ORIGINAL REPORTING: WHAT THE SOLAR MARKET LOOKS LIKE NOW, AND WHERE IT'S HEADED
What the solar market looks like now, and where it's headed; Solar saw record growth in 2014, but a tougher business environment is coming
Herman K. Trabish, March 26, 2015 (Utility Dive)
Solar is firing on all cylinders and running all-out — but a new report shows there are pitfalls as well as opportunities ahead.
The U.S. installed more than 6.2 GW of photovoltaic (PV) solar in 2014, up 30% on the year before, making it the best year ever for PV. The expansion was fueled by record growth for both residential sector and utility-scale solar, but there's reason to believe that the explosive growth for both sectors could soon sputter.
“We are now coming off three years in a row, 2012, 2013, and 2014, where the residential market grew 50% each year,” said GTM Research Senior Vice President Shayle Kann, co-author of the recently-released report, "U.S. Solar Market Insight 2014 Year in Review," which his researchers produced in partnership with the Solar Energy Industries Association.
“You rarely see that kind of growth and we are forecasting a fourth year of it in 2015 and probably a fifth year in 2016," Kann told Utility Dive.
Solar made up 32% of the year's U.S new generating capacity, more than any other generation source except natural gas. All three solar market sectors — utility, non-residential, and residential — had over 1 GW of new capacity. Over a third of all currently-operating solar went into service during 2014.
In the residential solar boom of last year, California was the key. It now constitutes over half of all U.S. residential solar.
More importantly, Kann noted, “The California Solar Initiative expired about a year ago but the California market continues to grow by leaps and bounds with no state-level incentives besides net metering and rate structures.”
Most of the other major state residential solar markets still have state-level incentives in place.
Utility scale solar and the 'cliff'
Utility-scale solar overcame a lull in 2014 that had plagued it over the last few years, Kann said. Utility procurements previously driven by state renewables mandates had slowed as utilities reached their required capacities. But utility scale solar’s price of $1.55 per Watt is now low enough for developers to win power purchase agreements from utilities in the absence of a regulatory mandate.
“We are tracking almost 5 GWs of PPAs that have been signed for utility scale solar outside of RPS standards,” Kann said.
Developers are winning PPAs through competitive bidding for technology-agnostic utility proposals, meeting avoided-cost PURPA requirements, and by directly selling solar-generated electricity to large volume retail offtakers like Apple and Google.
Utility scale solar could, however, be racing toward a cliff, according to the report. The 30% federal solar investment tax credit drops to 10% for business installations and to zero for private installations on January 1, 2017.
“Virtually all the utility scale solar in the pipeline is planned for completion in 2015 or 2016,” Kann said. “There will be a huge boom this year and next, and then a cliff in 2017.”
The rate structure cliff ahead of residential solar
Residential solar will feel the consequences of the ITC sunset as well, but an equally sharp drop off could hit the sector before the beginning of 2017.
“Rate structure revisions threaten growth,” the report notes. ”There are more than 20 ongoing proceedings that could impact residential solar’s value proposition through either changes to net energy metering or electricity rate structures.”
Some of the proceedings will be settled this year, it predicts, though “new debates will undoubtedly emerge.” So far this year, solar has been hurt by a legislative action in West Virginia and by rate cases brought by Arizona utilities Salt River Project and Tucson Electric Power. An Indiana bill to change net metering laws was turned back. An important renewables mandate decision is now working through the Illinois legislature, and the North Carolina General Assembly has just taken up a solar leasing law.
“The most important ones are those that will influence a big solar market,” Kann said. “Because California is about half the country’s residential solar, the results of its AB 327 process and the NEM 2.0 proceeding will make or break the U.S. residential market.”
Arizona and Hawaii are other state proceedings to watch, Kann said. New York’s REV process is important both because of the innovations it would initiate and because the state is now one of the biggest distributed solar markets.
Massachusetts is also important to watch because of the size of its market. Whether its solar advocates can revive the landmark 2014 compromise that gave the minimum bill concept so much notoriety is not yet clear, Kann said. But the minimum bill idea continues to be important.
“Solar advocates are pushing a minimum bill provision as a compromise solution in a number of state proceedings,” Kann said. It is preferable to a demand charge or a fixed charge “because it has a smaller impact on the economics of solar but allows utilities to have some visibility into the revenue they will get from solar customers.”
The coming changes in non-residential and residential solar
Kann said one of the report’s surprises was that it revealed the non-residential, commercial-industrial market didn’t rebound late in the year.
“We had forecast it would have single digit market growth, but it contracted,” he said. After 3% growth in 2013, it fell off 6% in 2014.
Following growth driven by federal stimulus act funding support for government and school installations between 2009 and 2012, the sector has been flat. Also, Kann said, the SREC-driven New Jersey boom “busted” and impacted much of the commercial-industrial-scale solar market.
Perhaps most importantly, “nobody has yet cracked the code on how to scale commercial solar,” Kann said. “It is a big potential market opportunity but it is also really hard to get the details done, to finance it, to get things uniform across different installations, and to keep transaction costs down.”
Community solar could be a breakthrough for the sector and the GTM Research team is “bullish” on it, Kann said. It is still “geographically limited” because there are only a few states with meaningful programs. But a lot of others are considering it.
One of the strengths of community solar, Kann said, is that it offers utilities a way to get involved with distributed generation.
“There are a number of program models. Some have a utility as an active participant and some don’t," he said. "But utilities see in it the opportunity to own solar and rate base the asset. And even if they don’t, they can maintain the customer relationship, which they care about, and they can sometimes get lines and wires fees.”
Growth in 2014 was driven primarily by utility-scale solar PV but the fastest 2015 growth will come in the residential market, according to the report. And the residential market is about to shift.
Third party ownership of residential solar grew to about three-fourths of the sector in 2014. But Kann believes it has peaked. With the many new loan opportunities now offered by solar companies, he said, the 2015 market will start to turn back toward direct ownership. That might have happened last year, but many of the important loan products — beginning with SolarCity's loan option — were not available until the fourth quarter.
The hope for concentrating solar power
In the next two years, utility-scale solar will be led by PV rather than concentrating solar power (CSP).
CSP can provide more and cheaper storage than PV and can therefore provide either smoother power or 24-hour power, Kann acknowledged. But utilities have so far failed to value those attributes and, instead, awarded contracts to lower-cost PV projects.
When there are higher penetrations of PV and other intermittent generation, utilities could start placing more of a premium on storage or smooth power. Then CSP could make a comeback. Or, conceivably, Kann said, utilities could stop signing fixed-price PPAs for utility scale solar and instead choose variable-price or time-of-use PPAs in which CSP’s storage would be more competitive.