Navigant Research Blog

The Future of U.S. Solar Energy Companies – Part 1

— June 30, 2015

Note:  This blog is the first in a four-part series examining the evolution of U.S. solar companies.

There is good reason for the concern that the expiration of the 30% investment tax credit (ITC) will have a major (negative) impact on the U.S. solar PV market in 2017, and there is precedent. The on-again-off-again production tax credit for wind power enabled the U.S. market to surge to as high as 12 GW in a single year and then drop to 1 GW the following. In addition, when key solar incentives in Germany, Spain, and the Czech Republic were removed or limited, similar reductions in deployment ensued.

However, the overall U.S. solar PV market, while expected to take a 60% hit in 2017, is projected to prove to be particularly resilient. New business models, international expansion, and continued cost reductions are expected to enable U.S. companies to compete in a post-30% ITC world.

In this four-part blog series, I will be taking stock of key trends in the U.S. solar PV industry that highlight the continued evolution of American solar PV companies and offer a glimpse of what to expect in the future.  Taken together, the key trends will provide a snapshot of what future U.S. solar and energy service companies are expected to look like. The blog topics will include financing, vertical integration, international expansion, microgrids, energy storage, and community solar. Two of these are covered below.

Financing

Marking one of the most important evolutions of the solar PV industry in the United States, in 2003, SunEdison pioneered a business model where the company would install, finance, own, operate, and maintain solar PV systems. This would enable customers to purchase the power from solar PV systems on their own roofs without putting any money down. SolarCity took this model to scale in the residential market, and now other companies, such as SunRun, Clean Power Finance, Vivint, SunPower, and Sungevity, are offering everything from leases, to power purchase agreements, to loans, in addition to direct sales. These financing schemes set the stage, in part, for the U.S. solar boom that reached 6.2 GW in 2014. This development is also representative of the way in which solar PV companies have adapted their business models to meet the needs of customers and increase investment in the sector as a whole.

Vertical Integration

Intense competition among hardware suppliers in particular has compressed margins and prompted companies to focus on more profitable downstream activities. SunEdison, for example, was one of the first to move toward vertical integration due to its 2009 acquisition by MEMC, a wafer manufacturer with a global presence and a deep balance sheet.

SolarCity has made strategic acquisitions including Silevo (modules) and ZepSolar (racking). SunRun, which started as a finance company, acquired an installer (RECSolar’s residential division), distribution company (AEE Solar), and mounting company (SnapNrack). Successful vertical integration has enabled solar companies to maximize cost reductions throughout the value chain–and also provide the best opportunity for sustained profitability, an elusive goal for solar component manufacturers and installers during a time of growing competition and market expansion.

In my next blog, I’ll take a look at the key trends of emerging markets and microgrids.

 

New Efforts Address EV Affordability

— June 29, 2015

Power_Paddle_webThrough the first 5 months of 2015, according to data from Hybridcars.com, plug-in electric vehicle (PEV) sales are down in the United States by 4% from 2014. This is due, in part, to the current price of gasoline being lower than the 2014 price by $0.89 cents per gallon (per the U.S. Energy Information Administration), as well as the drop off in sales of the Chevrolet Volt in anticipation of the updated model coming out soon. In fact, if the year-over-year Volt sales are ignored, the rest of the industry is actually slightly ahead of last year’s pace.

The higher upfront cost of PEVs is clearly one of the major hurdles to greater electric vehicle (EV) sales, along with greater consumer awareness of their benefits in reduced fuel cost, performance, and drivability. The higher price tag precludes many prospective buyers from considering a PEV, although several models are below the current average new car transaction price of $33,363, according to Edmunds.com.

Making PEVs more affordable would bring in EV buyers from a broader audience, as data from a recent Navigant Research survey of consumers in the United States indicates that the interest in PEVs is not limited to high-income families. Of the survey respondents who reported having an income between $25,000 and $50,000 annually, 15% said that they preferred their next vehicle purchase to be a PEV, which was higher than those with income of $50,000 to $150,000 annually (9%).

Incentives and Research

California is trying to make PEVs more appealing to lower-income families in areas where air quality is a concern. New programs for people living in the San Joaquin Valley Air Pollution Control District or South Coast Air Quality Management District provided incentives of up to $9,500 on a PEV purchase depending on the individual’s income level. While it won’t prompt a spike in nationwide sales, a successful program could encourage other regions to similarly target getting more PEVs into lower-income households.

The European Commission is also targeting lowering the cost of PEVs through three research projects. As reported by Automotive Fleet, the 3Ccar project is focusing on reducing the cost of the electronic components, which, along with the battery pack, are the primary contributors to the additional cost of PEVs. Greater volumes of PEV sales will lead to more competition in electronics, which will lower the cost and result in more sales.

Utilities are stepping up by creating programs to make EVs cheaper to operate and to make recharging easier. On June 8, the Edison Electric Institute signed a memorandum of understanding with the U.S. Department of Energy (DOE) that will make utilities more active participants in reducing the cost of electric transportation and to build on the DOE’s goal of making EVs as affordable as a gasoline car by 2022. Greater utility involvement is critical to reducing EVs’ operational costs as well as providing the baseline charging infrastructure for consumer confidence that EVs can be recharged wherever drivers need to go in urban areas.

 

Transition Away from Coal-Fired Power Plants Keeps Building

— June 29, 2015

The transition away from coal-fired power plants continues among a number of U.S. utilities both in an effort to comply with carbon reduction standards and for cost-cutting reasons. In the last few months alone, several thousand megawatts of coal-generated capacity have been taken offline. The trend is similar in other industrialized countries, with a key exception.

In the United States, Columbus, Ohio-based American Electric Power (AEP) has ceased generation at 10 of its coal-fired plants across five states. Operations were halted in May at coal units in Indiana, Ohio, Kentucky, Virginia, and West Virginia; combined, these units generated more than 5,500 MW. AEP intends to close two more of its coal-fired plants in 2016 in Oklahoma and Texas. Similarly, PacifiCorp, the Berkshire Hathaway-controlled utility operating in several Western states, shut down two coal units at its Utah Carbon Plant (172 MW) in April. Also, the company laid out plans to take nearly 3,000 MW of capacity offline by 2029. As part of PacifiCorp’s long-term resource plans, the company expects to add more renewable energy resources, further reduce its use of coal, and meet most of its expected generation needs with increased energy efficiency over the next decade.

Though no recent plant shutdowns have taken place in North Carolina, Duke Energy did announce that its controversial Asheville plant (which was part of a recent federal criminal settlement related to groundwater contamination) would shift from coal to natural gas and solar generation over the next 4–5 years. A new 650 MW plant would replace the 376 MW coal-fired facility and would significantly reduce emissions, the company said. In Arizona, Salt River Project officials have agreed to buy the Los Angeles Department of Water and Power’s portion of the coal-fired Navajo Generating Station plant as a next step in the eventual closure of one of the three generators in order to comply with U.S. Environmental Protection Agency (EPA) regulations. Overall, the U.S. Energy Information Administration expects the proposed federal Clean Power Plan could lead to about 90 GW of coal-fired generation being removed by 2040 under one scenario, which would be more than double the amount taken offline if no new carbon standards were in place.

A Global Trend

This trend away from coal is playing out in most other major industrialized countries as well, with one exception. Canada and the United Kingdom have implemented policies for phasing out coal. In France, Italy, and Germany, the markets for coal are weak, according to E3G, a European public interest non-profit organization that conducted research for Oxfam on the topic among the G7 countries. For instance, France has shut down seven units in 2015 and is now down to a total of four. Japan is the exception; plans in the country call for an increase in coal-fired electricity generation in part due to the Fukushima Daiichi disaster, which led to the shutdown of nuclear power plants that made up 30% of Japan’s energy supply, with coal filling the gap for now.

With the exception of Japan, the shift away from coal-fired plants is underway in leading nations, though not fast enough nor in the way environmental groups like the Sierra Club and others would like. Nonetheless, the direction away from coal seems clear.

 

 

GM Aims For American Diesel and EV Leadership

— June 26, 2015

General Motors (GM) recently hosted a Chevrolet Innovation Day event in Detroit in conjunction with the reveal of the all-new 2016 Chevrolet Cruze compact car. During the sessions attended by media and analysts, GM executives, engineers, and designers covered a variety of topics including both internal combustion and electrified powertrain plans. As all automakers struggle with how to meet increasingly stringent fuel economy and emissions standards while also meeting customer expectations and remaining profitable, GM made it clear that it intends to be the market leader for both diesel and plug-in vehicles.

“We want to make EVs approachable to all, not just the elites,” said Pamela Fletcher, executive chief engineer for electrified vehicles, as she echoed a message dating back to the late 2006 previews of the original Chevrolet Volt concept while also taking a subtle jab at Tesla. At the time, GM officials explained that the Volt was badged as a Chevrolet rather than a Cadillac because the goal was to bring electric vehicles (EVs) to a mass audience at an affordable price. Navigant Research’s Electric Vehicle Market Forecasts projects that luxury brands will account for 50% of global light duty plug-in electric vehicle (PEV) sales by 2018, but Chevrolet clearly wants to shift the percentage toward more mainstream segments.

GM wasn’t entirely successful with the first-generation Volt, but it provided a valuable learning opportunity and those lessons have been fed into the second-generation Volt that is launching this summer. Perhaps more importantly, Fletcher’s team is moving aggressively to bring the knowledge it’s gained about lithium ion batteries and electric drive systems to full battery electric vehicles, such as the upcoming 200-mile range Chevrolet Bolt EV. After revealing the Bolt as a concept at the Detroit Auto Show in January 2015, GM announced just a few weeks later that it would be produced.

Setting a Pace

GM has moved quickly on development that clearly began long before we saw the Detroit concept. Bolt chief engine Josh Tavel announced that his team already has more than 50 pre-production prototypes running in the United States and South Korea where they were built. These are the first prototypes with production representative bodies and other systems, and they typically arrive about 18 months before production. Because of this, it’s reasonable to expect the Bolt to arrive in late 2016 or early 2017, putting it a year or likely more ahead of the Tesla Model 3. Many of the components for the Bolt have likely been tested for as much as 2 years in other vehicles before these prototypes were built.

Recognizing that not all customers have the same needs, GM isn’t planning to rely entirely on batteries to meet fuel efficiency requirements. In 2013, the automaker dipped a toe into the water with a diesel version of the Cruze that gets the best  Environmental Protection Agency- (EPA-) estimated fuel economy of any non-hybrid car in America. With virtually no promotion, Chevrolet sold 6,000 Cruze diesels in 2014. Dan Nicholson, vice president of global powertrain engineering announced that Chevrolet would offer an all-new 1.6L diesel engine in the 2016 Cruze that would offer even better fuel economy and more refinement.

“GM is aggressively going after passenger car diesels in North America and aims to be the market leader,” said Nicholson as he specifically called out long-time diesel champion Volkswagen. Along with new, more efficient gasoline engines with auto stop-start, diesel, and natural gas in trucks and future fuel cell vehicles, GM clearly intends to leave no stone unturned.

 

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