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With Dark Clouds on the Horizon, Can Financial Innovation Keep Distributed Solar Shining?

Jesse Jenkins's picture

Jesse is a researcher, consultant, and writer with ten years of experience in the energy sector and expertise in electric power systems, electricity regulation, energy and climate change policy...

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  • Mar 10, 2014

Full Spectrum: Energy Analysis and Commentary with Jesse Jenkins

US electricity capacity additions 2012 & 2013The United States installed 4,751 megawatts (MW) of solar photovoltaics (PV) in 2013, a 41% increase over 2012. That was enough to contribute 29 percent of all new electricity capacity installed in the United States last year, second only to natural gas.

While solar is growing fast in America, there are dark clouds on the horizon for the distributed or rooftop PV industry, according to Dan Reicher, an energy finance and policy expert and professor at Stanford Law School and executive director of the Steyer-Taylor Center for Energy Policy and Finance.

Speaking at the MIT Energy Conference in Cambridge, Massachusetts on February 21st, Reicher said that while solar has been booming in the United States, four challenges might dim PV’s prospects.

Four dark clouds on the PV horizon

First, the federal investment tax credit (ITC) for solar projects is worth 30 percent of eligible project costs, providing a critical boost to the industry.

In 2017, that tax credit is scheduled to phase-out for residential taxpayers and revert to a 10 percent permanent investment credit for businesses.

Unless solar project costs continue to fall, the phase-down of the ITC could take the wind out of solar’s sails.

Second, state renewable portfolio standards (RPSs), which obligate utilities to purchase renewable energy, have been the other major policy incentive for solar installations. A “carve-out” in the New Jersey RPS, for example, has created a special market and turned the Garden State into the second largest solar market in the United States.

Map of U.S. states with renewable portfolio standards (RPSs)

Source: U.S. Energy Information Administration

Yet thanks in large part to solar’s recent success, utilities are getting close to filling their obligations for renewable energy purchases, Reicher warns. Once RPS markets “fill up,” solar PV will lose the important market pull these policies have historically offered.

Reicher doesn’t see too many states increasing the obligations on utilities. Recent efforts to roll back state RPS policies sponsored by the conservative American Legislative Exchange Council (ALEC) and the Heartland Institute have mostly failed, Reicher says, but they may have succeeded in stalemating efforts to further expand RPS targets.

Third, while solar module costs have plummeted in recent years, falling by 60 percent from 2011 to 2013 alone, those rapid declines may not continue, Reicher says.

As Chinese manufacturers clear out their oversupply and market demand picks up again, solar module prices will rebound somewhat, Reicher believes.

Whether or not technological innovation or economies of scale can continue to drive down PV costs is an open question.

Market analysts at GTM Research see further PV module cost reductions ahead, but at a far more modest pace than in recent years. In a June 2013 report, GTM projects “best in class” PV module costs will continue to decline somewhat, dropping from about $0.47/Watt in 2013 to $0.36/Watt by 2017, a further decline of 23 percent.

Solar PV module costs, 2012-2017

That said, PV module costs have become an increasingly small fraction of total solar project costs. The average PV system installed in the United States in 2013 cost $4.53/Watt, according to data collected by the National Renewable Energy Laboratory. An $0.11/Watt decline in module costs by 2017, as GTM projects, would only reduce total PV project costs by 2.4 percent, a far cry from the 20-30 percent increase in project costs coming due to the expiration of the current ITC.

Finally, net metering laws have been another cornerstone for the growth of PV. These laws allow which solar panel owners to be credited at the going retail electricity rate for their solar output and have been key to opening markets for rooftop solar.

Yet as solar grows from a blip on the radar to a real force to be reckoned with, utilities and regulators in some states are increasingly concerned that net metering may destabilize utility revenues and distort energy tariffs by letting PV owners avoid paying for the costs of the power grid they use to export and back up their solar output while shifting grid costs to non-adopters.

Several states have recently begun proceedings to adjust, alter, or replace net metering laws, casting further uncertainty over the future of rooftop solar.

Can financial innovation keep solar shining?

Solar financial innovationWhile dark clouds loom, solar’s future can stay bright, according to Reicher and other panelists at the MIT Energy Conference. The key: financial innovation that can lower the cost of finance and keep the installed costs of solar falling.

There are two ways to reduce the costs of a rooftop solar project, explains Albert Luu, Vice President for Structured Finance at SolarCity, the largest rooftop solar installer in the country:  you can cut the actual costs of the panels and installation, or you can cut the cost of financing the project.

“If you cut the cost of capital by 1 percentage point, or 100 basis points, that’s worth 1.5 to 2 cents per kilowatt-hour off your PPA [power purchase agreement] price,” Luu told conference attendees.

With typical residential rooftop solar PPA prices in California in the range of 14 to 15 cents per kilowatt-hour, reducing the cost of capital can translate to substantial declines in total project costs.

Solar City’s target is to reduce installed costs of their rooftop solar projects by 5 percent per year in order to prepare for the step down of the ITC in 2017. Financial innovation will be the key to meeting those costs, Luu said.

Panelists at the MIT Energy Conference discussed several innovative models for solar finance that could keep the costs of solar falling and the industry growing despite new headwinds.

Master Limited Partnerships and Real Estate Investment Trusts

Stanford’s Reicher has been a big advocate of extending the ability to form Master Limited Partnerships, or MLPs, and Real Estate Investment Trusts (REITs) to the solar industry.

As contributor Kristopher Settle explains, “An MLP is a business structure that is taxed as a partnership, but whose ownership interests are traded like corporate stock on a market.  Whereas profit from publicly traded C-corporations is taxed at both the corporate level and the shareholder level, income from MLPs is taxed only at the shareholder level because it is treated as a partnership for tax purposes.”

That lower tax rate makes MLPs a more attractive investment vehicle, and lowers the cost of raising capital via the MLP structure.

MLPs are a common investment vehicle open to oil, gas, and other traditional energy infrastructure investments, but have been off-limits to solar so far. Several bills introduced in Congress would change that, bringing parity to fossil and renewable energy investments.

REITs similarly allow individual investors to buy shares of commercial real estate assets, like commercial development projects.

“REITs are attractive to many investors because they are required to distribute virtually all of their net earnings to shareholders, and to the extent they do so, they are only subjected to a single level of tax,” explains Josh Freed, director of the Clean Energy Program at Third Way.

Making solar projects eligible to raise money as an MLP and REIT could open up large new pools of investors at an attractive cost of capital, lowering total solar project costs.

Given the sorry state of Congress these days, however, Reicher isn’t holding his breath for Congress to pass the legislation required to open MLPs and REITs up to solar any time soon. It would be smart policy, Reicher told the audience, but that requires Congress to be up to the task of legislating.

Correction: While the U.S. Treasury Department could make REITs a viable option for solar investment simply by clarifying federal rules, Congressional action is needed to open up MLPs as a solar finance vehicle. While Congress has not been up to the task of legislating much lately, Reicher says he is “modestly optimistic” that Congress will, in fact, adopt legislation opening up MLPs to renewables. This could happen as part of a package of legislation extending recently expired tax credits, part of broader tax reforms, or as a stand alone bill. 

Whether or not Congress or Treasury acts on MLPs and REITs, several other innovations are also gaining traction.

Mosaic: crowdfunding solar investment

Mosaic made waves in 2013 when it launched a new online platform to crowdsource rooftop solar project funds from hundreds of individuals making investments as small as $25.

Following on increasingly popular crowdfunding platforms like Kickstarter, Mosaic wants to open solar project investing “to the masses,” thus tapping another large pool of potential investment capital.

Mosaic advertises an internal return on investment of “up to 4-6 percent,” and after taking a 1 percent cut themselves, can still offer solar PV projects an attractive 5-7 percent cost of capital.

Mosaic recently partnered with solar installer RGS Energy to offer another new investment option, the “Mosaic Home Solar Loan.”

Mosaic and RSG’s loan offers homeowners the chance to install and own solar with no money down, while repaying the loan over time. The new loan product is an attractive alternative to traditional solar lease offerings, in which a third party retains ownership of the solar system and leases it to the homeowner.

Mosaic will offer investments in the Home Solar Loan products via their online crowdfunding platform, with the loan repayments from homeowners offering a return on these investments.

“Homeowners gain all the benefits of ownership with the simplicity of a lease,” said Billy Parish, Mosaic’s president and co-founder, “while investors gain access to transparent and tangible investments in the booming home solar market.”

While Mosaic had typically offered financing to larger rooftop projects on commercial or institutional buildings, this new Home Solar Loan product will open up crowdfunded loans to the residential segment as well.

RGS Energy plans to offer the new loan product to California homeowners starting in the first half of 2014. 

SolarCity: securitizing solar assets

The biggest innovation in solar project finance may be the securitization of solar assets, a feat recently accomplished for the first time by SolarCity.

“In the most basic form of solar securitization, the holder of a portfolio of solar assets bundles contracted revenues from a group of projects and sells that revenue stream to a special-purpose vehicle – an entity that exists solely to buy or finance specific assets,” explains Elias Hinckley, a strategic advisor on energy finance and a contributor and advisory board member at

Solar securitization explainedBy bundling and pooling hundreds or thousands of individual solar projects together, securitization can achieve both the large scales and lower risks that are attractive to institutional investors. That could open up tens of billions of dollars or more in potential solar project investment, according to SolarCity’s Luu.

Institutional investors allocate as much as 40% of their assets to these types of securitized investments, totaling on the scale of $37 trillion at the outset of 2014, writes Travis Lowder of the National Renewable Energy Laboratory. (See NREL infographic at right for how securitization works).

SolarCity raised a more modest $54 million through its first series of securitized notes backed by solar power contracts, which it offered to investors in late 2013. The ten year notes pay 4.8 percent. After fees, that could give SolarCity a cost of capital in the neighborhood of 6 percent.

Still, there are challenges ahead for SolarCity and others to prove that solar securities are reliable, “investment grade” assets. The first notes offered by SolarCity were rated BBB+ by Standard & Poor’s, a relatively investment-grade rating. At $54 million, the offering was also much smaller than typical securities, which are typically denominated on the $100 million scale.

As SolarCity gains practice in vetting and securitizing solar assets and institutional investors get more comfortable with this new asset class, that rating may improve over time, offering even more competitive costs of capital.

A race against time

These financial innovations has the opportunity to shave off a significant portion of overall solar project costs.

Yet the U.S. rooftop solar industry is in a race against time to drive down costs before the impending 2017 drop-off in the value of the investment tax credit.

“The big question is whether financial innovation can overcome the 20 percent effective cost increase created by the ITC’s expiration,” says Shayle Kann, Senior Vice President of Research at GTM Research. “That is a high bar to set, and clearing it requires fast action between now and 2017.”

Correction: The original version of this story incorrectly stated that Congressional action would be required to allow solar companies to use Real Estate Investment Trusts (REITs) to raise financing for projects. The United States Treasury Department could issue clarifying rules opening REITs to solar projects without Congressional action. The original story also mischaracterized Dan Reicher as “not holding his breath” for Congress to pass legislation enabling MLPs for solar. In an email, Dan clarified that he is “modestly optimistic” that Congress will adopt legislation opening up MLPs to renewables.

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Geoffrey Styles's picture
Geoffrey Styles on Mar 10, 2014


It’s encouraging to see entrepreneurs creating mechanisms that could ease the impact of the end or phaseout of the current solar tax credits and the maturation of the state RPS targets. I’d much rather see the private sector take this on than to perpetuate such generous tax credits for any technology. At the same time, it’s worth recalling that those same governmental mechanisms have been key drivers of the solar leases that the solar loan products are apparently intended to compete with. 

There’s an irony to all this. When MBAs (disclosure: I am one, too) cook up new financial engineering schemes aimed at home mortgages or financial products, there’s an understandable tendency to raise concerns about the lessons learned from the recent, painful financial crisis. Yet when the same idea is applied to renewable energy, it is embraced uncritically.

Without intending to cast “dark clouds” over solar loan securitization, which in general seems like a good and useful idea, there might be reasons to worry about the performance of securitized loan portfolios built on no-money-down solar systems, just as the risk of mortgage-backed securities based on zero-down mortgages was widely underappreciated before the financial crisis. Although a home rooftop solar system is closer in price to a new car than a house, it is also harder to repossess than a car. After installation, isn’t the solar loan tantamount to a second mortgage, though presumably secured by a depreciating asset (the solar installation) rather than an appreciating asset (the house)? I’d think that would give it essentially the same risk of default as the mortgage on the home on which it’s installed, though with less security. I’d love to hear Eli or someone else involved with this discuss the risk modeling of such securities, whether of the traditional or micro variety.  

Elias Hinckley's picture
Elias Hinckley on Mar 10, 2014


I don’t think it is all that much of a risk.  Here are a couple of points to consider:

1        All of the residential pools right now are using fairly high and stable credit scores (680+ at least), so not anything like sub-prime. 


2        People pay their electric bills before mortgage payments and car bills (smaller payments, and it is easier to shut off power than to foreclose or even repossess a car).


3        Much of the financial crisis was built on secondary instruments traded against asset backed securities – the basic idea of a pool of asset backed obligations doesn’t create the same kind of risk that the layers of derivatives in the mortgage crisis did.


As with any market if abused and manipulated into something altogether different than it’s shaping up to be would create some risk – similarly if the underlying credit risk slides deep into high risk credit – selling junk backed securities as asset backed equivalents still seems like a bad idea whether it is tied to real estate or solar – then there would be some risk, but that all seems awfully remote against the value of this evolving market.   


Geoffrey Styles's picture
Geoffrey Styles on Mar 10, 2014


Makes sense although #2 would appear more applicable to leases than to loans for which the homeowner owns the rooftop array. As you say, no one is suggesting subprime or slicing and dicing the asset pools in the way that was done pre-2007. However, if the underlying proposition is sound, it’s hard to see why zero-down would be necessary to entice high-credit buyers, while the most credit-worthy segment of the market may still choose to put their own money into rooftop solar, rather than borrow to do so, since the alternate return on savings remains zilch and consumer interest isn’t tax deductible–hence the advantage of packaging solar into new homes with the cost absorbed in the mortgage. From the outside, this looks like a package designed to appeal to those who couldn’t afford solar any other way.

And of course whatever the risk might be it’s only of concern to potential investors, rather than the economy.

Jason Burwen's picture
Jason Burwen on Mar 10, 2014

I agree there was probably a systematic difference at the outset between households with solar loans and those with 3rd-party leases. However, I understand that the move of the market in the last couple of years to 3rd-party leases now has less to do with household finances than 1) greater net benefits to households than solar loans (see, and 2) transferring risk (e.g., in the event of solar PV system performance problems) to the third party from the homeowner.

Schalk Cloete's picture
Schalk Cloete on Mar 11, 2014

I share Geoffrey’s concerns about using financial means to make rooftop solar appear attractive to people who require a no-money-down option for getting solar PV. While the solar market is nowhere near large enough to have anything close to the global impact of the housing crisis, it could have a sizable impact if such measures drive exponential growth for several years. Hopefully the four “dark clouds” Jesse described can prevent this from happening. 

The fundamental issue is that rooftop solar at $4.50/Wp installed in a good location (18% CF) using a reasonable discount rate of 7% and a $20/kW.year O&M cost will return a LCOE of $250/MWh over 25 years with no panel degradation. The avoided costs will be about $35/MWh for fuel and (a heavily debated) $25/MWh for avoided capital costs due to assigning a positive capacity credit to solar PV. From this viewpoint, rooftop solar is being enormously overvalued (factor of 4) and an exponential expansion of rooftop solar in spite of these fundamentals is obviously unsustainable. 

When looking at the broader picture, I’m afraid that this additional mechanism to make the most expensive form of climate change mitigation (rooftop solar) appear more attractive will only contribute to the global failure to stem emissions increases. The ideological attractiveness of solar PV seems to defy all reason in this regard.

On a somewhat related note, the default of a Chinese solar company is now being labelled as China’s Bear Stearns moment. The very high debt loads of Chinese solar companies pose quite some risk if we see a crisis of confidence and rapidly rising yields as the government signals that bail-outs are no longer common practice. 

Jesse Jenkins's picture
Jesse Jenkins on Mar 11, 2014

Thanks all for the thoughtful comments.

Elias Hinckley's picture
Elias Hinckley on Mar 11, 2014

Are you assuming there is adequate built fossil fuel capacity to meet future electric demand? Fuel only seems a strange comparison.  Also, assuming static pricing in a young a growing industry doesnt’ seem quite right either.  

Schalk Cloete's picture
Schalk Cloete on Mar 11, 2014

The rough estimation above accounts for fuel and some displacement of capital due to the capacity credit that can be assigned to solar PV in good locations. I have seen calculations of solar PV capacity credits as high as 57% for ideal locations like Nevada under low solar PV penetration. This is because PV output aligns well with demand spikes in these regions. 

Sure, prices will go down in the future, but the point was just that the difference between value and cost is currently so large (roughly a factor of four) that the current trend of creative financing allowing for the rapid deployment of this 1/4 value/cost energy source appears to be quite dangerous. 


Jesse Jenkins's picture
Jesse Jenkins on Mar 11, 2014

The value of solar would be an excellent candidate for your Seeking Consensus column. There is considerable debate on this topic, and I’m not sure you’ve adequately accounted for the value solar can provide to a system. It is indeed highly system or location contingent. But replacing fuel and the capital at a central station power plant is certainly not the only value solar can provide. 



Elias Hinckley's picture
Elias Hinckley on Mar 11, 2014

That’s right (not sure anyone has quanitified the possible impact on T&D capex needs), and especially since we’re still basing all this on emission cost of zero (which is of course entirely absurd if we’re trying to lay out the true economics). I look forward to the analysis!

Clayton Handleman's picture
Clayton Handleman on Mar 12, 2014

“and especially since we’re still basing all this on emission cost of zero (which is of course entirely absurd if we’re trying to lay out the true economics).”



Clayton Handleman's picture
Clayton Handleman on Mar 12, 2014

Schalk, its hard to keep current with everything in markets that move as fast as PV and wind.  Since your concerns seem to revolve around circumstances several years from now, I encourage you to reconsider your numbers and revise your installed cost for PV to the conservative figure of $2.00 / W installed. 

Here are some data points.  Massachusetts was hitting $3.75 / W installed in 2012.  I am looking forward to the 2013 numbers which likely will be lower.  With further anticipated module price reductions I would be astonished if we aren’t seeing things moving below $3.50 / W for 2013.  This is without considering the ample fat to be cut in soft costs.  Our labor rates aren’t so great and we have a long way to go on other soft costs such as getting electrical inspectors trained and reducing interconnection related costs. 

Germany gives us a hint ant what we have to look forward to.  When taking the Euro exchange rate into account Germany has already demonstrated $2.00 / W.  Just two years ago, the Sun Shot initiative targets appeared to be quite a reach.  Given Germany’s numbers, Massachusetts’ success with driving down soft costs and the accelerating rate of deployment of PV creating scale in the US, the Sunshot initiative target of $1.50 / W by 2020 is appearing quite reasonable and even a bit conservative. 



Schalk Cloete's picture
Schalk Cloete on Mar 12, 2014

A CO2 price of $40/ton would translate to about $20/MWh, which does not change this picture significantly. In addition, I think that the sub-optimal utilization of existing capital caused by forcing intermittent renewables into a system with stagnant electricity demand (most of the developed world) invokes externalized costs of similar magnitude. 

Here is an article listing the valuation of rooftop solar by a utility and a solar lobby. The differences are as large as you might have guessed, but I find myself agreeing much more with the utility than the solar lobby. 

Clayton Handleman's picture
Clayton Handleman on Mar 12, 2014

If you use $20 / MWhr and the SunShot number of $1.50 / W then it looks to me like we come pretty close to parity by 2020 (See my earlier comment).

If you are only willing to use numbers that are proven as viable today then I think you are on pretty shaky ground going above $2.00 / W given that that is where Germany is now and that their labor rates are considerably higher than US labor rates.  At that point, even if you feel that solar is more expensive, it is no longer the 4X disaster that you suggest or even a 2X problem. 


NOTE: This was supposed to go with a comment thread below so it has been added there.  Not sure how to delete this one.





Clayton Handleman's picture
Clayton Handleman on Mar 12, 2014

Sorry for the double comment, this was put at the top rather than as reply to this comment as I had intended.


If you use $20 / MWhr and the SunShot number of $1.50 / W then it looks to me like we come pretty close to parity by 2020 (See my earlier comment).

If you are only willing to use numbers that are proven as viable today then I think you are on pretty shaky ground going above $2.00 / W given that that is where Germany is now and that their labor rates are considerably higher than US labor rates.  At that point, even if you feel that solar is more expensive, it is no longer the 4X disaster that you suggest or even a 2X problem. 

Schalk Cloete's picture
Schalk Cloete on Mar 14, 2014

Sure, if the US reduces rooftop solar costs by a factor of three, things would look a lot better in good locations – at least up to 5-10% penetration. I see the Sunshot initiative projects 14% solar by 2030 and 27% by 2050 under these cost assumptions. This would appear to be quite optimistic given that 3 decades of active wind development in the US has led to roughly 4% wind electricity on the grid ($1/W solar will put solar PV roughly where wind is today).

Thus, under the optimistic assumptions of the Sunshot initiative, the richest nation in the world with arguably the best solar/wind potential (great resources and lots of space) can ramp up solar to about 11% of total energy consumption by 2050. To me, this result just does not justify the substantial financial risk, cost reduction uncertainty, associated broad revamps to the entire electricity sector to accommodate intermittent renewables, the lock-in of flexible fossil fuel generating capacity which is less compatible with CCS, and the delaying effect that renewable energy technology-forcing has on cost-effective technology-neutral CO2 abatement policy.

Clayton Handleman's picture
Clayton Handleman on Mar 14, 2014

Whoa, lets stay on topic here.  The reason I brought up SunShot was as one of several sources to validate more realistic pricing estimates of PV in the near term.  My hope was to invite you to offer more up to date numbers on your cost estimates for PV.  My point was to suggest that by 2017 when the ITC is scheduled to sunset, that $4.50 / Watt is completely unrealistic.  I offered support for $2.00 / Watt as a better number.  I think you make a reasonable case that solar is expensive.  However, you use artificially inflated numbers and blow it far out of proportion with the apparent position that it is so far afield that it cannot be reasonbly expected to be reigned in.  My point was to debate your contention that PV is 4x above other sources and represents some kind of catastrophic risk.  Using reasonable numbers in your analysis I think we are at about 2X as an outside number in the near term.  Still a high number but a MUCH lower number than your exaggerated $4.50 / W.  In the longer term ( 5 – 10 years) there is still room to run, particularly in soft costs.   

A discussion of what a useful level of penetration would be 20 – 30 years from now is a completely different discussion dependent on a variety of issues that go far afield of this thread. 

Mark Goldes's picture
Mark Goldes on Mar 14, 2014

Out-of-the-box solar science is emerging that will help to rapidly retire fossil fuels and change the energy ballgame.

Engines have been invented designed to run on atmospheric heat, a huge reservoir of solar energy that has never been tapped. This potential resource is thousands of times as large as all the fossil fuels on earth.

Nikola Tesla recognized the potential in 1900. Jacob Wainwright, an unsung civil engineer, began delivering papers explaining how and why it can be tapped at about the same time. He was not able to complete the design of the necessary engine cycle.

Since these engines circumvent The Second Law of Thermodynamics, which has sadly rigidified into Holy Writ in the science community, his work was ignored.

An inventor who was granted a U.S. Patent a few years ago on a commercially impractical engine that circumvented The Second Law, was inspired by Wainwright’s work to design a (patent pending) piston engine that needs no fuel. It will run 24/7 and can be scaled to any size.

A cowardly troll hides behind pseudonyms and attacks my work as dishonest and fraudulant. When prototypes are validated by independnent labs they will prove him incompetent.

See for a fast-track to a cost-competitive 24/7 solar replacement for fossil fuels that can sharply boost the economy.

Jesse Jenkins's picture
Jesse Jenkins on Mar 14, 2014

Well you know what they say: prove it. A working prototype will go do what a million comments on blogs will not: convince us that this is legitimate. Until then, I think you should expect the 2nd Law to keep winning. 


Mark Goldes's picture
Mark Goldes on Mar 14, 2014

You are right of course. Prototypes are in the works.

Meanwhile, see SECOND LAW SURPRISES on the AESOP Institute site 

“Over the last 15 years the absolute status of the second law of thermodynamics has come under increased scrutiny. More than two dozen distinct challenges have appeared in the refereed scientific literature—more than the sum total over the previous 150 years—raising the possibility that the second law might soon be shown violable in laboratory experiments. ” Since he wrote those words, the Second Law has now been proven violable in experimental work by Dr. Daniel Sheehan of the University of San Diego en-route to publication.  

Schalk Cloete's picture
Schalk Cloete on Mar 15, 2014


I understand your point. My point is just that the creative financing mechanisms discussed in this article and comment thread are just another way to artificially reduce the cost of solar power – especially the more expensive distributed kind. In fact, this article basically asks if exponential solar energy growth can be made to continue when direct subsidies are lessened by replacing it with another kind of subsidy: cheap financing.

As is the case with direct technology subsidization, creative financing comes with financial risks (discussed in a number of comments) and opportunity costs (the direct CO2 abatements and broader energy innovation that could have been achieved by using the money differently). These risks are induced by making something which is expensive today (rooftop solar at $4.50/W) appear much cheaper and thus ending up investing a sizable portion of society’s time, energy, skills and resources in an area giving little return at a time when we can ill afford such inefficiency.

I understand that a big part of the subsidy goal is to drive cost reductions, but the effectiveness of this can also be called into question. A German think-tank has recently said that the Energiewende does not have a measurable effect on innovation when based on patent filings. 81% of the huge 2011/2012 price slump has been due to margin erosion and a polysilicon price slump resulting from large oversupply.

Soft cost reductions are generally driven by incentives that are so lucrative that the entire supply chain is flooded with customers who want solar on their roofs so that almost nothing needs to be spent on customer acquisition and other overheads. This is not a healthy situation because it features an inherent self-strenghening feedback: if incentives are good, soft costs go down, driving more demand, but if incentives are cut back, soft costs go up and further hurt demand. It therefore accentuates the highly economically inefficient boom-bust cycles typifying subsidized renewables. 

And yes, in the end we have to ask what all this effort is for. The point I tried to make in my previous comment is just that this global solar crusade (solar is easily the most subsidized form of renewable energy delivering the smallest amount of energy with the lowest capacity factor and the most pronounced intermittency) will most probably have a very limited impact even under very optimistic assumptions (at least up to mid-century). This is a very important point to consider as the ideological attractiveness of solar PV keeps on generating mechanisms to make it appear much cheaper than it actually is. 

Jesse Jenkins's picture
Jesse Jenkins on Mar 15, 2014


New financing tools for solar are not subsidies. Perhaps you can make the case that an MLP is a subsidy because it reduces tax burden. If so, it’s a subsidy available to fossil fuel infrastructure as well. But the other options discussed here and market based approaches to matching risk and reward in project finance. That has nothing to do with subsidy. Securitization lowers risk and thus lowers the cost of capital required to compensate investors for risks. That isn’t a susbsidy and it doesn’t make solar “artificially cheaper.” There is nothing set in stone about the costs of financing solar projects.




Schalk Cloete's picture
Schalk Cloete on Mar 15, 2014

Thanks Jesse. Yes, I did not phrase that very well. Of course the lower financing costs brought by the securitization of solar assets is not a form of direct subsidy, but I do feel that a 5% cost of capital significantly misprices the risks tied to rooftop solar and that this mispricing can lead to significant longer-term problems. On the one hand, we have the 1/4 value/cost ratio (example in German data which includes a lot of cheap onshore wind) and the fact that solar PV cannibalizes itself with increasing penetration due to the intermittent output. And on the other hand, we have the target market for rooftop solar – ordinary folks who uncritically think they can save money and the environment through rooftop solar – which is unable to properly evaluate these risks. 

Perhaps I’m a little over-sensitive to these matters, but I have watched several informed commentators warn about mispricing of risk in the housing market, watched the Youtube videos recommending ordinary people to take on as many mortgages as possible to capitalize on this mispricing and watched Southern European nations go on a massive spending spree when the formation of the Eurozone mispriced their credit risk. Currently, I am watching the world buy treasuries for 2.7% yield even though the Fed is the biggest buyer and the dollar is slowly losing its complete global monopoly, watching excess reserves pile up in the banking system like an overstreched dam of inflation and watching the P/E ratio of Western stock indices rise into bubble territory despite very poor fundamentals.

All-in-all, excessive intervention combined with “creative financing” has caused mispricing of far too many important things. However, for stuff like housing and the stockmarket, we can crash, write down prior investments, learn from our mistakes and try again next decade. When it comes to energy and climate, however, we don’t have that luxury. Thus, even though solar is still far too tiny to have any real impact on the broader economy, I am quite concerned by this emerging trend. 

Clayton Handleman's picture
Clayton Handleman on Mar 15, 2014


Still at $4.50 / W?  The devil is in the details and any smart person can hand waive and throw around a couple of factors of two to justify any position.  I know the solar industry inside and out.  If you are playing fast and loose with the stuff I know about I can only assume that you do the same with the stuff I do not know about.  It kind of puts you in the same light as you cast some overzealous renewable energy advocates, you know, “those who live in glass houses . . . 

I enjoy and appreciate an informed discussion of solar and other renewables that points out their limitations.  But I remain convinced it has an important role to play and your pieces against it that incorporate cherry picked data, just strengthen my resolve that those opposed stake out their positions based upon bias rather than sound thinking. 

I sure do wish you would spend more of your time and talent providing this community the benefit of your expertise in CCS, educating us on why it is a good thing, why it is a credible part of the picture and how it works. 

Here is a laundry list of stuff to get you started:

– What pressures are typical for CCS?  What is the energy budget i.e. ratio of CCS energy to total produced?

– What is the volumetric ratio, at pressure, between coal and the rock the CO2 emitted from burning it is stored in. 

– How long can we reasonably expect to keep pumping emissions down in the wells before we are out of places to put it and how was that number arrived at.  i.e. is this really a long term solution.

– Presumably there is a range of safety.  Some rock can be reliably sealed and some probably is somewhat “leaky”.  What is the distribution of sites in that spectrum.

– What are the long term issues with plugging the hole after the reservoir is filled? 

– If a hole blows its plug is there potential for a “zone of death” due to CO2 escaping much more rapidly than it can mix with the surrounding air.  If so, how large are those zones anticipated to be and how long would they persist.

And there probably are other questions that get to the heart of the problem that would be of interest to people without expertise in the field.





Schalk Cloete's picture
Schalk Cloete on Mar 15, 2014

$4.50/W appears to be the current average cost of residential solar installations in the US. Since the biggest mover in creative solar financing, SolarCity, targets this market segment, I think it is a good number to use at present. 

It might be useful to mention that I’m not against solar or wind energy, I’m just against forcing these technologies through subsidization or creative financing now that economies of scale and supply chains had already been established years ago. If there ever came a technology-forcing policy specific to CCS, I would oppose that as well.

We have an incredibly diverse set of solutions to achieve the dual mandate of encouraging developing world growth while preventing a climate or societal disaster. Having a policy framework that directly favours one solution is inefficient at best and counter-productive at worst. The interaction between EU renewable energy targets and the EU ETS is a good example.

I’ll get to more CCS stuff soon. The next post is ready, I just need to get around to submitting it to TEC. 

Clayton Handleman's picture
Clayton Handleman on Mar 15, 2014

Got it.  All this stuff is complicated and contextual.  I have a better understanding of why you are picking that number and will backtrack a bit on my criticism of it a little. 

I think that the article was focussed on the 2017 timeframe when the tax credit sunsets.  MA is demonstrating how quickly a state can support the erosion of soft costs and so I think your analysis would be better served by using numbers in the $2.00 – $3.00 / Watt range for that timeframe.   

However if I correctly understood that you also are using that analyis as a way of establishing the longer term danger of PV and how you believe it to be far outside of the economic ball park I hope you will rethink your numbers.  For that piece of analysis I really do not see how you can objectively use numbers above $2.00 / Watt for 2020 and beyond.




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