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February 19, 2008

Wouldn’t It Be Nice – U.S. Solar Industry Basks in California Sun

John Davies
AMR Research Inc.

“Wouldn’t it be nice if we were older, then we wouldn’t have to wait so long, and wouldn’t it be nice to live together, in the kind of world where we belong…”

In 1966, the Beach Boys opened their album “Pet Sounds” with the now classic song quoted above. Wikipedia quotes an interview with Brian Wilson where he describes how the song “expresses the frustrations of youth, what you can’t have, what you really want and you have to wait for it.” That may make “Wouldn’t It Be Nice” the number one candidate for the solar industry’s 2008 theme song.

Big allowances for a growing industry

The Energy Information Administration documents the United States’ total electricity consumption at over ten billion kilowatt hours (kWh) per day. Energy statistics often stagger with their proliferation of zeros. In contrast to overall energy consumption, worldwide solar generated electricity represents only one-tenth of one percent of the $3 trillion global energy market. While that statistic may depress environmental activists, it’s the type of market opportunity that makes venture capital salivate.

As recently as 2003, cleantech investment totaled less than $250 million. National Venture Capital Association president Mark Heesen recently announced that cleantech funding totaled a record $3 billion last year. That’s up 70% from 2006, whereas total VC funding rose just 9.4%, according to figures from the NVCA and Thomson Financial. Solar investments accounted for over $1 billion of those overall venture investments. Much of this activity has focused on California. As noted by the Cleantech Group (who hosts investors, entrepreneurs, and corporate strategists at Cleantech Forum XVI in San Francisco at the end of the month), VCs invested $654 million in 33 solar-related deals in California in 2007.

According to the Earth Policy Institute, the United States, which gave the world the solar cell, has dropped from third place to fifth as a solar cell manufacturer since 2005, overtaken by China in 2006 and Taiwan in 2007. However, the United States is third (behind Germany and Japan) in terms of solar installations. While the industry is poised for strong growth, projections outside of California are often tempered as federal tax credits are typically extended on an annual or bi-annual basis. This creates uncertainty in the market for investors, especially as the Senate was unable to add an extension to the solar tax credits in the recent economic stimulus package. What the solar industry trade groups would like to see is an extension of the 30% solar investment tax credit for 8 years for commercial and for 6 years for residential installations. That would get them singing.

California offers solar industry “the kind of world where we belong”

California received over half of all solar power venture investments last year, which makes sense because 90% of the U.S. solar market is in the state. While 36 states offer rebates or incentives to install solar systems, none is investing like California. The California Solar Initiative (CSI), launched in January 2006 as part of the state’s Million Solar Roofs program, provides more than $3 billion in incentives for solar power. The goal is to generate 3,000 megawatts of new solar power statewide by 2017.

The California Public Utilities Commission (CPUC), which administers CSI incentives, recently published a progress report on the state’s activities. According to the report, demand for CSI incentives in 2007 exceeded California’s total installed solar generation from the previous 26 years. The report documented that “since 1981, California installed 198 megawatts (MW) of grid integrated solar statewide. From January 1 through December 31, 2007, the California Solar Initiative program has applications for 208.6 megawatts (MW) of new solar.”

Residential installations account for 89% of all incentive applications, but only comprise 15% of the total MW to be installed. Non-residential applications from commercial, government, and non-profit applicants make up 11% of the total applications but will account for 176.8 MW or 85% of generating capacity to be installed. The contrast between California’s legislation and the federal government’s policies is stark as the state has established a ten year commitment with a goal of creating a self-sustaining solar industry free from subsidies after 2016.

While its rare for anyone to use the words “nimble” and “government” paired together, one of the more impressive aspects of the California program is how the state has moved ahead quickly with the program since it was established in 2006 with a philosophy of improving it along the way. As with any aggressive program, unintended consequences arise. Through a series of quarterly public meetings, the CPUC and stakeholders discuss issues and potential solutions. These forums have avoided ratepayer as well as industry problems as the program is implemented.

Inside solar-what’s ahead for industrial installations?

As the solar industry grows, it offers opportunities for a wide range of industries to consider adding renewables to their energy portfolio. Over the course of the next few months we’ll highlight some of the companies to consider. We’ll start with a look at SunPower (see “Dark Glasses Required as SunPower Shines“) and follow with upstart GreenVolts, utility-scale BrightSource, and others in the coming months.

John Davies is Vice President of Green Research at AMR Research, Inc. Send an email to John at jdavies@amrresearch.com.

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