Battle for the Crown: Solar PV vs. Solar Thermal

I can picture it now, Michael Buffer steps out into the ring and grabs the microphone that just descended from the rafters, “In the near corner, gaining popularity among manufacturers worldwide, dropping in cost 41% over the past few years, meet Solar Photovoltaic aka PV.  In the far corner, holding steady at $0.27 per kilowatt hour, the old favorite but current underdog, Solar Thermal.  Let’s get ready to rumble!!!”  The crowd goes nuts, Larry Merchant goes to the tale of the tape.  Who will be crowned the king of the solar world???

Ok, I may be nuts, but sometimes a blog needs some excitement.  This boxing metaphor is actually an illustration of what is happening in the solar energy world where solar PV has taken an early lead in terms of implementation.  Solar PV is what you think of when you think solar panels on a roof.  The past few years have seen a push in terms of government funding for the technology (don’t even get me started on Solyndra), now the market is pulling the cost way down.  I promise to write a post later about the push-pull dynamics and what that means for the technology and the price, but that is a tomorrow problem.  In any case, China has been cranking out the solar panels at such a quick rate, that the cost has been plummeting.  Worldwide output of PV in 2010 doubled the 2009 output.  See right.  Now, PV is down to $0.17 per kilowatt hour versus the $0.27 for solar thermal.  Bloomberg New Energy Finance predicts that PV will reach grid parity with other forms of energy by 2015.  Unfortunately, this means that many solar thermal projects are now switching to solar PV instead, you can read the Bloomberg Businessweek article here.  So what should we do?  At this point, it seems that the pull dynamics of the market have embraced the idea of PV cells and will continue to make them cheaper and better than the previous generation.  Now would be a great time to continue to push the solar thermal technology until it is embraced by the market in much the same way.  Most types of renewable energy cost between $0.03 and $0.30 per kilowatt hour depending on the source, you can see a breakdown of the exact prices here.  In order to gain widespread traction and compete with conventional sources of energy, renewable costs will have to come down to the $0.03-$0.07 per kilowatt hour range.  As the cost comes down, there will be less resistance to switching to renewable energy and I think our bodies and our wallets will thank us for it.

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Geothermal

Geothermal energy is the energy created when steam from the Earth’s core is used to power turbines that in turn generate electricity. The largest geothermal facility in the US is The Geysers, a complex of 22 power plants in northern California that can generate 1517 MW of geothermal power. Currently, geothermal energy produces less than 1% of the United States supply but new technologies are promising to increase that to as much as 10% by 2050. This new technology called Enhanced Geothermal Systems (EGS) works much like the so called “fracking” that you have heard about in natural gas discussions, except instead of pumping a stew of toxic chemicals into the well, plain old water is added. The technology is relatively simple. Underground, the Earth can heat rocks to as much as 750 degrees Fahrenheit. By pumping water down the well into the rocks, steam is created that creates electricity. Historically, geothermal plants were situated near tectonically active areas that had naturally occurring steam. This new technology promises to increase the efficiency of existing geothermal plants as well as expand production to areas that are hot, but lack naturally occurring steam. In addition, researchers from Southern Methodist University, with help form Google.org, created a thermal map of the continental US that identifies new locations that were previously thought not to be suitable for geothermal energy. These new-found advances in geothermal technologies will definitely add a significant resource to our renewable energy portfolio. That is good news for all of us.

Below is a video about EGS and geothermal energy.

7 Billion

It is official, or almost official, but sometime around Monday, October 31st, 2011, the world population will reach 7 billion inhabitants!  While I don’t agree with some of the experts interviewed in the MSNBC article, others make very good points.  The main point here is that if we want to continue living the standards that we have now, we need to focus on being more sustainable.  This includes reducing our carbon emissions, developing a comprehensive energy plan, and striving to conserve our natural resources.  Technology, innovation, and improved education can all help to put us on a sustainable path, so lets start using them.  The alternative is not pretty, see my first post here.

Innovation

Inn-o-vate good times! Come on! Yes, it’s a terrible play on Kool & The Gang but it has an underlying theme – adapt to new conditions or miss the party. Just as Kool’s 70’s funk beats stayed the same, our music tastes changed and The Gang was left behind. The same can be said of companies. As many business know by now, if you can not adapt, you fail. Plain and simple. Look no further than GM or Chrysler – they failed to take notice of the changing tates of Americans as well as the threat from overseas competition and bam!, bankruptcy. Business is a simple game of evolution – use your skills to adapt to the ever changing environment, or die. Every animal and species out there today is a result of several others who didn’t have the necessary skills to stay competitive and were thus gobbled up by something smarter, faster, or more innovative. Why should our companies be any different? Now is adaptation time for energy companies, utilities, manufacturers and America alike. This message goes out to the utilities – America wants clean power. We love our televisions, the ability to read at night, power tools in the garage and streetlights on our block. But we like breathing without an inhaler better. We are just plain “sick” of breathing contaminated air. We depend on you to keep our houses lit, so tell us how can we solve this problem together? We want you to be part of the solution, because we like you. You were there when Lucy met Desi, when Neil walked on the moon, when the Berlin wall came down. You lit our front steps when dad came home from work, when mom put herself through night school and would do homework on the kitchen table, and our living room every Thanksgiving when generations of family would gather for a meal. So, lets figure this problem out together – we need power, you need innovation. What is going to power our nation for the next 100 years and beyond? I only ask because fossil fuels are literally killing us. Instead of spending ridiculous amounts of money fighting regulation upon regulation, how about you invest a little scratch into clean energy R&D? A simple innovation in clean power could pay off exponentially for you with the predicted increase in demand. Or partner with the Department of Education and work with them on how future students can be better prepared to tackle the problems of the 21st century. If you dont, someone else will . . . and they are going to send you the way of the Dodo bird.

Trade Wars

Forbidden City A long time ago in a galaxy far, far away…. no wait, that was Star Wars, what did I want to write about?  Oh yeah, Trade Wars!   Let’s try this again . . .Not so long ago, in a city just as dysfunctional as the late stages of the Galactic Republic, but centered in the US and called Washington D.C., a bill passed the Senate . . .

There is wide consensus that the Chinese yuan is considerably undervalued with some economists citing ranges between 20-40%.  While the renminbi is officially classified as a “managed floating exchange rate” whereby it is allowed to appreciate or depreciate within a narrow band against a basket of currencies, it sure feels like it is pegged to the dollar at a steep discount, dramatically lowering the cost of Chinese goods for export.  This also has the effect of a tax on US imports to China, making foreign goods seem more expensive on the Chinese market.  This has been a constant thorn in politicians’ sides over the past few years, especially those whose constituents reside in hard hit areas of the economy such as manufacturing that saw many jobs go overseas.  It is an old and familiar dance much like the hustle – politicians make noise about the undervalued currency, China reminds us that they want to get off the dollar as a reserve currency, a few months pass and just when it seems that the politicians want to implement protectionist policies, the value of the yuan magically increases and the calls for action fade.
Why this time is different
Unfortunately, this time seems different because just as the US is preparing for an election in 2012, China is ready for a political transition as well, and leaders on both sides of the Pacific want to look strong for their populace.  In this atmosphere, even minor disputes run the risk of being hyped-up.  Does anyone really want to see a trade war break out between the two largest economies in the world?  That spells doomsday for the global economy as a whole.
Mr. Greenbacks goes to Tiananmen SquareI had the pleasure of traveling to China earlier this year and one of the major lessons learned in dealing with Chinese is the concept of “face”.  I can hardly do this concept justice in just a few sentences, but hear me out.  “Face” is your reputation, but it is much more than that, it is your code of conduct in forming relationships – from new acquaintances to family elders.  I take it back, this is almost IMPOSSIBLE to explain in words.  Basically, it means not humiliating anyone in public – ever.  In the Chinese culture, it is acceptable to lie to a person in order to save face.  “No” is a very hurtful word and damaging to any relationship.  An example of this would be a street vendor selling souvenirs – while you might not want anything to do with this, you cannot simply say “No, get this crap out of my face” as we would here in New York.  In Beijing, you have to say, “It is very nice, but too expensive.”, or some form of lie to let the retailer “save face”.  This includes avoiding backing someone into a corner in an argument, you must always leave them a way out in order to preserve face.  Often the Chinese will lie directly to you, but their body language will tell you the real answer.  This is all done for the concept of “face” and to preserve the relationship.  It cannot be stressed how important this is in dealing with the Chinese culture.
Saber Rattling
So now the Senate passes this bill and calls China’s leaders out to the whole world, completely ignoring this concept of face.  Response – China lets the value of the yuan fall even further.  Now we have hard line politics being met with hard line resistance.  The problem with currency accusations is that they eventually morph into trade wars, add more fuel to the fire and trade wars become real wars.  As economist Frederic Bastiat once said, “When goods don’t cross borders, soldiers will.”  History tells us that China has never been an imperialist country, but they have, over the past few years, developed a blue water navy and began to exert their influence over an expanding area, from coastal protection to patrolling international waters that the US maintains shipping routes through.  Could more serious confrontation lie ahead?
Yuan Appreciation
The problem with the bill in the Senate is that it was a very public spectacle over a problem that has been solving itself.  From 2009 to early 2011, the analysis found, the yuan appreciated by just 4% in nominal terms, but by 17% in real terms, after accounting for inflation.  Other studies put the yuan appreciation at 30% between 2005 and today.  It should come as no surprise to China that they need to rebalance their economy from exports to domestic consumption in order to keep growing.  A floating yuan would give the government more flexibility in their domestic policies such as battling inflation as well as prove to other nations that China is committed to a level playing field.  Due to rising labor costs in the Middle Kingdom, manufacturers are already coming back to the US or moving their shops to other low cost Asian nations such as Vietnam.
Is the Measure Warranted?
Most economists will tell you that capitalism combined with free trade is the single biggest creator of wealth in history.  You will not find argument here, billions of people are now being lifted out of poverty due to the developed world’s appetite for cheap goods.  Even if one country is great at producing many goods, the concept of comparative advantage allows other countries to enter into the fray and begin to trade.  But while free trade is great for developing nations, what about America and other developed nations?  What we get in return is cheaper goods and soaring company profits, good for investors, bad for workers.  America has always been the creator, the inventor, and the producer.  We would then manufacture these new innovations on our shores (south and mid-west actually) for domestic consumption as well as export.  Now however, we have given up our manufacturing base.  We have outsourced and outsourced until the only possible play we have left is the service industries.  As education improves in developing nations, this advantage will become less and less.  New generations will have to compete with globally connected, highly skilled, low-wage workers.  So what is the answer for America?  How do we put America back to work?  That will have to be another post, so stay tuned.  One thing is sure, though, this bill is the wrong way to get results.  Not only would this bill fall apart in front of the WTO, but it also runs the risk of retaliation from other countries possibly convinced that the rounds of quantitative easing were a ploy to keep the value of the dollar low.  When countries stop trading, we all lose.  So instead of figuring out ways to build walls (pun intended . . . see photo below) to prevent trade, shouldn’t Congress worry more about optimizing the conditions for the next growth industry such as improved infrastructure, broadband or clean tech that will pull our country out of this funk?  After all, isn’t there an American jobs bill somewhere on their desks?Fordham MBA's on the Great Wall of China

Primer on US Solar Industry

The following is an excerpt from a white paper I wrote this summer regarding the US solar industry.  I hope you enjoy!

The United States has until recently lagged behind Europe in terms of embracing solar energy.  However, over the past few years there has been a steady increase in federal and state incentive policies that make solar energy more beneficial to producers and consumers alike.  Due to the lack of a clear federal mandates, there are many policies and incentives offered through the federal government, state governments, local governments, utilities, and private companies.  These incentives can be mandates to acquire a certain amount of energy from renewable sources, cash grants, tax credits, tax exemptions, performance based incentives such as feed-in tariffs, accelerated depreciation of equipment as well as many other measures.
Renewable Portfolio Standards
Renewable Portfolio Standards (RPS) are state policies that require energy suppliers or utilities to purchase a certain amount of energy from renewable sources such as solar, wind, and geothermal.  For example, Arizona can say that 2% of its energy must be generated from renewable sources.  This also creates a market for renewable energy credits (REC’s) that can be purchased, sold, or traded by the utility to comply with RPS policies.  Currently, 29 states and the District of Columbia have enacted RPS policies.  Together these states account for almost 40% of the US electricity load.  In addition to requiring a certain percentage of the electricity mix come from renewable sources, states can create “carve outs” or “set asides” that specifically target a certain type of renewable energy.  One example of this is New Jersey’s solar carve-out that requires 5,316 GWh of solar power by 2026.  There is no federal RPS yet although the Obama administration has advocated for 25% of America’s electricity come from renewable sources by the year 2025.
Financial Incentives 
Financial incentives can include grant programs that usually target larger commercial or industrial projects and offer direct cash payments to defray the cost of eligible systems or equipment.  A rebate is another financial incentive that is offered to the purchaser after a system has been installed in order to make the cost of the system more competitive compared to conventional energy systems.  These direct financial incentives lower the initial cost of the technology and lead to an increase in production, thereby decreasing the price further.  The goal is to have producers ramp up the production cycle to reduce costs to the point that a subsidy is no longer necessary.  Performance based incentives are cash payments resulting from the actual energy output of a solar system on a dollar per kilowatt-hour ($/kWh) basis.  These incentives are generally reserved for large scale solar facilities, however, there is a new interest in feed-in tariffs based on their success in Europe that can be used on a smaller scale and even residential properties through the use of net metering.
Net Metering
Net metering allows the owner of a solar system to sell back energy to the grid via a contract with the utility at a determined rate per kilowatt-hour.  Basically, electricity flows both ways through the meter – using power when it needs it and selling power back to the grid when the solar system is producing more energy that the facility is using.  Net metering is the cornerstone of distributed generation, and distributed generation lends itself to solar photovoltaic installation on residential and commercial properties.  Distributed generation not only allows a PV user to power their property, but it also rounds out the peak electricity loads that utilities face in the afternoon when power comes from the dirtiest sources.   There is no federal net metering policy yet, but 43 states have adopted policies to allow it.
Two of the most common financial incentives are direct cash incentives that provide money to lower the upfront costs associated with solar projects and tax incentives that reduce the tax liability of the individual, company, or organization that installed the solar energy system.
Federal Grant Program
Currently, the federal government is offering direct cash incentives for solar energy through the Federal Grant Program, but more than 30 states and 130 utilities throughout the US offer anywhere between a few hundred dollars up to a million in cash for solar PV projects.  In 2009, as part of the American Recovery and Reinvestment Act (ARRA) the federal government passed the Section 1603 Treasury Grant Program that offers a renewable energy grant worth 30% of the value of qualified renewable energy projects including solar, wind, and geothermal.  This grant includes commercial, industrial, or agricultural solar projects started before 12/31/2011 and completed by 12/31/2016.  As of May 5, 2011 the 1603 program has awarded 2,044 grants for solar electric technology totaling $936 million for more than 6,300 individual solar projects in 45 states and has supported over $3.1 billion in investment. The largest problem with direct cash incentives is that they have to be budgeted for and are not politically feasible in difficult economic times.  This leads to volatility in the solar industry and discourages long-term investment and stability.
Federal Tax Credits
Tax incentives including credits, deductions, and exemption are other financial incentives that the federal and state governments are using in order to expand solar energy production.  An investment tax credit reduces the taxpayer’s liability for a portion of the cost of buying and installing a solar energy system.  Investment tax credits are fairly straightforward and usually limit the dollar amount that the taxpayer can claim.  Policy makers favor tax credits because the amount of the incentive generally does not have to be appropriated or withdrawn from a budget.  By encouraging development through tax credits, policy makers hope to grow the industry and eventually create jobs in solar and related industries and thus increase the tax base in that district.  The 2009 American Recovery and Reinvestment Act (ARRA) also extended the investment tax credit through 12/31/2016 for residential solar electric installations.  The credit is equal to 30% of expenditures with no limit to the maximum amount.  The ARRA allows taxpayers eligible for the federal renewable electricity production tax credit (PTC) to take the federal business energy investment tax credit or to receive the grant from the US Treasury Department instead of taking the PTC for new installations.  Currently, twenty-one states and Puerto Rico offer personal and/or corporate investment tax credits to help offset the expense of purchasing and installing solar energy equipment.  Tax credits range from 10% to 50% of project costs, with maximum credit limits ranging form $500 to $12,500 for residential systems and from $25,000 to $10 million for commercial systems.  However, a major drawback of the investment tax credit is the policy discourages institutions with a low tax liability from reaping the benefits.  Recently, some states and municipalities have attempted to remedy this problem by creating provisions that would allow a “pass-through” option whereby the tax credit can be claimed by a third party who does have a tax liability.  This could include a partner of a non-profit as well as homebuilders who integrate solar systems into new construction.  In either case it encourages solar power systems to organizations that would not normally be afforded the tax benefit.

The Air Up There . . .

I read an interesting article this weekend in The Economist called Air-Quality Regulations: Don’t Hold your Breath. At issue is the EPA’s Cross-State Air Pollution Rule or CSAPR for short. CSAPR is set to take effect January 1st, 2012 and would require that power plants in 28 states (mostly east of the Mississippi with the exception of the Northeast) reduce their emission of sulphur-dioxide and nitrogen-oxide by 27% and 46% below their 2005 levels respectively. As you can imagine by the political bickering in Congress the past few years, this rule is bitterly opposed by at least 36 entities who have petitioned the US Court of Appeals for the DC Circuit to stop the EPA from implementing CSAPR.

So what is the dispute about and what does it mean for our economy? Those against the rule say that forcing power plants to meet these requirements would cost the consumer more in higher electricity bills as well as cut jobs at a time of 9% national unemployment because the utilities could idle some of their less efficient coal burning plants, costing jobs to plant technicians not to mention related industries such as mining. Others oppose the regulation simply because they see the federal government as interfering on state issues. Supporters of states rights argue that the government should outline a pollution reduction target and leave states to their own authority to meet the limits. The EPA claims that CSAPR will prevent 13,000-34,000 pollution-related premature deaths, and yield between $120 billion and $280 billion in health and environmental benefits annually.

Here is the way I see it. If the states wanted to create their own regulations, they would have done so by now. Why is the Northeast immune from this new law? Because those 9 states(ME, NH, VT, MA, RI, CT, NY, DE and MD) created a club called the Regional Greenhouse Gas Initiative (RGGI) that tackles the emission problem head on. By being proactive about this problem, these states now have wiggle room in terms of the decisions they can make. In addition, RGGI states show that not only are the emissions reductions working, but jobs are being created and $3 to $4 of benefits are being created by every $1 invested in the program.

In response to shutting down the old coal fired plant at the cost of jobs: do it! Shut that dinosaur down. And while you are shutting it down, start hiring Americans to build a new natural gas, wind, solar, geothermal or nuclear plant (or read my related post on distributed generation). This will create even more jobs as well as provide us with energy than doesn’t burn our eyes and harm our lungs. Side note: Don’t site a nuclear power plant on a fault line or frack under a watershed supplying drinking water to 19 million people – that is just stupid!

Climate change is one of the major problems facing our country, but another big one is health care costs. Any small business or large corporation will give you the same answer when it comes down to costs of employment – health care costs are absolutely prohibitive and are only expected to increase. Allergies, asthma, chronic obstructive pulmonary disease, and lung cancer are all results of air pollution. I see a trade off here – either face the cost now and comply with the new regulations, or keep the status quo and face higher health care costs later on.

If I can think of one inelastic product out there, it is electricity. When the price of gas rises, people drive less. They still get up and go to work each day, but they do drive less. If the price of electricity increases, you can be sure people will still turn on their coffee makers each morning and televisions at night. But hopefully the increase will make people think about turning the lights off when they leave a room. After all, if using electricity more sparingly prevents little Johnny from a visit to the emergency room, maybe he can stay in school long enough to graduate and earn a decent paycheck at the new clean energy plant instead of the old coal-fired one that almost killed him.

***UPDATE***: The American Economic Review just released a study on the air-pollution damages for several industries in the United States.  Its findings suggest that the economic loss from poor health due to pollution from coal fired plants is 0.8 to 5.6 times the market value of the power itself.  It doesn’t require an advanced degree to figure this one out.  A copy of the report is attached.