The State of Solar Power in 2015

Overall outlook: the state of solar power in 2015 is mixed by particular company and varies heavily by location; however, the overall trend is solid and continues upward in terms of growth.  Growth will not be nearly as fast as other industries like oil or natural gas, but installations are rising every year at a steady pace.  Companies are merging and vertically integrating.  The main players in the utility market are companies like SunEdison and SunPower, while companies such as SolarCity, Sunrun, and Vivint are dominating the residential market.

Correlation with oil prices?: It must be pointed out that solar fundamentals do not show correlation with oil prices, and in fact show slight signs of negative correlation with oil prices.

On-par with natural gas prices!: Utility-scale PPA prices decline steadily with natural gas prices and this trend has been occurring for about 5 years.  Solar prices were around $190/MWh in 2009 and a NGA contract was around $175/MWh.  In 2014 a solar PPA was around $50/MWh and a NGA contract was around that same area; however, much more volatile.

Raw material costs dropping!: Average global multicrystalline solar module prices in ($/watt) were around $1.30 in 2011 and as of the beginning of 2015 were around $.70.

Specific growth markets: Growth markets include: the Americas, India, Latin America, and South America, while China and Japan are large, but not growing.  Solar has succeeded in places like India due to relatively unpaved electricity access coupled with an extremely high amount of sunlight (shorter payback period) and an eager government that actively spots opportunities for solar development.

Microfinance in poorer nations: While average incomes in India are quite low, the government has set up microfinancing solutions that allow entire villages to pay for solar installations.  While ordinary lending institutions wouldn’t be willing to lend out to poor farmers with no history of credit, microfinance creates scenarios where payback is possible although not terribly profitable.  However, once installations occur, farmers benefit from and are thankful for tremendously improved productivity.  Solar water pump installations, for instance, allow farmers to extract water without the hassle of dealing with costly diesel pumps that require constant fill-ups.

Where solar is NOT doing well: Solar isn’t doing well in areas with low levels of sunlight and/or governments that don’t support policies like net metering.  Places like Arizona have tons of sunlight but energy prices are also relatively cheap there due to a large number of coal, natural gas, and nuclear power plants.  Additionally, the government in Arizona is not very supportive of solar energy installations, with very few incentives to help solar companies succeed.  Places like Germany are bad for solar, but the government there has dumped tremendous amounts of money into subsidizing the technology.

Kick start is often necessary: Solar markets blossom when energy policies create incentives for installation.  Due to the fact that solar requires time to pay off, PPA’s are often preferred and net metering has to be set up in some proportion in order to manage the flow of solar during the daytime and fuel source energy in the nighttime.  Rebates are not necessary for profit on solar systems; however, they do generate momentum due to the fact that solar is, and continues to be an ALTERNATIVE energy source run against mainstay utility companies.  Because consumers are not forced to take roof-top solar power, rebates help kickstart the industry and have also helped to speed up the drop in costs across the supply chain.

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Does Solar Power Create Wealth? What are the Benefits and Limitations of Solar Power?

So I’ve seen a bunch of articles out there on the benefits of solar power.  Every solar power company pretty much has a sales pitch on their website about the “benefits of going solar!”  By the way, I worked in the solar sales business for a little while.  It was very difficult, primarily because there was a ton of competition between companies and customers still didn’t know anything about solar or energy in general.  Many a disgruntled dads would object that it was destroying our economy because of all of the “subsidies, Solyndras, & socialists.”  Thus, to the best of my abilities, I wanted to prove that solar power is actually incredibly advantageous to the economy by showing you in basic terms whether or not it creates wealth.  I will even overestimate costs on the solar side and underestimate costs on the power utility side.

First, let’s examine the power grid itself.  The power grid has already been built but it does need repairs.  Solar companies will need to start paying a portion of these costs for maintenance proportionate to the percentage of electricity they create.  This is precisely what has been plaguing the utilities for years.  They need to charge at rates inflating in excess of standard US dollar inflation because power grids all across America are just so old they need countless repairs done every year.  In order to account for this mess, we’ll just pretend inflation doesn’t exist on either side!  There we go, easy as that…  We can never assume arbitrage from inflation, so it’s a good idea to just equalize it on both sides.

Now we are able to level the playing field: the cost of solar installations versus the cost of powering a home through a traditional utility.  We will use one of my old prospective customers, whose Pacific Gas & Electric bill I still have on file (no worries, I PROMISE I won’t pay his bill for him…).  The month I have indicates he used 773 kilowatt-hours of electricity.  This is a fairly average amount for a suburban family with a small pool.  The electric portion of his bill for the month was $173.47.  This amount ten years ago would have been significantly less.  However, to prove my point, I will keep his bill at $173.47 for the length of my 20-year calculation.  We multiply ($173.47 x 12 x 20) and see that over 20 years he will pay $41,362 to the electric company.

For our solar calculation, we will use a very high estimate to say that the cost per watt to install solar, including panels, equipment and installation, is $6.12.  I will find the source I used for this if you would like to see it, but it is a very high estimate of solar installation costs.  Because solar companies market so aggressively and there also happens to be a lot of red tape (like permitting), installation costs in America tend to be very high.  Now for 773 kilowatt-hours of electricity, this man would need roughly 3.2 kW worth of panels (14-16 panels).  This is 3200 watts.  We multiply (3200 x $6.12) to get $19,872 for his solar system.  The government subsidy is 30% of the cost of the panels, meaning it only supports at the most, a couple thousand dollars from this installation.  This man’s solar installation used a couple thousand in taxpayer dollars (I will get to this is a bit).

When we calculate ($41,632 – $19,872), we get very conservative estimate of $21,760 in wealth created by this solar system over a standard 20-year lifetime for a solar system.  The wealth would be even higher if we used a 25 or 30-year calculation, which is how long most solar systems are guaranteed to last.  By using let’s say $2,000 in taxpayer subsidies to fund his system, we created $20,000 – $25,000 for him to spend over the course of twenty years.  Now, many opponents (don’t know why they would still be opponents after reading this!) may claim that money also gets siphoned from poor people’s taxes, who can’t afford a “fancy” solar system, in order to fund the rich man’s shiny panels.  However, the government has, in general, skewed the playing field to help poor people with their electricity anyway.  The only reason that basic tiers of electricity stay low is because the government mandates them to stay low in order to allow people with a lot less monetary wealth to pay incredibly low rates for electricity.  It disproportionately loads the increases in power generation towards the wealthy people who are paying upwards of 31 and 35 cents for upper tiers of electricity (in the case of Pacific Gas & Electric).  When you consider this and add the fact that the solar system generates ten times the wealth that it siphons from taxpayers, I think it is fair to say that solar is a good investment for a homeowner as long as this ONE crucial criteria is met:

the homeowner knows how to extract value from the next homeowner upon leaving the home at any time: let’s say the homeowner who had the panels installed only stays for 4 more years following the installation of a 20-year system.  Technically they could charge just under the amount of money the new homeowner would pay to the utility for 16 years.  Should the seller feel more obligated to pass on attractive savings, they could “split the difference” in savings.  Should the homeowner move directly after installing the 20-year system, he could say “I paid around $20,000 for this system; however, you would have paid almost $45,000 to the utility over 20 years given a very conservative rate of inflation.  To include the solar system, I’m going to charge you an extra $32,000 for the home and you will save almost $13,000 in utility costs.”  Even the less skilled or anxious salesman could extract a mere $5,000 for himself and give the remaining $20,000 to the homeowner.

I have to add that solar does, of course, have limitations.  Consider the fact that solar only works when you have a proper roof, very limited shading from trees, and often several years to see the return on your investment.  Oh yes, and at the moment, none of your solar power is being stored…  It simply runs through the distribution lines and powers the grid during the daytime.  Every bit of power used after the sun drops comes from sources independent of the sun’s movement (hydro, oil, gas, nuclear and wind).  No matter where you are, the utility company can give you power.  It does not discriminate, it does not “qualify” you for a system.  You can still get power even if you are deep within the redwood forests with moss growing on your dilapidated rooftop.  So don’t hate on the utility company… but DO respect the power of solar and if you qualify for it, know how to take advantage of the investment should you move from your home.  It will be an incredible benefit to our economy and our environment, especially as costs continue to decrease due to new developments and better economies of scale.