1) Costs Will Continue to Come Down
This might be trivial to most solar industry professionals but its importance cannot be overestimated. Without significant cost reductions, the solar industry will not grow to the size that could possibly justify the investments made into R&D efforts and manufacturing capacity. Cost reductions are also necessary to achieve grid parity without the industry’s reliance on government support and subsidies. As manufacturing and installation costs will continue to drop, by far the biggest lever to reduce LCOE will come from financing innovation and increased competition.
2) State Level Hiccups and Blow-Ups
As long as the solar industry is reliant on state subsidies, there will be significant shocks to different state markets. Over the last couple of years alone, Arizona and Colorado partly blew up. As did LADWP. Some new ones came online like New Jersey. With rare exceptions (mostly the CSI rebate program in California), most local rebates are badly designed and do not allow participants to plan and build long-term stable businesses. Anyone who wants to play has to be ready to get up quickly and move his chips to another table.
3) Don’t Expect Help from Washington
Washington’s ineptitude to implement a coherent energy policy for the 21st century will continue. The best thing we can hope for is that the solar energy policy landscape will not deteriorate. As we approach the expiration of the 30% tax credit in 2016, anxiety will increase.
4) It Will be Difficult to Build Profitable Businesses
The most basic law of the energy industry is that its end product is a perfect commodity. A kWh of electricity is as good as the next one. You can’t brand it, you can’t differentiate it. This basic law is like gravity: you can’t escape it and it affects every part of the solar ecosystem. Entrepreneurs, investors and large companies will have to either find niches or be (in true Jack Welsh fashion) number 1 or 2 in their respective segments. And there is a decent chance that on the hardware side none of those winners will be in the US or Europe. The Chinese might sweep that category with their winning mix of subsidized cost of capital, outstanding manufacturing expertise and an endless pool of cheap labor.
As for businesses that find a niche, they will still feel the pull from gravity. Take Sungevity, for example. Most people agree they have an excellent business model and a great team. They are carving out a niche with a great brand and their powerful online quoting tool to reduce friction in the sale. But despite their great strategy and successful branding efforts, they still have to compete against all the other companies trying to get the same customer. And for most customers, brand recognition and ease of purchase are mostly secondary considerations. If Sungevity’s implied LCOE is not highly competitive, they will have a slim chance of winning business from new customers. Applying basic game theory there will always be competitors who are willing to lower their margins to win market share which in effect lowers the margins for everyone else in the market.
5) Installers Will Have to Find their Place in a Bifurcated System
Integrators will mostly fall into one of two buckets. There will be a small number of large installers with national reach that will gain a cost advantage through economies of scale. In this category, operational excellence will allow a few companies to build profitable businesses. At the other end of the spectrum, there will be an ever-increasing number of small mom and pop installers who will establish themselves in a local market. The only way for them to compete with the big guys is to work with razor-thin margins or possibly no profits at all. As long as the employees and owners can take home a decent salary, the doors will stay open and they will get a steady but small stream of customers.
Electrons are a perfect commodity. Nobody knows or cares where they come from as long as they are there at the right time when you switch on your lights or charge your phone. Since there is no difference in quality between kWhs of electricity, the only thing customers care about is how much they pay for their electricity. Some renewable energy enthusiasts wonder if some people are willling to pay extra for their electricity if it came from a clean source. From my experience, that's unfortunately not the case. Clearly there will always be a minority of customers who are willing to pay a few cents more for energy from a renewable source but for the solar industry to reach any significant scale, it has to be able to compete with conventional energy source in an even playing field.
I think most companies in the solar energy space understand this simple economic reality and are working hard on driving down costs to compete with conventional energy. If the solar industry (or any other rewnewable energy technology) does not manage to reduce their costs to a competitive level, it will be disappear again from the front pages and remain an obscurely small contributer to overall energy mix.
Clearly there are many different issues that play a big role in assessing the level playing field and how much a kWh of electricity costs for any given generating technology. Over the coming posts I'll go into more detail on how to calculate the levelized cost of electricity (LCOE) for solar and how that compares to other sources of energy.