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Most recently, it has looked at solar power:
November 5, 2015 12:01 pm
The suburbs of Las Vegas do not look like the cradle of a revolution. Golden stucco-clad houses stretch for street after identical street, interspersed with gated communities with names such as Spanish Oaks and Rancho Bel Air. The sky is the deepest blue, the desert air is clear and the distant mountains are beautiful. The only sounds are the buzz of a gardener’s hedge trimmer and a squeaking baby buggy pushed by a power-walking mother. The bright lights of Sin City seem a very long way away.
Yet these quiet streets are being changed by a movement that is gathering momentum across America and around the world, challenging one of the most fundamental of economic relationships: the way we use and pay for energy. There are now more than 7,000 homes in Nevada fitted with solar panels to generate their own electricity, and the number is rising fast. Just five years ago, residential solar power was still a niche product for the homeowner with a fat wallet and a bleeding heart. Not any more. Technology, politics and finance have aligned to move it into the mainstream. Solar power has become the fastest-growing energy source in the US.
For decades the electricity industry has been a cautious and conservative business, but the plunging prices of solar panels, down by about two-thirds in the past six years, have woken it up with a bang. Dynamic rooftop solar power companies have entered the market, in the most radical change to electricity supplies since the industry was born in the 19th century. It has been described as the equivalent of the mobile revolution in telephony, or the PC in computing.
A shift away from fossil fuels and towards renewable energy will be a central issue at the UN climate talks in Paris, which begin later this month. Although countries will arrive having made commitments to curb their future greenhouse gas emissions, analysis of the pledges so far suggests they are unlikely to be enough to meet the internationally agreed goal of stopping global temperatures rising by more than 2C from levels before the Industrial Revolution. The hope is that countries will do more, including developing more renewable energy.
On a global scale, solar power is still tiny, providing only about 1 per cent of the world’s electricity, according to the International Energy Agency, the think-tank backed by developed countries’ governments. It is now clear, though, that it has the potential to contribute much more than that. Solar power and onshore wind power are the two most cost-effective forms of renewables but solar has the greater capacity for costs to fall further. “Wind is basically mechanics; solar is electronics. And the progress there is much more rapid, and will continue,” says Gérard Mestrallet, chief executive of Engie, the French energy group. Solar is also flexible in scale: it can power a calculator, or a city.
Yet for some the disruptive potential of solar power is not so much a promise as a threat. Established electric utilities are facing challenges they had not dreamt about five years ago. Many are starting to push back. It is a battle that will shape the future of the industry — and possibly of the climate.
If Las Vegas is an unlikely hotbed of radicalism, Blake Guinn makes an equally unlikely eco-warrior. One of the first things you see when you walk into his house is a picture of his grandfather Kenny Guinn, who was the Republican governor of Nevada from 1999 to 2007. “I think people are shocked when they find out I’m a Republican,” he says.
The reason this is shocking is that Guinn, a former real estate agent, has thrown himself into a new career as an advocate for solar power. His company polo shirt identifies him as an employee of rooftop solar company SolarCity: Guinn is one of its top sales people. “I believe in the free market. We have different cellphone makers, different carmakers, and the more competition you have, the more you drive the cost of something down,” he says. “And I believe in job creation. That’s what we’re doing here.”
When he is pitching solar power to customers, the environmental benefits often come up, he says, but “at the end of the day it comes down to money first and foremost”. Electricity from SolarCity’s panels costs significantly less per kilowatt hour than the rates charged by NV Energy, the local utility. Typically customers can save 20-25 per cent on their electricity bills by going solar.
That payback — not a warm sense of benevolence but a saving in cold hard cash — has sent the solar business in Las Vegas soaring. In January, SolarCity opened a new warehouse as a base for five five-person installation crews. By October there were 15 crews based there, with a further five expected to join in November. They are so busy that they do all the maintenance on their trucks at night, because they cannot afford to have one off the road during the day.
At the start of the year there were some 30 people working at the warehouse; now there are about 200. The jobs are a welcome boost for a city that was hit hard by the property crash and the financial crisis of 2007-09. Experienced crews have been brought in from neighbouring California and Arizona, and some of the new hires are former oilfield workers from Texas and Oklahoma, laid off following the collapse in oil prices.
The origin story of SolarCity has the neatness of a legend. Lyndon Rive, a serial entrepreneur who emigrated to California from his native South Africa, had become bored by his business software company, and was looking for something to do next. As he was trying to decide, he drove out with his cousin Elon Musk to the Burning Man festival in the Nevada desert. Musk, who had made a lot of money from his stake in PayPal and had then branched out into electric cars with Tesla and rockets with SpaceX, told him that the next big opportunity was solar power.
“He knew that there was lot of investment going into technology, and the cost would come down,” remembers Rive, who is tall and sandy-haired, with the intense demeanour of a Silicon Valley champion. “It was really just a matter of time before it transformed solar energy.”
Initially the idea was vague: just to do something in solar power. As he was discussing the plan with his brother Peter, Rive came to the decision that would make the company’s fortunes. “We realised that everyone was focused on manufacturing: making the equipment,” he says. “No one was focused on delivery.” Imagine if the cost of solar power came down as Musk and others were predicting: “How would it get applied? That was the problem we had to solve.”
The answer was a company that did not make anything but bought in equipment from all over the world, packaged it up and made it accessible to customers. Musk backed his intuition by becoming chairman and largest shareholder. The decision not to make panels proved a masterstroke when the US solar manufacturing industry was battered by a flood of cheap Chinese imports.
Solyndra, which had an innovative but deeply flawed product, became the poster child for the failure of US solar manufacturing when it went bankrupt in 2011, defaulting on a $535m loan guaranteed by the US government. For SolarCity, plunging panel prices were good news because they made solar power more affordable. The company is now leasing one of Solyndra’s old Silicon Valley buildings. It is also getting into manufacturing for the first time, announcing last month that it plans to build its own panels at what will be one of the world’s largest solar factories, in upstate New York.
The critical contributions from SolarCity and other installation companies such as Sunrun, Vivint Solar and Sunnova have come not in the technology of the panels but in the way they are sold, fitted and paid for. The price of the panels has fallen so far that it is now less than a quarter of the cost of an installed system. It is the other costs, including sales and installation, that have become critical, and the companies have been working hard to make the process smoother and faster. “The number-one cost in solar is getting the customer to see that it’s not too good to be true,” says Sunrun’s Bryan Miller. “And the more customers see their neighbours do it, the easier it is to persuade people.” Three years ago a typical installation would have taken two or three days; now it can generally be done in a day and, if straightforward, a crew can do one in the morning and another in the afternoon.
The other crucial innovation is in financing. Theresa Hobbs-Inserra and her husband Antonio are closer to the stereotypical solar-power enthusiasts than many of their Las Vegas neighbours, with an “Obama Biden 2012” sticker on their dusty people carrier. When you ask Hobbs-Inserra why she had solar panels fitted, her first answer is, “We’re trying to do what we can to help the environment.” The couple’s good intentions would have come to nothing, though, if the arithmetic had not been right. The system is worth $31,000 fully installed, which would have been a prohibitive expense. Solar power worked for them because they had to pay nothing up front. SolarCity still owns the system, and the Inserras pay a monthly bill for the solar power they generate, at a lower rate than they are paying for the remainder of their electricity, which still comes from NV Energy. The contract is for 20 years but after five they will have the option to buy the system for its depreciated value or just continue their contract. SolarCity, meanwhile, packages up the revenue streams from installed systems in structured finance funds, which companies including Google, Bank of America and Credit Suisse invest in.
For all the bright ideas that solar installers have brought to the industry, however, their business model still depends on two key policies: the federal Investment Tax Credit (ITC) for some types of renewable energy, worth 30 per cent of the cost of a residential system, and the state rules on what is known as “net metering”. Under net metering, solar customers are billed by their utility each month for the electricity they have used, minus the amount their panels have produced. When customers are generating more power than they are using, they are selling the excess to the grid at the same price they pay.
Both policies are under threat. The ITC is scheduled to drop to zero for residential investments and 10 per cent for larger-scale developments at the end of next year. Meanwhile in Nevada the energy regulator is trying to work out what to do after the popularity of solar meant that net metering broke through a cap set in state law. There are similar debates over the future of solar in many other states. The uncertain future of those policies is one reason why many people are still suspicious of what sounds like an offer of free money from the solar companies. “People are really, really sceptical,” says Hobbs-Inserra. “Surprisingly so, considering solar has been around for a long time.”
The world’s first solar array was set up on a New York rooftop in 1883 by an American inventor called Charles Fritts. John Perlin, author of Let It Shine, the definitive history of solar power, describes Fritts as one of the 19th century’s great “zealous tinkerers”, like his contemporaries Thomas Edison and Alexander Graham Bell. Unlike them, however, Fritts never laid the foundations of a business empire, perhaps because he was too far ahead of his time.
His experiments were carried out just five minutes’ walk from where Edison had built the world’s first truly commercial coal-fired power plant only a year earlier, and Fritts predicted that solar power would soon be a viable alternative. “We may ere long see the photoelectric plate competing [with coal-fired plants],” he wrote in a scientific journal in 1885. “Ere long” turned out to be optimistic. Fritts’s panels used selenium, in which the photovoltaic effect — the way that photons striking some materials create a current — is very weak, and there was no way they could compete with the rapidly growing coal-fired power.
It was not until Bell Labs made a breakthrough using silicon in the 1950s that solar power had any practical applications at all, and even then it was viable only for specialised uses such as satellites. Since then, solar panels have made the long, slow journey from cutting-edge technological marvel to humdrum household gadget. The first Telstar satellite in 1962 ran on 14 watts of solar power. Today you can get the same power from a portable set of fold-out panels to charge your iPad on a camping trip, available on Amazon at $39.99.
The phenomenon of the ever-decreasing costs of solar power has been dubbed Swanson’s Law, after Richard Swanson, the founder of SunPower, one of the largest US solar companies. Swanson’s Law holds that every time the total cumulative production of solar panels doubles, their cost drops by 20 per cent. Swanson modestly denies any great originality. “It’s based on the idea of plotting a learning curve, which is well known in many industries,” he says. “The cost always tends to come down as you make more and more of something.”
Still, the price of panels has followed that learning curve pretty closely. When Swanson started SunPower in 1985, the idea of solar power as a mass-market product still seemed implausible. “Most people, including the experts, said there is no ‘there’ there. It just isn’t going to happen,” he says. “Most people thought that, except for a few brave entrepreneurs.”
Over the next two decades, the steady decline in costs meant that widespread adoption of solar power no longer looked quite so ludicrous. Just five years ago, however, it remained an expensive option. While costs were much lower than in the 1970s, or even the 1990s, they were still higher than for coal-fired or gas-fired power. What changed that was China.
In the industrial town of Ningjin about 240 miles south of Beijing there is a long campus of neat white buildings, blue lettering fading into the grey air. The campus is owned by a Chinese company called Jinglong Group and its listed subsidiary JA Solar. Jinglong is one of the world’s largest producers of monosilicon, used to make solar panels, and JA was the fifth-largest manufacturer of panels in 2014. Each factory houses a different process in the long chain of manufacturing that turns crushed grey silicon ore into shiny black or blue panels.
Jinglong was founded by Jin Baofang, a former electricity bureau official in Ningjin. Pictures of Jin meeting Chinese leaders adorn each factory. His expression is the same in each: sombre and attentive. “Open and aboveboard personhood, works conscientiously”, is his motto, written in cramped characters on the company brochure.
JA Solar was listed on Nasdaq in 2007, during a wave of investment in Chinese solar manufacturing. At that time, Germany was the world’s largest market for solar panels, as it was for much of the 2000s, and in 2007 the EU set a target of deriving 20 per cent of its energy from renewable sources by 2020, encouraging governments to set up generous incentives for investment. In the first half of the decade, the world’s principal producer of panels was Japan, followed by the EU and then the US. It was clear that there was an opportunity for lower-cost production.
China’s solar-cell production rocketed from just 50 megawatts of generation capacity in 2004 to 23,000 megawatts in 2012, by which time it was supplying more than 70 per cent of the world market. The problem was that the effort to stimulate solar manufacturing succeeded all too well. In the wake of the financial crisis, European countries began cutting back their solar subsidies and, in 2011, demand for new panels in the EU started to fall.
Meanwhile China’s soaring exports, helped by its lower labour and environmental costs, pushed many manufacturers in other countries out of business. Those who were left pressured their governments to launch anti-dumping investigations, and in 2012 the US imposed duties on Chinese solar imports, followed by the EU in 2013. Chinese manufacturers were staggering from this one-two punch and, with huge overcapacity in the industry, prices continued to fall.
In each of the Jinglong plants, a photograph of China’s premier Li Keqiang meeting a crowd of the company’s workers holds pride of place. Li visited the campus during what employees refer to as “the crisis” — those nerve-racking months in 2013 when the pressure was at its greatest and Jinglong halted production for months. Jin never missed a salary payment but he did borrow from many of his employees to stay afloat, asking them for loans at 10 per cent interest.
Their investment paid off. Many smaller Chinese solar firms folded but Jinglong pulled through. Margins have improved as overcapacity has shrunk. Wang Song, vice-president of Ningjin operations for JA Solar, joined the company over a decade ago because he thought it had potential to grow. After the hard times of 2011-13, things are “much better now”, he says. “Last year was profitable and this year is certainly no problem. At least for a few years, the industry should be OK.”
JA Solar still faces challenges. Other countries have made comebacks in solar manufacturing, in part because of the US and EU tariffs. The only new plant JA Solar has opened this year is in Malaysia. In China, wages are rising, and the company is thinking about automating more of its processes to hold costs down. “There’s still a lot of room [for costs] to come down,” Wang says. “Other than quality, the thing everyone talks about is cost.”
The big difference now is that new markets for solar power are opening up all over the world. Contracts for big solar developments have been signed in countries such as Brazil, South Africa and the United Arab Emirates, which has agreed a deal for the world’s lowest-cost solar project so far without subsidies, in Dubai. Above all, there is a huge market in China, which is now the world’s biggest buyer of solar panels and is expected to account for 40 per cent of the world’s growth in renewable energy over the next five years, according to the IEA.
Georgina Hayden, an analyst at BMI Research in Singapore, says the weakness of China’s grid has caused problems with getting all its new solar generation working. Nevertheless, she adds, the Chinese government remains “very committed” to deploying solar capacity, and is likely to keep conditions for solar power attractive as it seeks to cut pollution from coal-fired plants and diversify its sources of energy.
Another of those new markets was in Las Vegas. JA Solar was one of two panel suppliers for the vast solar array installed this year on the rooftops of the Mandalay Bay Resort and Casino. The complex is a larger-than-life fantasia, with an artificial beach, and windows that reflect gold. Its solar-power system is appropriately outsized: with more than 20,000 panels, it is one of the largest rooftop arrays in the world. The project’s story, however, reveals some of the obstacles that can hold solar power back.
Cindy Ortega, the chief sustainability officer at MGM Resorts, which owns the Mandalay Bay, says the company had been looking at rooftop solar for a long time. Bright lights, hot showers and perfectly calibrated air conditioning mean that MGM’s Las Vegas properties use as much power as a small city. The company was keen to take an environmentally friendly approach but could never make the numbers add up. Then, when the cost fell, there was a long series of regulatory hurdles that took years to surmount. “There is this lag time, when technology is coming but the regulatory process and the legal structures to make that work are behind it,” Ortega says. “That’s what’s happening with SolarCity right now.”
As Nevada’s energy regulator tries to work out how to manage the explosive growth of rooftop solar, it has become a battleground for the competition between NV Energy, the monopoly electricity utility, and the upstart residential solar companies. NV Energy has proposed a complex system of different charges for customers taking advantage of net metering, which the solar companies say would put people off installing systems, in part simply because they would not understand it.
NV Energy points out that although they may be using less power from the utility’s grid, solar homes are still connected to it. It argues that under the present system, customers with net metering are not paying their fair share of the costs of the grid, including all the wires and transformers and gas and coal-fired power plants that lie behind them, ready to be called on if needed.
“No matter how much you use the grid, you’re still 100 per cent reliant on it, and it has to be paid for,” says Kevin Geraghty, NV Energy’s vice-president of energy supply. “There will be a great future for rooftop solar but it has to be done in such a way that makes sure the company and the investors investing in that fixed grid are rewarded appropriately.”
On the dozens of occasions in recent years when this issue has been fought out at the state level, the rooftop solar companies have almost always won, fending off attempts to impose large charges on their customers. As their market share grows, however, so will the pain for the traditional utilities, and the battles are likely to become more intense.
The IEA has warned that battles over net metering, and the impending lapse of the renewable energy tax credit, are threatening to slow the growth of solar power in the US. The havoc caused by Europe’s stop-start solar subsidies is a warning of how boom can turn to bust when policy changes. But the genie is out of the bottle now: solar power is becoming competitive with fossil fuels, even without subsidies and tax credits, and its costs are still falling. Shares in SolarCity fell sharply last month after the company said it was putting a brake on its growth to prepare for the end of the tax credit. But that represented a slowdown from 80 per cent to 40 per cent growth — still stellar by most standards.
All around Las Vegas, new solar plants are springing up like exotic desert flora. To the north of the city, an American company called First Solar has a huge site that will eventually cover 2,000 acres with about 3.1 million panels, stretching in long black ribbons across the landscape.
Nearby, a patch of scrubby desert will be the site of a plant that will sell the world’s lowest-priced solar power. First Solar will be building it for NV Energy, which will sell the power on to Switch Supernap, a fast-growing Las Vegas data centre company that has a huge demand for electricity and wants to meet all its needs from renewable sources. The initial price paid by NV Energy for the power from the new solar plant will be just 3.87 cents per kilowatt hour. That is an amazing price, one of the lowest for new power generation of any kind in the US. The federal investment tax credit helped, but Paolo Frankl of the IEA says that even without it, the power would cost about 6.5 cents — roughly the same as electricity from a new gas-fired power plant.
In the south-western US, and in other sunny parts of the world including the Middle East, Africa and Latin America, solar power is increasingly attractive. Engie’s Mestrallet says it is already competitive with fossil fuels, unsubsidised, in north Africa. In five years it will reach that point in southern Europe, and in 10 years in northern Europe, he says.
“There is no obvious constraint on solar,” says Seth Kleinman, head of European energy research at Citigroup. “The long-term potential is clearly enormous.” Hydropower is limited by the availability of suitable sites for dams; wind turbines by people’s willingness to live near them. But solar power faces no such constraints, says Kleinman — it is the “clear winner” in renewable energy.
Local solar systems could also make a huge difference to those who do not have access to electricity, according to Jim Rogers. Formerly chief executive of Duke Energy, the largest utility in the US, he has in his retirement become an advocate for widening energy access. “If you combine energy-efficient appliances with solar power, that is a pretty interesting way forward,” he says. “It’s not going to be 24/7 power. But there are a billion people who are connected to the grid but still don’t get reliable power.”
Francis O’Sullivan, director of research at the MIT Energy Initiative and a lead author of the university’s recent “Future of Solar” study, says renewables could eventually supply half the world’s electricity. That would call for some big changes to electricity markets: because solar power costs nothing after the system has been paid for, it can mess up the conventional power market. It would also require some cost-effective ways of storing electricity. At the moment, battery-storage costs are generally too high for it to be attractive but many companies are working on driving them down. Musk’s Tesla, for example, is launching a new line of batteries called the Powerwall, to be built at its new “Gigafactory” in north Nevada. There may be bigger breakthroughs to come. The story of solar so far suggests that dramatic improvements are possible.
Many people remain sceptical but Perlin, the technology’s historian, suggests that their attitudes are often rooted in an irrational response. “They see these slender solar cells, and they compare them to a great big power plant, and they think ‘this can’t be real’. But all electrons are created equal,” he says. “Solar really works.”
Ed Crooks is the FT’s US industry and energy editor; Lucy Hornby is the FT’s China correspondent
Photographs: Jason Andrew; Jiehao Su
Britain’s boom-and-bust in residential solar power shows how vulnerable the industry can be when it relies on subsidies. In 2010, the UK government introduced “feed-in tariffs” for people who fitted solar panels or other renewable energy systems, offering guaranteed payments from the utilities for power generated, paid for by charges added to all customers’ bills. The rates were attractive, and about half a million homes in the UK now have solar panels.
In August, however, the government said costs were rising too fast and the feed-in tariffs would have to be cut back. It proposed reducing the tariff for home systems, from a typical 12.47 pence per kilowatt hour generated to just 1.63 pence: an 87 per cent cut.
Already at least three UK solar installation companies have gone bankrupt, and jobs have been lost. The industry is urging the government to reconsider the planned cuts before they take effect at the start of next year.
The British climate means it was always going to be a more difficult market for solar power. In parts of the US, Latin America, Africa and Asia, solar is already competitive with fossil fuels, even without subsidies. In northern Europe, that could still be 10 years away.
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