrough.

Pletka’s new number is a bit of a shocker: Distributed generation could potentially provide up to 40,000 gigawatt hours of electricity, or two-thirds of projected demand.

“Certainly some of the new transmission lines will be needed but not as many as before,” he says.


That analysis also calls into question the need for as many large-scale solar power plants. Currently there are about 35 Big Solar projects planned for California that would generate more than 12,000 megawatts of electricity.


A game-changer has been the rapid rise of thin-film solar. Thin-film solar modules are essentially printed on glass or other materials. Although such solar panels are less efficient at converting sunlight into electricity than traditional crystalline modules—which are made from silicon wafers—they can be produced more cheaply.


In the past year, utilities like Southern California Edison have signed deals with First Solar, the thin-film powerhouse, to buy electricity from four massive megawatt thin-film solar farms. And in September, China inked an agreement with the Tempe, Ariz., company to build a 2,000-megawatt power plant, the world’s largest.

The next day, Nanosolar, a Silicon Valley startup, announced it had secured $4.1 billion in orders for its thin-film modules, which it claims will be even more efficient and cost less to produce than those made by First Solar.


Meanwhile, California’s two biggest utilities, PG&E and Southern California Edison, this year each unveiled initiatives to collectively install 1,000 megawatts of distributed solar generation. SoCal Edison will put solar arrays on warehouse roofs throughout the Southland - First Solar snagged the first big contracts - while PG&E is focusing on ground-mounted solar systems near its existing substations.

So what’s behind this rooftop revolution in solar?

Partly it’s due to a glut in the solar panel market. The global economy collapsed last year just as solar module makers ramped up production. But it’s also a result of technological innovation and economies of scale that have made thin-film solar, for instance, competitive. Strides have also been made in cutting installation costs, which typically account for half the price of photovoltaic systems. And finally, a giant key in gaining traction towards critical mass in rooftop solar systems is financing. California-based SolarCity has emerged as an industry leader in providing financing that makes fiscal sense for homeowners and commercial building owners through their SolarLease program.

The solar market, of course, is heavily dependent on government incentives—in the United States and overseas—and thus vulnerable to disruption. But the trajectory remains one of falling prices and thus Black & Veatch’s projections pose a conundrum for transmission planners.

Given that transmission projects can take a decade to complete, power bureaucrats make their plans based on 10-year projections of energy costs according to Pletka. That wasn’t much of a problem when planning transmission for, say, a grid supplied by natural gas-fired power plants as the technology or the market was not likely to change radically.

Not so for solar, where technological advances and fast-changing market conditions are shaking long-held views that photovoltaic power, or PV, is not ready for prime time.

“I’ve worked in renewables since the ‘90s and I myself had written off solar PV for years and years and years,” Pletka says. “That’s a firmly rooted mindset among everyone who works from a traditional utility planning perspective.”

“We present this new information on photovoltaics to people and it’s still not sinking in,” he adds. “It would cause a major shift in how we plan.”

While fewer massive transmission projects would be needed if California generates gigawatts of electricity from rooftops, the distribution network will need to be upgraded and a smart grid created to manage tens of thousands of pint-sized solar power plants.

Cities, Pletka notes, could become generators of electricity rather than consumers of power.

“It brings up questions people haven’t had to talk about before,” says Pletka.

First Solar Earnings Chatter - A View from 33,000 Feet

First Solar's (FSLR) earnings report has hit the Street, and with it, the buzz and the volume has been cranked up on it's ramifications for not just First Solar, but Solar and Renewable Energy as a viable industry. I wanted to bring some "boots-on-the-ground" perspective to the conversation, and hopefully both add some insight into the discourse, as well as debunk some truths being espoused as absolutes.

First, let's address First Solar:

1. Market Reaction to the Q3 Earnings Release - The stock plunge after the Q3 earnings release is simply common knee-jerk reaction to headlines in a real-time world. It's common, and frankly if I held a substantial position in First Solar, would inspire not much more than a yawn. Earnings and revenue are up substantially. The sell-off was due to First Solar not being able to recognize revenue attributable to a specific project until Q4 (Note: In a balance-sheet world, I would be up someone's tail if I were the CEO, a gifted CFO always ensures you don't miss earnings based on revenue recognition GAAP rules - I'm not saying I would pursue something illegal, quite the opposite, there are times GAAP simply doesn't reflect the true fiscal situation of a corporation, ESPECIALLY a fast-growing technology firm). When examined, the project is absolutely solid, and First Solar will have to post the revenue in Q4. Nothing we tech sector veterans have not seen a million times.

2. Company Performance and Trends - Late Wednesday, the company reported a 55 percent leap in third-quarter earnings on a 38 percent increase in revenue. But sales of $480.9 million missed the average analyst estimate of $528.8 million, as measured by a Thomson Reuters survey. This is a timing issue based on revenue recognition, not a revelation of weakness within the company or the solar sector. "This is truly a timing issue," Chairman Mike Ahearn said on a conference call with analysts. "That project has been sold, the contract wasn't signed until early in the fourth quarter. We remain on track for annual guidance." First Solar has some fantastic fundamentals in a sector that is prime to explode for the macro-reasons I list later in this posting. Bottom line: First Solar should remain the low-cost industry leader for the foreseeable future and will likely gain share value in large-scale projects.

3. Market Penetration - If First Solar navigates current conditions effectively, they will still have tremendous upside with their first-to-market (FTM) leadership position in residential rooftop installations in the U.S. - in technology sectors, never discount the critical FTM factor. Many inferior models have thrived simply based on this factor alone.

Second, let's quickly take a look at the solar industry from cruise altitude, so we can factor industry trends into any analysis of solar-related investments:

1. The Truth About Germany - German feed-in tariffs and other incentives indeed spurred the acceleration of solar energy projects in that nation, and they have a large number of roof-installed solar systems. Critics are always so fast to glance at a number or article and then convey them not as opinions, but as absolutes. But I suggest to be sure to do your due-diligence. Germany has horrid solar generation conditions, averaging only four sun-hours per day. So yes, it is not going to displace other traditional forms of energy generation. But be careful to state it has failed, because that was never the point. Germany made a strategic move in investing a lot of capital in solar energy generation - to attain industry leadership. Germany now possesses the intellectual property and the manufacturing and export capacity that is expected to make it one of the three dominant global players in an industry that will be worth tens of billion dollars a year. Even today, it already has over 50,000 employees in the solar industry.

2. Rooftop Solar Energy Generation Systems - I continually hear, "We are not going to make any dent with only rooftop installments. We will only displace a couple of coal power plants, at best." I have irrefutable evidence to the opposite - I personally have dozens of rooftop installation projects I can share with anyone, anytime, that have eliminated a homeowner's entire energy bill. These installations were in Arizona and California, primarily in desert regions, where averages of 7-8 sun-hours per day are common. So to take the above often-repeated statement-of-fact further, indeed if we extrapolated that on a much larger scale, and there are several hundred thousand homes in the Phoenix metro area with rooftop installations that are 100% offsetting their energy bills, we can displace more than a "couple of coal power plants at best." So that is indeed not an absolute fact - it's actually very much incorrect.

3. End-User Return-on-Investment - As far as overall return-on-investment, we have a program in place with realtors and have executed several successful case studies in Phoenix and Palm Springs that are clear in showing it has a significant ROI on a homeowners capital investment - better returns than most places you could deploy that capital in this economy. When you combine government subsidies that help offset a significant portion of the homeowners out-of-pocket up-front costs with the lift on property values in this real estate market (with 20-year warranties on the balance-of-systems, you are selling a home that does not have an electricity bill attached to it - a powerful hedge against future energy and inflation cost increases), the resultant ROI is powerfully conclusive in these markets that residential solar installations are absolutely viable.

4. Long-Term Outlook for Solar - The longer-term outlook is cloudier, but trends positive. Government funding, as well as funding from the private sector, has been flowing strong into the solar industry. That is a leading indicator - "follow the flow,", as we say in Silicon Valley. But that isn't sustainable long-term - the key metric to follow is the LCOE (Levelized Cost-of-Energy), or LEC (Levelized Energy Cost), two different names for the exact same thing. It is an economic assessment of the cost the energy-generating system including all the costs over its lifetime: initial investment, operations and maintenance, cost of fuel, cost of capital. A net present value calculation is performed and solved in such a way that for the value of the LEC chosen, the project's net present value becomes zero. Typically LECs are calculated over 20 year lifetimes, and are given in the units of currency per kilowatt-hour, for example USD/kWh or EUR/kWh or per megawatt-hour. Solar's LEC must come down to the level of other, traditional energy generation sources for it to truly gain critical mass and the accelerated investment and deployment that comes with it.

5. The Green Culture Cannot be Discounted - Another powerful force isn't a quantifiable metric but must be factored when forecasting the solar industry, which is the cultural and societal push to renewable Energy, both domestic and internationally. The United States has been effectively put in the position of either taking over the leadership of the GreenTech sector, and the climate debate, as only the U.S. can do, or find ourselves behind Europe and Asia in a technology sector absolutely critical to the economy. And effectively there is no choice - whether you believe in global warming or Renewable Energy, we are jumping on the train because we must.

6. The Smart Grid Impact - The Smart Grid's evolution and the corresponding innovations will have a dramatic effect on Solar's LEC. The Smart Grid is in its infancy, so we will see its impact on Renewable Energy sources and their net efficiencies over the next 5-10 years start to be realized. I cannot stress enough how critical a factor the Smart Grid will have on the entire energy industry, and the result of its impact simply cannot be forecasted yet - by the Smart Grid's very nature, there are too many variables to accurately analyze and draw a clear conclusion.

7. Solar Component Oversupply Issue - The oversupply of solar panel units does indeed have an impact on First Solar, but it is a net-positive for the industry as a whole for obvious reasons. Case-in-point, China's Solar production capacity has increased substantially (both qualitative and quantitative, I have seen impressive bench test results from very low costs panels as compared to expensive established brands, and the build quality is impressive), and the impact of a downward pressure of solar panel components will continue to effect LEC in a positive manner for the solar industry as a whole.

8. The Federal Government Impact - Finally, at least in the near-term, we have an Administration and Congressional body that, right, wrong or indifferent, is dedicated to continue investment substantial sums into the GreenTech industry, solar very much included. And the investment is coming both directly and in the form of subsidies and tax-credits. It's stunningly substantial when I can eliminate 75% of a homeowner's out-of-pocket initial costs of a rooftop solar energy system. That cannot be discounted, again in the near-term.

Just some insights to consider when you look at the solar landscape from a macro-level. I hope it is helpful!

Disclosure: No holdings in any of the companies referenced in this article.