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.

 

A Microcosm of Massachusetts Solar Policy

— June 19, 2015

I grew up in Massachusetts, went away for school, spent my 20s exploring other parts of the country, and came back home to settle down and start a family. Working in the energy industry, I closely follow state policy from a professional perspective. However, my personal and extracurricular worlds have also now become entwined in the ongoing soap opera that is the Massachusetts solar policy and its politics: the good, the bad, and the ugly.

For the first 8 years of home ownership, I lived in a condo, where I could not control what was done with the exterior of the structure. I would have loved to install solar while there, but it was not possible due to the building restrictions. I did get the condo association to undertake an energy audit with the local utility, which resulted in several thousands of dollars of savings on our condo fees. This was before Community Solar came into being, which has since flourished in Massachusetts and is perfect for the condo/apartment dweller who can’t install on-site panels.

Two years ago, my family moved into our own house in Franklin, Massachusetts. Literally, the first day we arrived, we had an energy audit and I contacted a solar company to get an estimate for a rooftop array. Without any utility bill history, the company had to estimate our electricity usage based on average square footage values and created a proposal. Knowing that our household would be more efficient than the average, I decided to hold off until we got some real data for a year to avoid unnecessarily overbuilding the solar. It turned out that we use about half the electricity of a typical house our size in our area (according to our OPower report), so it was a good thing we didn’t take the plunge right away.

Worth the Wait

After a year of data collection, I started compiling the plethora of mail offers that we received from various solar companies in preparation for getting some new quotes. Then, I heard about the new concept of municipal solar aggregation, promoted by the Massachusetts Clean Energy Center as Solarize Massachusetts. I figured as long as I was going to do it, I might as well take advantage of bulk pricing and get others in town to benefit from solar, as well. I spearheaded the Franklin Solar Challenge, where a committee of community volunteers put together an RFP and selected a vendor to work with who provided the best combination of pricing, product options, and service. I got my system installed in April after the harsh New England winter and got my first utility bill with $0 due and a bill credit! Over 100 homeowners have expressed interest, and we are on our way to getting the best bulk pricing available for everyone who participates.

 The Results

Brett house

(Source: Brett Feldman) 

But Wait… There’s More

The other side to the solar story in Mass is the fact that the net metering caps in certain utility territories are being hit now, meaning that no new projects above residential-scale can be installed. The state government and stakeholders are trying to work out a solution, but in the meantime things are on hold. I am on the Town Council in Franklin, the elected governing body of the town. We own a large piece of property along a highway that would be perfect for solar development, but due to the cap, it can’t be done at this time and the space might be used for condos and office buildings instead.

So there is a personal story for you that offers insight into the various aspects of solar drama in Massachusetts.

 

Solar PV on Leased Buildings: Drivers, Barriers, and Solutions

— June 17, 2015

Andrea Romano co-authored this blog.

Navigant Consulting works with the U.S. Department of Energy’s (DOE’s) Better Buildings Alliance (BBA) to understand barriers and solutions to promoting solar PV adoption. Currently, we are focusing on solar PV on leased buildings. We have teamed with the SunShot Initiative to develop a request for information to better understand the barriers, benefits, and solutions to installing solar on leased buildings. We are encouraging those active in the solar industry to voice their opinions so that we can develop tool to meet the market’s needs.

Why Leased Buildings?

As of 2012, there were 5.6 million commercial buildings in the United States, comprising 87 billion SF of floor space and representing a huge sustainability and clean energy opportunity. However, a large portion of these buildings are multi-tenanted leased spaces facing a split incentive in that the building owner does not typically pay the energy bills, but would bear the upgrade costs. A number of green leasing initiatives have developed concepts, tools, and guides to overcome this barrier for energy efficiency, but have not focused on solar PV. As a result, Navigant is focusing on this issue in 2015.

Benefits of Solar PV

In many cases, solar PV benefits both the landlords and tenants, however, the division of the economic and environmental benefits depend on the structure of the building lease. The lists below demonstrate the potential benefits.

Solar Benefits for Landlords

  • Reduced utility electricity consumption leads to reduced operating costs and reduced exposure to volatility of energy prices
  • Enhances marketability of the building
  • Lowers occupancy costs, which facilitates the ability to charge higher rent
  • Improves tenant retention due to lower operating expenses

Solar Benefits for Tenants

  • Lowers electricity costs
  • Stabilizes electricity costs
  • Supports corporate sustainability goals
  • Demonstrates environmental responsibility to employees and the community

In general, for commercial buildings, reducing operating expenses through the installation of a PV system can provide a hedge against escalating energy prices. Buildings may see lower costs of capital and higher market value because of this reduced risk. Depending on how the lease is structured, some or all of these benefits can lead to increased revenue for the building owner. Additionally, solar helps diversify revenue streams, reducing the overall volatility of the property’s income.

Barriers to Solar PV

A number of factors impact the growth of the commercial solar market, with the greater obstacles being the lack of project standardization and high transaction costs. Within the commercial real estate market, owner-tenant facilities in particular have an added level of complexity including:

  • Split incentive: Energy costs often paid by tenants and solar PV system is purchased and owned by building owner
  • Short payback requirement: Building owners want 2- to 3-year payback
  • Timeframe discrepancy between building lease and solar PV system life: Solar PV system has a 20- to 25-year life, which is often greater than building leases
  • Property owner creditworthiness: Many properties owned by LLCs without publicly rated investment quality
  • Property ownership entity: Determines 30% Business Energy Investment Tax Credit eligibility

Overcoming the Barriers

While many barriers to installing solar PV on leased buildings exist, companies are developing innovative solutions to address or overcome these challenges. The figure below summarizes the ideas by system ownership. Navigant Consulting is currently working with the DOE and BBA on a guide summarizing these strategies and it will be available later this summer.

System Ownership Strategies

diagram

(Source: Navigant Consulting)

 

Biofuels: A Guide for the Next Couple of Years

— June 16, 2015

Six months after its official deadline to propose the Renewable Fuel Standard for 2014 (yes, 2014), the U.S. Environmental Protection Agency (EPA) has finally released a draft proposal for the annual standards for 2014, 2015, 2016, and for the 2017 biomass-diesel volume.

The EPA played it safe for 2014, matching the standards with the actual consumption of biofuels such as transportation fuel, heating oil, or jet fuel in the contiguous United States and Hawaii. For the upcoming years, the EPA is proposing a slight increase in the total mandate: 9.2% in 2 years. Most of the growth is expected to come from advanced biofuels, which are set to increase by almost 31% by 2016, while conventional biofuels (grain-based ethanol) are expected to grow only grow 5.6% in the same period. The mandate will likely not make too many people happy, and that is probably good.

Fats Are In, Carbs Are Out

For conventional biofuels, the news is not good but perhaps not surprising. In the original mandate, conventional biofuels had a target for 2015 of 15 billion gallons (1.6 billion gallons more than in the new proposal), but the adoption of ethanol has been limited by what the industry calls a blending wall, or a technical/regulatory limit that impedes older gasoline vehicles to consume fuel blends containing more than 10% of ethanol by volume.

The supply-demand balance in the industry seems in favor of buyers. The Renewables Fuel Association reported June 1 that operating capacity of the industry was 14.57 billion gallons per year, which implies that the mandate will cover 92% of its capacity in 2015 and 96% in 2016. They might be able to sell more ethanol if enough gasoline in consumed in the United States (increasing the volumes allowed under the blending wall), but they will have to price it below gasoline to attract buyers. The lower mandate is expected to hit harder the producers with old and inefficient plants. Leading producers like POET, Green Plains Renewable Energy (GPRE), or Abengoa are anticipated to perform well.

The picture for the rest of the industry is rosier. The new standards for biomass-based diesel (produced from vegetable oils or animal fats) is high enough to absorb the current capacity. The National Biodiesel Board plant database aggregate capacity  sums 808 million gallons, although it does not account for the whole biomass-based diesel industry. The new standard will benefit producers like the Renewable Energy Group (REGI) and Neste Oil – both large producers of biomass-based diesel.

The Underdog Story

Finally, the EPA kept a large enough carve-out for cellulosic fuels. The United States used 26 million gallons of ethanol-equivalent cellulosic fuels in the first four months of 2015. If the country continues producing them at the same rate, the annual production would reach 78 million gallons, or 28 million gallons below the 2015 mandate. Although a lot of investment has gone into technologies that promise to produce liquid fuels from cellulosic material, it is the biogas producers that are benefiting the most from this mandate, as they are supplying virtually all the cellulosic-based biofuels. This is surprising given that biogas was only approved as a cellulosic fuel halfway through last year.

 

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