Responding to Wally – The Other Side of Innovation


My friend Wally read “Solar Flair”[i], a recent post to this blog, then asked my views on a particular commercial aspect of the solar energy industry. In order to respond to Wally, I reviewed the recent news. I struck by the extent to which the solar energy industry is experiencing the economic equivalent of a tsunami. My intention in this post is to look at the situation in the solar energy industry both as a market opportunity and as a commentary on the risks inherent in innovation. — C.H.




An Adolescent Industry




In Solar Flair, I referred to solar energy as an “adolescent industry”. By that, I meant that the industry is already quite large ($8.4 billion in the U.S. in 2011, up from $5.0 billion the previous year[ii]), although far from its potential. Moreover, the industry also consists of a vast wealth of innovative ideas in competition with one another, within the solar energy industry and without. This isn’t a particularly unusual situation during the emergence of a new technology. I’m reminded of the emergence of the personal computer industry in the 1980’s, when only Las Vegas had enough display space to host the main annual Comdex trade show (there was also a smaller Comdex show six months later each year, to accommodate the pace of innovation and new entries).




As an industry matures, some ideas prosper, others wither. Firms coalesce. Many fail. As the technology defines itself in a commercial sense, the barriers to entry increase and the rate of innovative introductions declines. This is the economic tsunami that is the solar energy industry, on a global scale, at a break-neck rate. Here are a few recent and rather dramatic examples[iii]:




Lightning ImageSolyndra
– A producer of innovative CIGS modules; bankrupt, along with a $565 million U.S. Government loan and a storm of political commentary.




Q-Cells
– A German firm, until recently the world’s largest solar manufacturer on the brink of bankruptcy, after very heavy losses.




Odersun
– A German manufacturer of flexible, thin film CIGS photovoltaic (PV) material, bankrupt.




Solar Millennium
– A developer of utility scale solar power projects, including a major project under development in Blythe, California, bankrupt.





The Prize




Through all of this grief, it is useful to keep the prize in mind. The prize is a significant piece of the entire global energy market. In 2011, solar energy capacity was about 4.5 gigawatts, valued at $8.4 billion. Compare that to the 26.5 gigawatts installed globally in 2011 alone, worth about $110 billion[iv]. The U.S. solar capacity amounted to about 1% of the total U.S. primary energy generated in 2011, or about 2.5% of the electric power generated. The potential is staggering.




Avenues for Innovation




If solar power generation increases from about 1% to 20%, or 30% or more of the global power mix within the next 30 or 40 years, there will be huge opportunities for innovative products and services. Here are a few of the avenues for innovation:




  • There are two primary approaches to solar power: photovoltaic (PV), the direct conversion of sunlight to electric power; and concentrating solar power (CSP), using focused solar heat in lieu of combustion to turn conventional electric generators. Each has its virtues and limitations. Each has its own components and supply chain.



  • There are several competing PV materials. Each has its own supply chain economics and particularities.



  • Photovoltaics generate electricity as direct current (DC). The direct current must be converted to alternating current (AC) for routine uses. Methods and equipment for that conversion must be manufactured, with all that entails.



  • Solar energy requires sunlight. People require electricity 24/7. Power storage methods and techniques are needed to balance the diurnal generation cycle with demand. There are lots of possibilities, none particularly well developed.


The Political Dimension




Governments in many countries have initiated policies and objectives for replacing fossil fuels with renewable energy sources. This is mainly for environmental reasons, especially global climate change concerns. As a result, governments have introduced incentives, such as loans, development grants, tax breaks and feed-in tariffs (a feed-in tariff is a price that utilities pay for power from renewable sources that is in excess of the cost of power generated from combustion of fossil fuels).




These policies are intended to help renewable sources gain the economics of scale necessary to compete economically. Since governmental policies are political, they can be changed as political expedients change. Right now, solar energy and most other renewables are not economically competitive with fossil fuel without some sort of political mandate or subsidy. That will change as environmental and competition for resources pressures increase on fossil fuel sources, and renewable sources attain a degree of maturity and scale. Until then, changes in government policies, changes in economics of scale and changes in the relative economics of competing materials and technologies can be expected to shake out many contenders, especially in this global marketplace.




For Smaller Manufacturers




Manufacturers, large or small, should consider adolescent technologies and their associated markets in view of their overall business plan and degree of risk aversion. Risk, however, can be moderated by seeking niches consistent with existing resources and capabilities.




As one possibility, consider the potential for PV power installed on new residential construction.
Along with the already ubiquitous solar panels, there are innovations such as Dow Chemical’s roofing shingles that double as PV cells and thin film PVs that can be applied to siding or window glass. With new construction, PV power generation can be included in the architectural design of the residence, reducing costs and improving efficiencies.




I think that prospective home buyers might be attracted to a “no monthly power bill for house or electric car” sales pitch, especially since net incremental construction costs (if any) would be included in a home mortgage. Opportunities for smaller manufacturers exist in all of the products, parts and supplies needed along the equipment, construction and maintenance supply chains.



And PVs for new home construction is just one of who knows how many possibilities.



As always, your thoughtful comments and experience reports are appreciated. Click on the title of this post to open the comments section.



Photo - Chuck at Asilomar
…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)




P.S
. Visit Jera’s resource website for smaller manufacturers at: www.JeraSustainableDevelopment.com




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