HOW U.S. SUN WILL SELL IN THE NEXT 3 YEARS AND WHY

The United States PV Market: Project Economics, Policy, Demand, and Strategy Through 2013
December 1, 2009 (GTM Research/Greentech Media)

SUMMARY
There has never been a better time to go solar. Incentives are up, panel manufacturers are overstocked, system costs are down and utility money is moving into the marketplace. The price of solar energy electricity is, or is nearing, the price of grid electricity on a widespread national basis. And it is premature to say so but it looks like the recession is receding. If it does, Old Energy costs will go up, which will drive demand for New Energy in general and solar energy in particular. So now is an excellent time to act.

The United States PV Market Through 2013: Project Economics, Policy, Demand, and Strategy, by Shayle Kann and Daniel Englander of GTM Research, notes this constellation of market propositions and describes what is happening within the solar energy industry as players across the spectrum of solar energy business activities position themselves in a ready-to-explode marketplace. It summarizes the utility, large-scale (commerical) and homeowner (residential) markets across the wide variety of state, local and retail markets, describes national trends and analyzes 16 key state markets, considering prospects for financing and demand drivers in each state and each segment of the industry.

The report develops 7 Key Findings:
(1) 2009 U.S. PV demand will grow despite the recession.
(2) By 2012, the U.S. PV market demand will be the biggest in the world.
(3) Secondary states will become increasingly important sources of demand.
(4) Grid parity, the point at which the cost of PV-generated electricity without incentives and the cost of grid-generated electricity converge, has already been achieved in places of high demand and by 2012 there will be 11 states with high enough demand to achieve grid parity.
(5) Growth in the residential sector will be driven by innovative financing.
(6) Utility-scale projects will become the fastes growing area of PV demand through 2012.
(7) To be successful in the U.S. on a national scale, it will be necessary for developers to have adapatable marketing strategies that can accommodate the many different state regulatory, incentive and demand circumstances.

Most important take-away: Solar energy-generated electricity is about to become price-competitive with grid electricity on a widespread national basis. The booming market that follows will offer huge opportunities and require aggressive flexibility.

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COMMENTARY
The worldwide solar industry grew over 50% per year until the recession of 2008-09. With the financial downturn came financing challenges and a solar industry shakeout.

Installed U.S. grid-connected PV capacity grew over 70% per year between 2000, when it was 4 megawatts, and 2008, when it reached 290 megawatts. The U.S. faced many of the same challenges as the world market but expects a big recovery for the simple reason that its sun has barely been tapped.

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On the Key Findings:

(1) 2009 U.S. PV demand will grow despite the recession.
Grid-connected PV demand will reach at least 440 megawatts (MW) this year, from 2008’s 320 MW. With a better-case economic scenario, 2009 demand could reach 544 MW. Residential and local/state government projects have driven and will continue to drive demand growth this year because of 2 important factors: (a) Changes to the 30% federal Investment Tax Credit (ITC) extending it for 8 years and removing the cap on the tax credit so that it applies to the full cost of the system; and (b) More available financing from provisions in the stimulus bill. California is the dominant marketplace, accounting for at least 205 MW, which is 50% of U.S. demand, but important secondary markets are emerging in Arizona, Colorado and New Jersey.

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(2) By 2012, the U.S. PV market demand will be the biggest in the world.
Because of its gift of sun, its population and the market factors outlined above, the U.S. will see the fastest demand growth of any major PV market. It will grow to at least 1,515 MW in 2012, with an average yearly growth between 2008 and 2012 of at least 48%. In the better-case economic scenario, demand could reach 2,022 MW in 2012. The U.S. is expected to pass Spain in demand, and possibly even world-leading Germany.

(3) Secondary states will become increasingly important sources of demand.
California will likely hold 50% of the U.S. demand, but second-tier markets will become ever-more significant markets as their absolute size increases. By 2012, the combined demand from leading secondary states like Arizona, New Jersey, New Mexico, New York, Nevada and Massachusetts will reach at least 376 MW.

(4) Grid parity, the point at which the cost of PV-generated electricity without incentives and the cost of grid-generated electricity converge, has already been achieved in places of high demand and by 2012 there will be 11 states with high enough demand to achieve grid parity.
Each of the 16 leading states that comprise 97% of the U.S. demand market is driving economies of scale with an incentive package. Though heavily sector-dependent, states with high levels of demand, such as New Jersey and California, have already achieved grid parity, or price convergence, in particular market segments. Others are very near it. By 2012, 11 of the 16 states will have passed grid parity in the commercial sector. 10 will have matched or beaten grid electricity costs in the residential sector.


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(5) Growth in the residential sector will be driven by innovative financing.
Financing models that eliminate the need for direct ownership of rooftop systems, such as municipal programs, power purchase agreements (PPAs) and lease arrangements, will create increased uptake in the residential market. Even with grid parity in the residential sector, up-front cost and extended full payback periods will slow demand for residential installations. Innovative financing diminishes these obstacles and will enable the residential sector to grow to at least 363 MW by 2012.

(6) Utility-scale projects will become the fastest growing area of PV demand through 2012.
Utility-scale installations will take market share away from the commercial sector and reach at least 466 MW by 2012. 2 factors will drive utility-scale projects: (a) State (and possibly a federal) Renewable Electricity Standards (RESs), many with solar-specific requirements (solar “carve-outs”); and an increasing awareness on the part of utilities of numerous economic and operational benefits of ownership.

(7) To be successful in the U.S. on a national scale, it will be necessary for developers to have adapatable marketing strategies that can accommodate the many different state regulatory, incentive and demand circumstances.
Unlike other major world markets like Germany, Spain or Japan, the U.S. is 50 sometimes very different and constantly changing PV markets. Success in the coming 2010-to-2012 boom will require project developers and supply chain builders to be adaptable in their market strategies. Rigidity will not succeed but flexibility will reveal the opportunities in the U.S. market complexity.

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The complication in the U.S. is due to the fact that, though aspects of the electricity market are regulated at the federal, state and local levels, the main regulators of price, utility policy and New Energy standards in the U.S. are the state public utility commissions. This means that in the U.S. there are essentially 50 separate markets.

In the past, California and New Jersey were so dominant that the industry simplified its analysis by focusing on those 2 states but that is no longer practical. There is demand in every state. Meeting it competitively necessitates familiarity with every state’s market.

There are 5 basic questions that can bring more clarity to the complexity and identify the best business approaches:
(1) Where in the U.S. is the opportunity for project development?
(2) How will financing and ownership be affected by the recession long-term?
(3) When will PV demand recover and how will the Recovery Act affect it?
(4) When will there be parity between PV-generated electricity and standardized grid electricity and how will the PV market respond?
(5) How does the plethora of federal, state and utility incentive structures affect the economics of PV projects, how does each type of incentive affect solar value and which is the best?

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The study’s analysis and predictions are based on the 16 major state PV markets that make up 97% of U.S. demand. The researchers identified demand drivers and the economics of utility-scale, commercial and residential projects through 2012. It mainly used Levelized Cost of Energy (LCOE) in dollars per kilowatt-hour ($/kWh) as a metric to analyze 100+ projects.

Analytic factors: (1) State (16 primary demand states); (2) Market Segment (Residential rooftop, commercial rooftop and utility-scale ground-mounted); (3) Insolation and utility territory; (4) Available incentives (local, utility, state and federal).

The analysis made 4 important comparisons: (1) Comparison of similar projects in different parts of a single state; (2) Comparison of different market segments within a single state; (3) Comparison of similar projects across states; and (4) Comparison of each individual project to grid electricity prices.

The analysis used the last comparison to predict when various segments of the solar market will achieve prices low enough to be called grid parity and how that will affect demand.

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The complete report includes: Demand projections by market segment for 16 primary state markets (97+% of national demand0; Analysis of demand drivers, incentive value, and subsidized grid parity for each state and market segment; National bottom-up demand forecasts by state and market segment; Analysis of market players and development strategies; Comprehensive listing of PV market incentives and regulations including the stimulus bill and the pending cap&trade legislation; Analysis of trends in financing and structure comparisons; Profiles of 31 U.S. residential, commercial and utility-scale project developers.

A Sample State: Arizona

The state has 2 big demand drivers, (1) High insolation and (2) Lots of available land for utility-scale projects.

Due to 2 main factors, Arizona installed 6.4 MW in 2008, the 7th biggest U.S. growth:
(1) A utility incentive program, and (2)A state RES requiring 15% of the state’s power to come from New Energy by 2025 with a carve-out requiring 4.5% the state’s power (30% of the RES) to come from customer-site distributed generation (which is mostly solar PV).

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APS, one of Arizona’s major utilities, introduced its own PV incentive program with:
(1) an up-front rebate to system owners in exchange for the rights to their RECs,
(2) Residential rebates of $3.00/Watt, up to 50% of project costs or a maximum $75,000, among the highest in the nation,
(3) For commercial project owners, a choice between a $2.50/Watt up-front rebate or a 10-to-20 year Production-Based Incentive (PBI) at varying prices.

Despite the high value of incentives, the residential program has not yet been filled. As of July 31, 2009, $34.5 million was still available for residential rebates in 2009, 70% of the yearly allocation.

Commercial project owners prefer the PBI to the up-front rebate. Only $11.7 million of the total $77 million lifetime PBI fund has been allocated but $52.8 million has been reserved by pending projects. In May 2009, APS petitioned the Arizona Corporation Commission (the state’s public utilities commission) to raise the PBI cap from $77 million to $220 million, but the ACC has not issued a ruling.

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The PBI program may soon be filled. The residential incentive is expected to remain available.

Levelized Cost of Electricity (LCOE) in Arizona: The total Phoenix residential incentive value (including federal incentives) is $0.189/kWh. The total Phoenix/APS commercial incentive is $0.132/kWh. The Phoenix/APS utility-scale projects incentive is $0.105/kWh.

Arizona’s PV incentive package levels the playing field amongst market segments, reducing the differential between residential and utility-scale project LCOE to just $0.01/kWh.

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The residential sector in Arizona will achieve price convergence in 2010 at $0.101/
kWh, after a $0.025/kWh LCOE decline from this year’s level. Insolation variability
results in a $.009/kWh differential between locations in 2009, falling to only $.004/
kWh in 2013. With the APS residential incentive, residential PV in Arizona may become, and remain, a preferable alternative to grid electricity from 2010 on.

While Arizona’s commercial sector LCOE is nearly equivalent to residential LCOE in
2009, commercial electricity prices of $0.083/kWh create a more difficult competitive environment. Commercial LCOE in Phoenix will decline 11.7% in 2010, followed by smaller declines through 2013 so that commercial sector price convergence (grid parity) varies by system location and electricity prices. Phoenix projects will reach price convergence by 2012. Flagstaff projects will follow a year later. Widespread price convergence may be achieved by 2012 to 2013 at prices from $.085/kWh to $.095/kWh.

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Some utility-scale demand will occur from the state’s RES but incentives in Arizona heavily favor distributed generation. Utility-scale projects in Arizona will achieve price convergence with average wholesale peak electricity prices by 2013 at LCOEs
between $0.07/kWh and $0.085/kWh, but this will be very electricity price-dependent.

Distributed generation will play a primary role in Arizona’s market development. There will be a 1-to-2 project per year market for utility-scale installations. Commercial sector demand will grow but be constrained until the ACC increases the PBI cap. Residential applications take the largest market share and continue to grow, with grid parity in 2010.

Bottom line: Solar energy is about to become price-competitive with grid electricity. Navigating the boom that follows will be exciting - and tricky. The Arizona example demonstrates how specific and local the factors that determine New Energy’s success inevitably must be. The old “think globally and act locally” bumper sticker becomes “think locally and act for the global good.”

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QUOTES
- From the report: “This report presents our comprehensive analysis of the downstream market for photovoltaic (PV) power in the United States through 2013. It considers demand, regulatory structures and project economics at the utility, state and federal level. The primary focus of this report is to analyze the proximity of price convergence between PV generation and grid electricity prices in three market segments: residential, commercial and utility-scale. Price convergence, which incorporates both the policy and financial variables that determine demand for PV, underpins our bottom-up, state-by-state, segment-by-segment demand forecast of the U.S. PV market. This report seeks to identify the highest opportunity areas for PV development in the U.S."

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- From the report: “Global PV demand grew at an average rate of 51 percent per annum from 2000 to 2008, led by rapid growth in the German and Spanish markets. However, today’s global PV market is experiencing difficult circumstances. As we concluded in last year’s 2009 Global PV Demand Analysis and Forecast: The Anatomy of a Shakeout II, the shift to a buyer’s market for modules and components has weakened the position of suppliers, forcing them to become both more competitive in their pricing and more innovative in their product offerings. Such diversified strategies are more evident in the U.S. than any other market, owing both to a complex set of policies and to a diverse range of end-market requirements. We argue that embracing strategic diversification will be advantageous for companies competing in the U.S. market.”