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Riding the Giant ‘Solarcoaster’
editor bounce@conway.com
uring the Great Depression, Thomas Edison supposedly said, "I'd put my money on the sun and solar energy. What a source of power! I hope we don't have to wait until oil and coal run out before we tackle that." He was quoted in conversation with his comrades, Henry Ford and Harvey Firestone who, as it turns out, did not take him up on the offer.
New solar modules at the Vatican? Yes, thanks to SolarWorld AG. Read the sidebar below for more.

      As the world continues to sink into what many are terming the "Great Recession," solar energy has again been identified as a fuel of the near future. Most industry analysts believe that renewable energy – and solar power in particular – will be a winner during the next few years, thanks to a combination of federal stimulus spending and new policy initiatives. But how rosy is the outlook for solar energy? On the one hand, the stimulus bills represent the largest national commitment to clean energy in U.S. history. On the other hand, the renewable energy industry is not immune to the trends dragging down the global economy, and any optimism over stimulus must be tempered by mounting job loss reports and gloomy projections of pending business failures. So where is solar going? This article attempts to shed some light on whether solar will be recession-proof or recession-prone by reviewing a series of recent, high-profile policy developments.

The Recent Past
      In the past few years there has been a rapid ramp in solar energy investment worldwide. Globally, the solar market boomed from a US$15.6 billion industry in 2006 to $29.6 billion last year. In the United States, the solar energy market had its best year on record in 2008, with over 18,000 solar photovoltaic (PV) systems installed, totaling 356 megawatts (MW) of capacity. To put that number in perspective, there were only 21 MW of PV installed – total – in the United States 10 years ago. The 2008 numbers represent 70-percent growth over the previous year, and the United States installed more capacity than Japan did for the first time since the 1980s. The year also saw several high profile announcements of new manufacturing facilities, such as Hemlock Semiconductor's plant in Tennessee (followed soon thereafter by Wacker Chemie's announcement of a similar move), and SolarWorld's plans to site its largest North American factory in Oregon.
      An exclamation point was added to these impressive statistics when the solar industry received a long-term extension of the 30-percent federal Investment Tax Credit (ITC) under the Emergency Economic Stabilization Act of 2008. The ITC was initially authorized under the Energy Policy Act of 2005, but only for a limited time. As a result, the tax credit had to be periodically renewed by Congress. Although the tax credit drove rapid industry growth, uncertainty surrounding its renewal was a source of continual anxiety for the domestic solar industry. The on-and-off nature of the ITC also made the United States a less attractive market for international players than the comparatively stable European policy climates. The eight-year tax credit extension under the Stabilization Act appeared to give the industry what it had been requesting for years.

The Rocky Present
      While 2008 was a boom year, the financial crisis is beginning to have a marked impact. Around the world, solar stocks have plunged by 60 percent to 90 percent, and many solar companies are laying off hundreds of employees. A recent report from PHOTON Consulting predicts that many smaller manufacturing companies will not survive 2009. There have been a wide range of new entrants, for example, into the thin-film photovoltaics manufacturing space. Thin-film is viewed by proponents as a potentially disruptive alternative to the dominant, and more expensive, crystalline silicon photovoltaic modules. PHOTON projects, however, that 150 of the 208 thin-film companies it tracks will fail within the next nine months.
      After the success of 2008, and the long-term extension of the tax credits, one might assume that the U.S. solar industry would be one of the few industries to grow in the face of recession. The financial crisis, however, has the potential to disrupt the U.S. market in particular because of the tax credits. Tax credits require there to be profits that the credits can offset. In order to take advantage of the tax credits, U.S. solar project developers typically form partnerships with large tax investors. In many instances, the tax investors claim the projects' tax benefits, enabling developers to sell solar electricity to customers at competitive rates. Innovative models such as this drove the majority of U.S. commercial installations in 2008.
      The financial crisis has hit the commercial solar market particularly hard because many of the tax investors were investment banks. With the abrupt collapse of investment banking, the pool of tax investors shrank, just as competing uses for tax equity – such as low-income housing tax credits – became more attractive. The result was that many solar developers lost their investment partners, and those that didn't found that tax equity had become considerably more expensive. A recent report from the Lawrence Berkeley National Laboratory found that tax equity yields increased by up to 200 basis points, which would translate into a 7-cent per kilowatt-hour spike in the price of solar electricity.       To address concerns about the tax credit, the American Recovery and Reinvestment Act contained a provision that allowed solar developers to receive a 30-percent grant from the U.S. Treasury in lieu of the 30-percent investment tax credit for projects that begin construction in 2009 and 2010. The 30-percent grant could provide a timely alternative to the tax credit, although it would require some solar developers to restructure the types of deals that have driven U.S. market growth for the past several years.

Where To Next?
      Although most industry analysts acknowledge that 2009 will not be the boom year that 2008 was, the outlook is not entirely bleak. This is because of several new market and policy trends. First, the federal tax credits may enable some market segments to grow, even as they complicate existing models. The 2008 Stabilization Act extended the ITC to utilities, which were previously ineligible to take advantage of it. This has provided new momentum to existing utility-based solar initiatives, and inspired new utility participants to enter the market. In North Carolina, Duke Energy has announced plans to install and own 20 MW of PV; in New York, ConEdison recently stated its intent to install 12 MW; and in California, PG&E has announced plans to own up to 250 MW of PV.
State Incentives for Renewables and Efficiency
Source: Database of State Incentives for Renewables and Efficiency (www.dsireusa.org)

      The large-scale entry into the photovoltaic market could fundamentally reshape the industry in the United States. The 2008 Emergency Economic Stabilization Act also removed a $2,000 cap on the ITC that residential systems could claim. In other words, a homeowner who buys a two-kilowatt, $16,000 photovoltaic system can now claim $4,600 in incentives, rather than $2,000. In recent years, the commercial market has eclipsed both the utility and residential markets, but this could change in 2009 as investors test the new policy environment.
      Another important trend is the emergence of state policy. Almost every U.S. state has some form of PV incentive – though some are more effective than others. California, for example, has committed $3 billion towards the goal of installing 3,000 MW of PV by 2016. Additionally, 14 states and the District of Columbia have enacted legislation requiring that a portion of all electricity sold in the state comes from solar power (Figure 1). These laws, called Renewable Portfolio Standards, set yearly targets for solar power consumption. In Missouri, the state requires 0.3 percent of all electricity sales to come from solar by 2021 while New Mexico requires a 4-percent solar share by 2020. Although these targets may not provide a complete backstop to federal tax credit complications, they do provide a partial safety net and send a signal to the market about state commitment to solar power.
      Perhaps the most surprising and compelling trend in solar policy is the emergence of feed-in tariffs at the state level. A feed-in tariff is a policy that guarantees renewable energy generators a long-term (e.g. 20-year) per kilowatt payment that ensures project profitability. Feed-in tariffs have driven explosive renewable energy market growth in European countries over the past decade. Germany and Spain, for example, each installed as much PV capacity in 2008 alone as the United States has installed in its entire history. The solar policy community has long thought that feed-in tariffs could never be established in the United States. In 2009, however, Gainesville Regional Utility in Florida established a feed-in tariff for PV that already has over 4 MW of projects in the pipeline. In Hawaii, the Governor, the Ratepayer Advocate and the utilities have agreed to put a feed-in tariff in place by July 2009, and in California, the Energy Commission recommended a feed-in tariff similar to Germany's for generators up to 20 MW. The governors of Oregon, Michigan and Wisconsin have announced plans to pursue feed-in tariffs, and 10 state legislatures are currently considering feed-in tariff bills.
      The ultimate success of these initiatives will depend on their structure. The PV feed-in tariffs in Spain and Germany have been criticized as being too generous, but analysts have also noted that feed-in tariff regimes are continuing to attract private capital, even during the financial crisis.
      It's been nearly eight decades since Thomas Edison mused with his fellow captains of industry on the promise of a solar-powered world. While his dream has long gone unfulfilled, technological advancement and the recent flurry of forward-thinking government policies may mean it won't take another 80 years for that dream to become reality.

      Wilson Rickerson and Andrew Belden work for Meister Consultants Group, an international consulting firm focusing on alternative energy, environmental sustainability, corporate responsibility and international dialogue.

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