With the Obama administration’s increased focus on clean energy, and the recent Solyndra loan scandal, solar energy has come into the public purview like never before. Depending on your worldview, solar energy is either a high growth industry that represents a viable alternative to fossil fuels or a massive waste of taxpayer money and venture capital. What will it take to ensure the former comes to fruition?
Continued Cost Cutting
In a commodity business like energy, the spoils go to the victor that can produce the lowest cost product. Shale gas and coal present formidable opponents for solar, which is currently 2-4 times more expensive. In order to be competitive, solar must come down the cost curve in a meaningful way.
There are two ways that solar has, and will continue to, cut costs to end customers. The first is by accepting margin compression, which has been driven by pricing pressure. Solar panels, which account for ~48% of system costs, have seen 20% annual price decreases since 2004 and are projected to decrease a further 16% annually through 2013. Chinese manufacturers like Trina and Yingli have driven significant pricing pressure, changing the panel market to a low margin-high volume business. This decrease has been so steep that a coalition of US solar manufacturers has recently brought a trade lawsuit against Chinese companies for dumping product on the US market.
The second way to cut costs is through technological innovation, either by reducing costs at current efficiencies, or increasing efficiencies at current or slightly higher costs. Companies like 1366 Technologies have produced innovations in the solar module production process, which have promised a 50% cost reduction. Enphase Energy, a solar microinverter company, has invented a revolutionary power conversion technology that improves the energy harvest of solar systems by 5-25%. These types of continued innovations are critical to solar energy’s success.
In order to become a ubiquitous resource, solar energy customers will need access to debt finance to take on such projects. Such financing will enable greater access to solar systems for customers, and therefore allow manufacturers to generate enough scale to continue their push down the cost curve.
There are three major segments in the solar market: residential (on the top of your house), commercial (on top of Huntsman or a Wal-Mart) and utility scale (solar farms in the desert). Financing options are plentiful in the residential segment, with companies like SolarCity, Sungevity and Sunrun providing capital and installation for end customers. In the commercial and utility segments, though, capital has been hard to come by.
The solar credit crunch has occurred because commercial and utility scale solar projects require a large amount of capital but do not have a long track record, especially when compared to other loan products (e.g.: home and auto loans). This lack of data makes lenders skittish, as they have less certainty on how to value and therefore less confidence in originating such loans. The consequence is a negative feedback loop, where solar projects cannot gain financing due to a relative lack of historical data on similar loans, and lenders cannot gain the historical data they need to originate such loans because solar projects are not being financed. In this scenario, the DOE loan program has been extremely valuable. By guaranteeing loans on select solar installations, the DOE has enabled banks to extend the necessary credit to get solar systems installed.
Support Through Government Incentives
Unfortunately, government incentives are still necessary to make many solar projects financially attractive. Why is this necessary? On the technology side, solar is not yet cost effective enough to compete with traditional energy on a widespread basis. This does not mean that solar won’t ever get there; in fact, as noted above, solar is making huge strides towards becoming cost competitive with traditional energy resources. From 2004-2010, the cost of a solar system decreased by 56% overall (13% CAGR) and is projected to decrease a further 37% (7% CAGR) by 2016 according to the US Department of Energy’s Office of Energy Efficiency and Renewable Energy (EERE). However, without government incentives, solar will not be able to make the sales that will generate the scale to come down the cost curve and achieve these types of reductions.
On the financing side, as discussed before, the solar industry’s short track record has made it difficult for financial institutions to provide credit for commercial and utility solar projects. In the near term, government will provide an important backstop to enable financing for select solar projects. In the medium and long term, as financing becomes more readily available, solar will become more ubiquitous. The resulting economies of scale will enable the industry to come down the cost curve and become a more competitive alternative to coal and natural gas.
 National Renewable Energy Laboratory, US Department of Energy. “National PV Cost Values, for: NARUC 7-Member Consortium for PV Resource Characterization”, page 3. December 21, 2009.
 First Solar. “Renewable energy: From analysis to action”, presentation by TK Kallenbach, President, Component Business Group, 2010.
 The Guardian. “Price of solar panels to drop to $1 by 2013, report forecasts.” June 20, 2011.
 Solar Energy Industries Association. “US Solar Market Insight Report, Q3 2011”
 1366 Technologies website. Accessed February 18, 2012.
 Enphase Energy website. Accessed February 18, 2012.
 John Lushetsky, Program Manager, Solar Energy Technologies Program, Department of Energy
Office of Energy Efficiency and Renewable Energy. “The Prospect for $1/Watt Electricity from Solar”, August 10, 2010.