Solar capitalism

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By John Harris, Operating Partner, GlendonTodd Capital

John Harris, Operating Partner, GlendonTodd Capital

Solar energy has been promoted as a clean, safe energy source that has the potential to reduce the nation's reliance on nuclear energy and fossil fuels. For many years, the cost of producing electricity from the sun has been prohibitive compared with traditional electric power generation sources. To be viable, technology must be economically sustainable, with a balance between cost and value.

Currently, renewable energy technologies enjoy a high valuation in intangible categories such as environmental goodwill. Certain aspects of this goodwill can be monetized by federal, state and local incentives designed to enhance the speed of solar adoption. These policy mechanisms may be forever debated in the political arena, thus vexing private investors. Clearly it will take more than taxpayer support to create an economically sustainable business model for photovoltaic (PV) solar energy.

Sustainable businesses typically realize capital and operating costs that are less than the tangible revenue received. For the last three decades, solar energy has failed to attract the class of investors who will accept long-term revenue to recover high upfront investment. But the world is changing: Upfront costs of solar have seen a steady decline through competition, manufacturing efficiency and policy that have led to a precipitous drop in the cost of PV modules, the fundamental component of a solar power plant.  Additionally, there have been ongoing cost reductions in other solar power components, such as inverters, racking, monitoring, and tracking. These changes are sparking a PV solar revolution.

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It will take more than taxpayer support to create an economically sustainable business model for PV solar energy.
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All of these trends are influenced by market and policy forces. The question is, will cost reductions due to innovation and volume production continue to the extent that policy incentives will no longer be needed to bring investors to the solar PV industry?

Although some investors are fundamentally attracted by the initial capitalization incentives, this class of investor may leave the market when subsidies are challenged in the political arena. This wreaks havoc on the developers competing for their support. Therefore, the focus of a sustainable solar business must be on two factors: 1) up-front costs of solar and 2) long-term revenue stream from the electric energy produced.

Economic sustainability is supported by the observed decline in new PV solar power plant construction costs while demand for electricity continues to rise. Furthermore, solar PV plants constructed in 2013 will produce for at least 25 years, while projections indicate that production from nuclear and coal plants will decrease in response to market and policy forces for at least the next 15 years.

In this ripe environment, major investors have committed to large solar projects in the past year:

  • Investment trendsetter Berkshire Hathaway has taken a stake in a $2 billion California solar farm.
  • NRG has moved aggressively into solar, with their 397 MW Agua Caliente Solar Project -- more than half completed -- as part of the more than 2,000 MW of solar projects they are developing in the US.
  • Industry behemoth Duke Energy has continued to increase its solar energy capacity

Although incentives and policy have contributed to economics of recent projects, these major players undoubtedly understand how deployment of capital leads to return on investment. They have been watching the trends and have made the decision that now is the time to enter the solar utility market, even as the economics likely continue to improve for years.

About the Author
John Harris, a Board member of Principal Solar, Inc., is a veteran in the information technology and business process outsourcing industry, currently serves as an operating partner and investor, GlendonTodd Capital, and CEO of Chemical Information Service.