Much of investor enthusiasm is due to sharply falling capital costs, improving efficiencies, and new government incentives
From Standard & Poor's RatingsDirectAmong alternative energy sources, solar power has long played wallflower to more seductive wind energy. That's because generating solar power has typically involved higher capital costs and greater technological uncertainties. Those disadvantages meant that the cost of generating solar power was often double or triple that of traditional fossil-fuel sources while wind approached parity with other sources when tax incentives are included. Yet the sun obviously is a huge source of energy. According to the U.S. Energy Dept.'s National Renewable Energy Laboratory (NREL), about 0.1% of the earth's land covered with 10%-efficient solar cells could provide the whole world's current energy needs, while a 100-mile by 100-mile area in the U.S. Southwest could provide all of America's electricity.
However, solar power—which currently produces less than 1% of U.S. electricity—has lately been gaining attention from both utilities and investors. While rising concerns about climate change, energy security, and volatile fossil fuel prices partly explain this new interest, the sources of much of the investor enthusiasm today are the sharply falling capital cost of solar technologies, improving efficiencies, and new government incentives and subsidies.
Because the solar power industry is still in its early stages, Standard & Poor's Ratings Services does not yet have public ratings on large solar photovoltaic (PV) projects or on makers of solar PV panels, not even industry leaders such as First Solar (FSLR) and SunPower (SPWRA). We do, however, rate the debt backing one large-scale solar generating project, Harper Lake Solar Funding (S&P rating, BBB-), which sells electricity to Southern California Edison (EIX). This solar thermal project (i.e., it uses the sun's heat to generate energy) has been around since the 1980s.
How Do You Channel The Sun?
Two different processes generate solar power: solar PV cells that absorb light, and concentrating solar thermal (CST) technologies that harness heat. PV cells are semiconductor-based, and manufacturers assemble them into panels that capture sunlight and transform it into direct current. Solar PV technologies come in two broad types, wafer-based and thin film. CST collects sunlight through an array of reflecting mirrors, focusing the sun's heat onto a heat-transfer fluid, which produces steam to run traditional turbines.
Both technologies have the advantage of generating approximately "peak-coincident" electricity, i.e., during hours of highest demand on the electric system. However, CST requires the sun's heat and thus is only viable in climates similar to those of the deserts in the U.S Southwest. PV cells can work everywhere, but with varying production levels. PV has another advantage: It's suitable for rooftop configurations that generate power directly at the customer.
While the largest solar PV project in the U.S. is only 14 megawatts (the largest in Europe is about 60 Mw), CST already exists on a bigger scale. The Harper Lake project totals 160 Mw, and Nevada Power (NVE) built a 64 Mw CST plant in 2006. Now, tax incentives, Renewable Portfolio Standard (RPS) mandates and falling costs have spurred plans for a large number of utility-scale PV and CST projects.
Government Support Is Key
CST and utility-scale PV projects require large footprints to collect sufficient sunlight. That can prove expensive and can raise environmental concerns. In 2008, the U.S. Bureau of Land Management, which oversees some of the best solar locations in the world, placed a moratorium on new solar projects on public land in six Western states (Arizona, California, Colorado, Nevada, New Mexico, and Utah) until it studies their impact on the desert's environment. This is likely to take about two years, although the bureau recently announced it was putting the study on a faster track because of states' increased emphasis on renewables.
The global solar PV market has grown rapidly, at a 47% compound annual rate over the past five years. However, this expansion is concentrated in just a few countries, with Germany, Spain, Japan, and the U.S. accounting for more than 80% of the global market. Government incentives that make solar power economically viable have been key to growth in these countries.
Europe, especially Germany and Spain, adopted extremely generous "feed-in tariffs," which require local utilities to buy renewable power at fixed prices that are above market rates. These tariffs provide high fixed prices for solar-generated power for a 20-year period, providing strong returns that have spurred solar growth. However, Spain illustrates the risks of depending on government support. Spain's extremely generous subsidies drove its market for solar power from under 400 megawatts in 2007 to about 2.5 gigawatts in 2008—before the world financial crisis really set in. Such growth was effectively a massive bubble of private equity investment in solar plants that proved unsustainable in the wake of the recession. Spain eventually capped its subsidies, and its share of the global market for solar panels collapsed to 5% in 2009—so far—from 50% in 2008.
China Emerging as a Player
China is the world's largest market for new electricity generation; by some estimates, it adds the equivalent of the entire U.K. electric grid annually. Now China is emerging as a player in the solar PV industry, as companies such as Suntech Power Holdings (STP) and Yingli Green Energy (YGE) (neither rated by Standard & Poor's) have become prominent solar panel manufacturers and exporters. The government recently indicated it will institute subsidies to encourage domestic use as well. A number of estimates suggest that China's solar generation, now a tiny 20 megawatts, could reach 3.5 Gw by 2014. There is a mismatch between China's electricity load and solar resource, with sunny regions in the west and southwest, and population centers in the east and southeast. This means the country would need large, cross-country transmission lines to achieve that number.
India may have a better chance of quick success, since its population centers are sunny. It has set a national target of 20 Gw of solar power by 2020, versus less than 10 Mw currently.
Government support will remain critical to solar, although some optimistic panel manufacturers predict that within a few years they'll successfully compete against traditionally generated electricity without incentives. Whether or not they can remains to be seen.
U.S. Favors Supply-Side Incentives
Spain and Germany chose to fix the price of solar power through feed-in tariffs and let the market determine the quantity supplied at that price. The U.S., meanwhile, seems to be pursuing policies that cover both price and quantity. RPS in several states are effectively a demand-side subsidy, while some municipalities are pursuing FITs, and others are pursuing municipally financed rooftop PV systems paid for through property tax increases. Many states also offer attractive subsidies for residential and small commercial customers to install PV systems. However, the primary incentives in the U.S. are supply-side tax incentives. The U.S. has had a 30% federal investment tax credit (ITC) for some time, but expanded that as part of the Emergency Economic Stabilization Act of 2008. Some of these provisions include:
An eight-year extension of the 30% ITC, through 2016.
A rule allowing corporations, including utilities, to benefit from the ITC. This allows large developers to take the benefits themselves rather than enter into complicated tax equity structures. Companies can also apply the benefits towards the alternative minimum tax and carry the tax credits back one year and forward 20 years. However, taxes can go down by no more than 75%.
Elimination of the existing $2,000 cap on tax credits for homeowners who buy solar panels, plus the option of applying credits to the alternative minimum tax.
Taken together, these incentives may considerably expand the market for solar power and support the volume growth and economies of scale that the industry hopes will eventually lead to grid parity—costs and rates that are competitive with electricity generated from coal or gas.