Unlike the integrated package presented in Part III, the following executive summaries do not necessarily reflect the positions of REPP, the REPP Board of Directors, or the Advisory Committee assembled for this project.

CHAPTER ONE: Government Buy-Downs for the Residential Market

Thomas J. Starrs of Kelso Starrs and Assoc., Vashon, WA
Vincent Schwent of the California Energy Commission, Sacramento, CA

Executive Summary

Government-funded buy-down programs consist of rebates or other cash subsidies to consumers or retailers that reduce the cost of a new technology. In recent years, policymakers in various regions have used buy-downs to create markets for photovoltaic systems, and several more such programs are under development.⁴ In this paper, we recommend a coordinated array of state-run buy-down programs, the state funding of which would be matched by federal funds collected through a national system benefit charge. To expand markets for PV successfully, however, such a program must be accompanied by the removal of diverse barriers to PV market formation: we recommend formation and support of a core group of professionals able to assist states in this market transformation work.

State-funded buy-down programs for the residential PV market, matched by a federal system benefit charge on electricity sales.

Most notable among American efforts, California initiated its Emerging Renewables Buydown Program in March 1998. (PV buy-down programs in Japan and Germany have been under way somewhat longer.) Receiving $54 million over four years from the state’s system benefits charge (set to expire in 2002), this endeavor will disburse rebates to purchasers of small wind, fuel cell, solar-thermal electric, and PV systems. Over time, the program will offer progressively smaller rebates on a per-watt basis. At this very early date in the program’s history, it seems successful at encouraging sales of medium and large PV systems, but has attracted only a few dozen purchasers of small systems. This indicates, we believe, the need for simultaneous market transformation activities of the type described elsewhere in this collection of reports. (See, for example, Policies to Support a Distributed Energy System by Thomas J. Starrs and Howard Wenger, and Public Education and Professional Training by Larry Shirley, Shawn Fitzpatrick, and Chris Larsen.)

Supporters of buy-downs refer to two major rationales for their use. First, short-term subsidies such as buy-downs stimulate technology purchases at early (high) prices, thereby encouraging manufacturers and distributors to accelerate their investment. This raises production levels, which in turn decreases prices and expands markets. Second, the early sales stimulated by buy-downs help develop the necessary infrastructure to support larger, non-subsidized markets in the future and force the early resolution of institutional barriers. These include, among other problems, utility interconnection requirements, lack of financing for purchasers, and building code officials ignorant of the technology.

Analysts skeptical of buy-down programs raise three concerns: that the marketplace may perceive buy-downs as transitory, and resist the investment necessary to achieve the expected economies of scale; that governments should not attempt to select technology winners and losers by their eligibility for buy-downs; and that subsidies such as buy-downs can skew the market for PVs in various ways. Based on the experience to date, we offer six recommendations to address these concerns.

1. Lower non-price barriers: Buy-downs are a central element to a commercialization strategy, but they will not succeed if institutional barriers remain in place, or if policymakers and PV firms neglect consumer protection and education.

2. Allow flexibility: For a buy-down to succeed, its managers require the flexibility to adapt the program to the market’s response. Consequently, enabling legislation or regulations should avoid specifying program details and instead should allow the implementing agency to determine them.

3. Guarantee reliability: Program features critical to success include a multi-year term, certainty of funding during the program term, avoidance of arbitrary time limits for expenditure of program funds, and the ramping up of demand and ramping down of the level of incentive over the term of the program.

4. Don’t pick winners: On the basis of policy goals and physical resources, program designers may appropriately determine which broad technologies (such as PVs or wind) to include in their buy-downs. However, government should avoid favoritism at the sub-technology or company level.

5. Use auxiliary financial tools: Other financial incentives that can complement and apply leverage to buy-downs include net metering, property and sales tax exemptions, income tax credits and a low interest rate, and financing with long terms and low interest rates for purchasers.

6. Coordinate programs: States and the federal government must coordinate their activities to maximize the number, size, and effectiveness of buy-down programs for PVs and other renewables. A state-federal matching program may make it easier to secure protection for PVs and other renewables in any state restructuring proceedings. However, federal participation should not be a requirement for state programs to go forward.

Action Recommendations

We recommend buy-downs as a major building block to expand domestic markets for PV. Nevertheless, we prefer to place incentives for PVs within the context of a broader renewable energy program. In addition, we believe that a buy-down can only succeed if numerous other market-enabling conditions are met, which will require a large, coordinated effort by a core group of professionals. We propose the following two-part action plan:

A National Systems Benefit Charge for PVs and Renewables

Federal legislation should create a nationwide system benefits charge of 1 mill (0.1 cents) per kWh on all electricity sold in the United States, perhaps as part of a broader charge to guarantee a variety of public-interest programs. Such a charge could generate approximately $1 billion per year, and should be reviewed after 10 years. The money collected should be held in a trust fund and invested until spent. They should not be subject to any short-term time restrictions for their expenditure.

The fund would be used solely to provide matching grants to states that maintain their own programs to provide incentives for purchases of PVs or other renewables. No matching funds would be granted for R&D expenditures, nor could matching funds be allocated to programs that only mandate purchases of renewables, such as portfolio standards or set-asides. The Department of Energy would determine the level of matching, which would depend on the number of participating states and the level of their commitment. Presumably, the federal commitment would be substantial and on the same order as the amount of funds directly committed by the states.

Individual states would determine the details of their buy-down programs, including the identification of appropriate recipient renewable technologies and the level of buy-down payment. Depending on the states’ decisions, the matching program we describe might stimulate more than 1,000 megawatts of new photovoltaic purchases over its lifetime, as well as thousands of megawatts of other renewables. Thus its impact on the commercialization of renewables would be significant.

A Solar “Rapid Response Team” to Coordinate State Efforts

Every effort should be made to maximize the number, size, and effectiveness of state buy-downs and other programs for renewables, especially in states currently restructuring their electric sectors. To accomplish this, we recommend the formation of a small group of experienced, knowledgeable individuals who can devote their full efforts to coordinating national renewable energy efforts at the state level. This effort is needed immediately, as at least six states currently have programs in varying degrees of implementation and operation.

Such an effort would have three broad components:

1. Identify states potentially interested in establishing new PV and renewables programs. Work with state legislatures, regulators, and local non-governmental organizations as appropriate to assist in the creation of state-level incentive programs. Provide information, model legislation, communication with counterparts in other states, and expert witnesses as needed.

2. Coordinate and establish on-going communications between states that have enacted programs. Provide information, analysis, and expertise to the program designers and implementers in each state to ensure that programs enjoy maximum success and provide a coherent and ordered program of market incentives.

3. Research the effects and impacts of these programs on the market prices of PVs and renewables and the development of the necessary long-term infrastructure. Provide this information to the states in a timely fashion so that state policymakers can adjust their programs (for example, with respect to buy-down level, program size, and duration) as necessary, to ensure continuous, increasing sales of renewable energy.

CHAPTER TWO: Industry Development Strategy for the Photovoltaics Industry

Eric Ingersoll of Lucid, Inc., Cambridge, MA
Daniel C. Gallagher of Lucid, Inc., Cambridge, MA
Romana A. Vysatova of the J. F. Kennedy School of Government, Cambridge, MA

Executive Summary

PVs will not compete broadly with conventional electricitygenerating technologies in the United States unless PV prices fall substantially. These drops will most likely occur as manufacturers increase cumulative volume and capture associated economies of mass production, and as the business operations at other links in the value chain mature and expand. In the interim, PV firms will sell some of their relatively expensive wares to customers who value characteristics of PV other than the cost of electricity, such as independence from the grid, reliability, portability, or benign environmental impact. While conceivably lucrative, these markets are too small to produce appreciable, volume-driven price reductions.

Relying on subsidies to supply the difference by producing “apparent” cost reductions for consumers in the United States and other developed (that is, wired) countries would be expensive, perhaps costing billions of dollars. Yet there may exist a more economically efficient alternative: tapping markets in the developing world in which PVs can already compete. In the developing world, where some 2 billion people still lack electricity, PVs do not have to contend with an established distribution infrastructure and can enjoy a price advantage over conventional alternatives. PVs can also compete in these markets on the basis of value rather than price. For instance, the technology’s modularity is an asset in the developing world, because PV power investments are scaleable — that is, affordable — to an extent that large-scale conventional technologies are not. Most important, markets for PV in the developing world may prove large enough to spur cost-reducing investments in PV production and distribution facilities.

That photovoltaics are not yet widely deployed in markets in the developing world suggests that barriers such as distance, geographic size, fragmentation, and cultural and regulatory diversity inhibit deployment. To the extent that individual PV companies, constrained by small size and meager resources, cannot overcome these barriers, effective and responsive mar-keting infrastructures will fail to develop. The end result will be high costs, poor presence, and a lack of optimal (or perhaps even appropriate) products.

However, domestic markets exist for which firms could develop PV-based products and the associated business infrastructure. Although too small to produce the full economies of mass production sought by the industry, or perhaps even be profitable on their own, these domestic markets could serve as testing grounds for new products and market development strategies, thus providing experience that could spark rapid penetration of international markets. With effective development of the necessary distribution infrastructure — including appropriate financing mechanisms — these larger markets could then help to accelerate demand for PVs dramatically.

Domestic markets exist in which firms could test PV-based products appropriate for the developing world — the only market capable of driving economies of scale.

To identify PV market barriers and development opportunities we recommend value-chain analysis. This technique entails explicit consideration of each step in a product’s distribution chain — product design, manufacturing, sales, and service — thus identifying the weak or absent elements in a potential product’s journey from raw material to no-hassle use by the customer. For example, the value-chain approach could be used to develop a strategy for PV penetration of the remote pump market. At more than 10,400 megawatts a year, the remote pump market alone is some 70 times larger than total world output of PV. Given PVs’ performance characteristics relative to the dominant pump power technology (i.e., the diesel engine), this should be a major opportunity — yet the industry has achieved little in this area so far.

Action Recommendation

We recommend that an appropriate analytic organization apply value-chain techniques to identify the best market opportunities for PV, identify domestic analogs for these markets (where possible), and devise strategies for their coordinated development.

We suggest convening a meeting of potential funding organizations in order to secure joint support of this program. Invitees might include donor organizations such as the Rockefeller Brothers Fund, Rockefeller Foundation, and MacArthur Foundation; governmental agencies specific to a region, such as the Massachusetts Technology Collaborative and the Massachusetts Department of Economic Development; or federal agencies. It might also be appropriate to require cost-sharing by the PV industry.

Once funded, the program would develop PV market “industry scripts,” specifying individual roles and activities. Steps might include:

• analysis of PV industry structure;

• analysis of submarkets by geographic region and application;

• identification of PV opportunities in the submarkets;

• mapping of existing value chains;

• identification of product development issues and opportunities;

• identification of relevant market barriers;

• identification of ways to address these barriers; and

• identification of specific stakeholder roles in development of the market.

Depending on particular circumstances, PV market development activities could include the following:

Apply value-chain analysis to identify promising PV products.

• Foundations or other entities might arrange a joint cash prize for the best proposal to develop or refine products and marketing strategies to meet key market segments;

• The Overseas Private Investment Corporation or the Export- Import Bank might develop a competitive financing program tailored to the needs of small PV equipment exporters; and

• Foundations or the World Bank might develop a fund to provide “money-back guarantees” to early distributors and customers, thus encouraging them to try PV products, linked to the collection and dissemination of key information about customer and distributor satisfaction or lack thereof.

CHAPTER THREE: Policies to Support a Distributed Energy System

Thomas J. Starrs of Kelso Starrs and Assoc., Vashon, WA
Howard Wenger of AstroPower West, Walnut Creek, CA

Executive Summary

The established model for generating electricity sites large nuclear, fossil fuel, or hydropower facilities in central locations and delivers energy to scattered customers via a high-voltage transmission grid and, subsequently, a low-voltage distribution network. Recently, several analysts have explored and, in some cases, begun to implement an alternative model, in which very small generating units produce power close to where customers actually need it.

There remain substantial institutional barriers to distributed generation.

This model of distributed generation, which also accommodates small energy storage and energy efficiency technologies, can provide technical and economic benefits to utilities and customers that are unavailable from traditional central-station generation. These include relief of congested transmission facilities and slower, modular capacity increases more in line with today’s competitive, capital-constrained energy market. Furthermore, distributed generation can remove customers’ dependence on external suppliers for their electricity needs.

PV technology represents the quintessential distributed generating technology. It can provide high-quality, reliable power anywhere the sun shines, and it can generate power on any scale from milliwatts to megawatts. Recognition of the benefits of distributed generation by utilities, utility regulators, energy users, and other stakeholders in the electricity industry is likely to contribute to the expansion of PV markets.

Despite the technical and economic attractiveness of distributed generation, there remain substantial institutional barriers to its adoption. These obstacles reflect a century of central-station generation, with its associated laws, regulations, attitudes, and habits. In most cases, the appropriate response to these barriers consists of modest policy action. Removing the barriers will not guarantee the success of PVs, but it is a necessary precondition to that success.

Action Recommendations

To promote the development of PVs and other distributed energy systems, policymakers must take the following actions:

1. Offer net metering: Adopt pricing policies that recognize the value of distributed generation. Net metering, the simplest of these policies, allows owners of distributed PV systems to sell their excess electricity to offset retail power purchases from their local electric company, while buying any required shortfall for the same price, thus paying only for the “net” electricity consumed.

2. Institute standardized interconnection requirements: Although organizations such as Underwriter’s Laboratories and the Institute of Electrical and Electronics Engineers have developed standards for the safe interconnection of PV systems to the electric grid, utilities have the discretion to accept or modify such standards, resulting in a melange of requirements that differ from state to state and even within states. This prevents PV manufacturers from developing products for a national market. Electric companies should be encouraged to agree on an industry standard as an alternative to a standard mandated by the federal government and enforced by the states.

3. Offer standardized power purchase agreements: To attach a PV system to the grid, system owners must sign a power purchase agreement (PPA) with their local utility. Unfortunately, most utilities developed their PPAs for facilities with capacities up to hundreds of megawatts, rather than PV systems of perhaps a few kilowatts. Understanding these documents requires specialized — and expensive — legal expertise, presenting a substantial and unnecessary obstacle to PV market development. State policymakers must require that utilities offer simple, straightforward contracts to customers installing their own PV systems.

4. Minimize additional fees: Utilities frequently impose various fees, for example for engineering design reviews, metering, permitting, and utility insurance. These charges are arguably discriminatory and, at least, often incongruously onerous for small PV systems. Policymakers wishing to promote PV development must minimize these “hidden” costs or eliminate them by instituting standards. Otherwise such barriers will thwart even the best designed PV program.

5. Prohibit restrictive homeowners’ covenants: In many cases, developers of residential real estate institute covenants to restrict property modifications or other behavior perceived to lessen a community’s aesthetic appeal and thereby its commercial value. Often, homeowner associations retain these restrictions after a development is completed. According to solar professionals, these regulations constitute a large and unaddressed barrier to PV market development. Removing this barrier will require a combination of state legislation and education for associations of home builders and owners, along with coordinated legal intervention by state solar trade associations (or the “solar rapid response team” proposed above in Government Buy-downs for the Residential Market by Starrs and Schwent) when the presence of the state proves an insufficient safeguard.

6. Enact and enforce solar zoning laws: U.S. law generally accepts the right of property owners to build as they please over the right of adjoining property owners to air, wind, light or sunshine. Although a majority of states now recognize the validity of solar easements — voluntary agreements, negotiated individually — land use planning and zoning laws may prove a better vehicle for protecting solar access because of their broader application, simpler implementation, and more effective enforcement.

7. Ensure the fairness of future distribution utility rules: Today’s integrated utilities (firms that generate, transmit, and distribute power) may sense an incentive to discourage distributed, customer-owned generation such as PVs, in that regulators calculate the utilities’ allowed profits on the basis of the capital equipment they themselves purchase and install. Restructuring of the electric system will pare the regulated portion of many of today’s integrated electric companies into residual distribution utilities. Regulators will retain control over these firms, probably pegging their allowed rates to the amount of electricity they deliver. Thus, although disinterested in generation per se, the distribution firms will retain a financial incentive to discourage self-generation. Federal and state regulators must devise performance-based regulations that give distribution utilities an incentive to encourage PV and other distributed technologies — or that at least remove the incentives to discourage these technologies.

Finally, on a broader level, the PV community must reach consensus on at least two strategic questions. First, in the short term, they must consider whether and how to ally themselves with other distributed resource interests. Models for this collaboration include the California Alliance for Distributed Energy Resources and the Distributed Power Coalition of America. We acknowledge the controversial nature of such alliances: chief among scenarios to consider is the possibility that other, better funded technologies — for example, gas-fired microturbines or fuel cells — could use the political appeal of PVs to advance the cause of distributed energy, and subsequently squeeze PVs out of the market. Nevertheless, opening the market for distributed energy helps PVs. We believe that the very weak financial and political position of the PV community makes such alliances necessary: PV technology is in a tough spot, and must make tough choices.

Second, in the long term, supporters of PVs must address their relationship with established electric utilities and consider what kind of entity can best bring PVs to market: Electric utilities are well established, highly experienced, well capitalized, technologically savvy, and, from many customers’ point of view, trustworthy and likely to remain in business indefinitely. They control access to distribution networks, and are likely to pursue market opportunities that can be smoothly integrated into their existing networks. On the other hand, companies developing PV and other distributed generating technologies are likely to be more innovative, entrepreneurial, and creative, and they have no complicating commitment to central station technology. Distributed generation in general, by virtue of its real technical and economic advantages, poses a genuine threat to the established business of how electricity is made and delivered. Established energy firms can become potent enemies if policymakers freeze them out of the market for distributed generation. For this reason, we believe it wisest to provide opportunities for all potential market participants, while ensuring through policy safeguards that utilities cannot use their control over distribution networks to unfair competitive advantage.

CHAPTER FOUR: Government Procurement to Expand PV Markets

Joel B. Stronberg of the JBS Group, Purcellville, VA
Virinder Singh of the Renewable Energy Policy Project, Washington, DC

Executive Summary

Federal, state, and local governments can play a crucial role in expanding the market for PVs in the near term — not only through their policy decisions, but by means of their own purchasing power. Concerted government purchases could have an enormous positive impact on the PV industry. In 1995, the federal government alone constituted the nation’s largest electricity consumer, buying $3.5 billion worth of power. It also owns extensive property: countless office complexes, remote buildings and parks, vast stocks of residential housing, and other installations. If the federal government installed enough PVs at its facilities to generate just 1% of the electricity it consumes, it would require 334 megawatts of new PV capacity — more than six times as much as the U.S. PV industry shipped in 1997.

The renewable energy industries generally, and the PV industry in particular, would benefit from government purchasing in two main ways:

• Government purchases can address the chicken-and-egg dilemma of technology commercialization. Large government purchases will lower the net cost of the technology, leading to private market demand and a virtuous circle of increasing sales, swelling production, and falling prices.

• Governments, as important “early adopters,” can help overcome the many institutional barriers to pervasive PV markets. Early adoption paves the way for technologies whose commercialization requires integration within complex technical or regulatory systems.

Unfortunately, purchasing officers rarely consider PVs, often due to the technology’s high first-cost compared with various alternatives, as well as to rules that often require purchasing officers to consider cost rather than value in their decisions. Purchasing agents also often lack a means by which they can consider the environmental costs to society in their buying decisions. Finally, professionally cautious purchasing agents may doubt that renewable energy technologies will perform adequately, or that the firms that sell them can provide dependable service and future supply.

A carelessly designed procurement program might have little positive impact on the PV market. In fact, it could have a negative impact if it distracted PV firms into a line of business with little resemblance to private-sector markets.

Government purchases must train PV firms for the consumer markets on which they ultimately will have to depend.

A program that encouraged firms to acquire marketing and administrative skills, cost structure, and an organizational form that facilitated only the unique process of government contracting would leave them less able to compete in non-government markets. Most dangerous of all, without lasting political support and long-term incentives for risk-averse purchasing agents, government demand for PVs could dissipate, leaving firms with excess capacity, burdensome debt, and the threat of bankruptcy.

An effective program for the government purchase of PVs and other renewably generated energy would account for the high first cost of PVs and would convince purchasing agents that political leaders were willing to accept the cost; it would also pursue innovative financing options to limit the cost. It would educate the general public and government officials on the rationale for such purchases. It would remove confusing and conflicting regulations, and give purchasing agents the analytic tools to consider environmental costs in their decisions. Likewise, the program would include mechanisms to assure procurement officers that PVs are reliable, effective, and safe — and will be adequately serviced by the seller. The program would nudge the PV sector in the correct direction, by matching, as far as possible, the demands of government purchasers to the demands of the private market on whom renewable energy firms will ultimately depend. And by aggregating municipal, state, and federal government facilities in a given area and building on existing energy efficiency programs, the program would use tax dollars efficiently and advance local economic development.

Action Recommendations

Our specific recommendations fall into four broad categories. Some recommendations concern more than the narrow topic of PV procurement. We include them here to demonstrate just how much must be done to create the context in which a PV procurement program could succeed.

1. Resolving existing regulatory and legislative conflicts:
   • Grant federal agencies the authority to choose their energy suppliers.

   • Require life-cycle costing procedures by removing 10-year payback requirements.

   • Exempt renewable energy projects from the 10-year contract-term limit.

2. Creating an integrated procurement framework:
   • Streamline the existing procurement process.

   • Permit agencies to purchase renewable energy technology and green power.

   • Aggregate purchases among federal, state, municipal and other government entities.

   • Create an effective implementation structure.

   • Set quantitative goals.

3. Building the confidence of purchasing agents:
   • Demand long-term warranty protections for the entire system, not just the PV modules.

   • Develop standards and performance measures.

   • Train facilities managers and service personnel.

4. Financing:
   • Increase agency budgets to cover the higher first-cost of renewable energy systems.

   • Extend authority to sign Energy Service Performance Contracts for a minimum of 15 years.

   • Expand agency authority to use funds from separate accounts for related purpose.

   • Change the federal tax code to permit the issuance of tax-exempt bonds in support of renewable energy projects.

   • Enact a national Renewable Portfolio Standard and/ or Systems Benefits Charge.

It will be difficult to change governmental energy practices. Legislation and executive action can accomplish a great deal in the short term (that is, within a year), but full implementation at the federal level will require several years of persistent work. Elected policymakers and professional purchasing officers will only undertake and carry forward this tough task if they perceive strong public support. For this reason, we believe that implementation of an effective government purchasing program will require a strong public education effort, a targeted advocacy campaign, and a convincing demonstration by the renewable energy industries that the goal is worthwhile.

CHAPTER FIVE: Financing PV Production Capacity Through Risk Management

Eric Ingersoll of Lucid, Inc., Cambridge, MA
Robert DiMatteo of Draper Laboratories, Cambridge, MA
Romana Vysatova of the J. F. Kennedy School of Government, Cambridge, MA

Executive Summary

In order for the use of PVs to reduce carbon emissions dramatically and to expand the grid-connected market, manufacturers must reduce product costs, perhaps to a level where PV-generated power can compete with alternative energy sources. In addition to subsidizing R&D, conventional PV policy strategies focus on “leveling the playing field,” either by increasing the cost of conventional power (through carbon taxes or tradable permits, for example) or by lowering the apparent cost of PVs (through rebates, perhaps, or tax credits). In contrast, this paper proposes a market-based strategy for lowering the cost of PVs by linking investment in larger, more efficient PV production facilities with new demand created by the lower-priced product. We propose the introduction of “project finance” to the PV sector; this tool would allow PV firms to obtain investment on the basis of expected future revenue, secured by aggregated contracts to purchase PV products.

Photovoltaic firms and their backers can use project finance to manage many of the risk factors that hinder large-scale investment in PV production capacity. In general, project finance uses a project’s expected future revenue stream to obtain initial investment capital, and allocates the risks and rewards among a variety of stakeholders. Project financing proves especially apt where strong demand for a project’s output encourages purchasers to contract to buy that output at a specified price at some specified time in the future. Project finance is currently more typical of traditional “constructed” energy technologies such as gas-fired power plants than it is of new, “manufactured” energy technologies such as PVs. But project finance is becoming more common generally in the manufacturing sector, and could bring important benefits to PV firms.

To attract capital to the PV industry, manufacturers must convince sources of finance that the unsatisfied demand for PV systems on the part of scattered families and businesses constitutes a reliable market. To overcome this market/sales risk, we suggest the formation of “intermediary” agents, who would pool final consumer demand by entering into forward contracts (that is, bilateral contracts for future purchase at a set price and time) with PV producers, possibly on a secured basis or with third-party guarantees.

The existence of intermediaries would tie demand directly to investments in new plants. By pooling and guaranteeing future demand, forward contracts would provide security for the financing of new PV production facilities. Entities able to play the role of intermediary include power marketers, municipal utilities, energy service companies, purchasing cooperatives, real estate developers, and retail financial institutions.

Fostering dramatic production scale-up through the financial means described here may stimulate the PV industry at a lower cost than traditional policies such as direct subsidies of output or loans for plant and equipment. (It may also be used in conjunction with these policies.) However, the initial costs involved in educating the financial community, as well as developing the necessary contracts and documents, constitute a hurdle to achieving financing efficiency by this method. It would be appropriate to spend public — government, non-profit, or charitable — funds to help create this infrastructure, including the creation of educated financial services companies for subsequent transactions.

Action Recommendations: The “What”

By using standard approaches to risk management, the key obstacles to financing large-scale manufacturing facilities on a project basis can be overcome. Although these approaches are already available, they will need to be adapted for use by the PV industry. Some of the key tasks to accomplish this adaptation are outlined here.

1. Steps required to demonstrate economic feasibility:
   • Develop project pro formas necessary for bond issuers.

   • Model all financing costs and risk management costs.

   • Determine optimal capital structure for the project.

     Outcome: Determine production costs at which projects will be viable, and produce a detailed eco-nomic feasibility model.

2. Steps required to access the bond market:
   • Work with bond issuers/investment banks to determine possible deal structures and a standardized methodology for analyzing the risk of PV projects.

   • Identify other necessary players (such as those who can provide a letter of credit or guarantee).

     Outcome: Develop relationships with capital providers and reach consensus on how to structure deals and address risk.

3. Steps required to create performance insurance:
   • Determine the requirements for obtaining performance guarantees from insurers.

   • Work with manufacturing equipment suppliers and national laboratories to produce data on reliability and cost.

   • Compare with performance guarantees for existing products.

     Outcome: Develop prototype performance guarantee.

4. Steps required to create forward purchase contracts:
   • Explore alternative structures for the forward contract and evaluate them based on marketability and the level of security required by lenders and other stakeholders.

   • Work with mortgage issuers and insurers, including Fannie Mae and banks, to develop prototype contract.

     Outcome: Develop prototype forward purchase contract

5. Steps required to create Structured Demand Contracts (SDCs)
   • Explore security issues and solutions such as mortgage-backed SDC for distributed consumers, SDC guaranteed by back-up buyer, and large-buyer SDC.

   • Test market offers to customers and incorporate feedback into offer.

     Outcome: Develop prototype offer for consumers.

Action Recommendations: The “Who”

We describe the steps above as imperatives without subjects; we do not specify who should do these things. This reflects the basic nature of our proposal, as an instrument of voluntary corporate policy, rather than one of mandated government policy. To go forward, it will be necessary for a variety of private-sector players to undertake distinct but interrelated activities of their own volition because they believe that the financial tool we propose makes business sense.

Nevertheless, it will be necessary for the public sector or non-profits to convene and enroll the diverse players able to develop the tool. Our immediate action recommendation, therefore, is that a national laboratory or other government entity, or, alternatively, a nonprofit organization or foundation, commission initial feasibility studies to investigate the concept further. The express purpose of this work would be to identify the relevant actors able to implement the steps detailed above, and to develop the means to convince them that consideration of this model is in their business interest.

Based on the work described above, discussions should be held with representatives of PV and green power marketers, manufacturers, and manufacturing equipment suppliers; bond issuers; investment and other banks; performance insurers; national laboratories and other technical analysts; mortgage issuers and insurers; and other relevant parties. The purpose of these discussions will be to secure agreement from the different parties that the concept we describe bears consideration, and to assume group responsibility for undertaking the various steps. We believe that once this coordinated investigation acquires momentum, its inherent logic will propel it forward as a purely private-sector endeavor.

CHAPTER SIX: Public Education and Professional Training

Larry Shirley, Shawn Fitzpatrick, and Chris Larsen of the North Carolina Solar Center, Raleigh, NC

Executive Summary

A dramatic increase in the deployment of PV systems in homes, businesses, schools, and other venues across the United States will require a daunting increase in the sophistication of the nation’s legislative, regulatory, technical, and market infrastructure. The papers in this “Expanding Markets for Photovoltaics” series each address mechanisms for achieving this increase. Yet each proposal has an element in common: expansion of PV markets will depend on educating the public and training the professional community — and efforts in both areas must go hand in hand.

Events in California in 1998 highlight the import of public awareness. (See Government Buy-downs for the Residential Market by Starrs and Schwent.) Although an ambitious and well-designed state buy-down program offers rebates of $3 per watt toward the cost of PV systems, as of this writing homeowners have claimed less than 7% of the funds allotted for the residential sector. The sluggishness of the residential program (admittedly in its infancy) perhaps reflects the absence of a planned public education program, compounded by PV manufacturers’ and retailers’ modest marketing efforts. By and large, consumers do not know about the program, do not know about the costs and benefits of PV, do not know how to contact a PV business, and do not know how to evaluatethe qualifications of an installer.

Consumers do not know about the program, do not know about the costs and benefits of PV, do not know how to contact a PV business, and do not know how to evaluate the qualifications of an installer.

Programs to train the professions that make up the solar infrastructure are equally important. Such programs must target each of several professions and trades. Among others, these include: architects, builders, and developers; building inspectors and realtors; loan officers and real estate appraisers; utility engineers; and PV retailers, system installers, and service personnel. (Educating policymakers is a separate concern.) While some of these actors play a more central role than others during the life of a PV system, ignorance at just one link in the chain can stymie the best-designed PV policy program or the most determined potential customer.

Successful public education and professional training requires a combination of tested tools and new alliances. Much of the basic information

Ignorance at just one link in the professional chain can stymie the best-designed PV policy program or the most determined potential customer.

that a potential customer must receive before opting to buy a PV system falls within the “public interest” and may appropriately be funded and delivered by governmental, charitable, and nonprofit entities. Examples include the information that electricity generation has an environmental impact, that alternative energy sources exist, that public programs or funds can facilitate the purchase of a system, and so on. Although fresh ideas and approaches can greatly advance educational and training efforts, the industry and its advocates do not start from scratch.

Effective public and professional education are hindered not by lack of skills or tools but by limited funding and poor coordination. Many of the most successful programs, such as the National Solar Home Tour, survive on a shoestring budget and have not tapped even a small percentage of their potential. No vehicle exists for the development and execution of a comprehensive education program for either professionals or the public. There is no strategic vision that integrates local, state, and national needs and resources.

Despite the barriers, we can make appreciable progress. This report makes numerous detailed recommendations for a coordinated campaign of public and professional education. It will be necessary for an appropriate nonprofit or charitable organization to convene the principal organizations identified in this report. Using this document as a starting point, such a group should revise the recommendations, assign roles and responsibilities, develop budgets, and target potential funders for the purpose of implementing a comprehensive national plan.

It will be necessary to coordinate public-interest campaigns with the targeted marketing undertaken by individual PV firms.

We note here one final challenge. To establish self-sufficient markets for PV technology, it will be necessary to coordinate the public-interest campaigns of the governmental, charitable, and nonprofit sectors with the targeted marketing undertaken by individual firms. This new alliance may be awkward at first, but it is absolutely necessary. Our attempts to develop public and professional education must include consultation with the industry whose growth we hope to stimulate.

Action Recommendations

This paper proposes a comprehensive, although not exhaustive, set of action recommendations for PV education activities. The list is long, as there is much to do.

1. PV Education for the General Public:
   • The PV community must develop a comprehensive national media plan, including national spokespeople and targeted events, to promote public awareness of PV.

   • Environmental advocates planning events such as Earth Day 2000 and the twenty-fifth anniversary of Sun Day should ensure a central role for PVs, and coordinate their efforts with the PV industry.

   • Public-interest PV education should complement the PV industry’s efforts to identify specific market segments that can act as early adopters.

2. PV Education for Professionals:
   • The PV industry and states should require certification of PV installers through accredited training institutions.

   • The PV community should develop PV education programs for real estate and finance-related fields who advise and provide financing for home buyers.

   • The PV industry and advocates should work with labor unions, professional societies, and other groups to provide PV education programs for technical and building-related professionals who are essential to the deployment of PV.

3. Financing for PV Educational Activities:
   • PV advocates should continue to seek resources for PV educational activities from a variety of sources: the PV industry, utilities, state and federal government, and foundations.

   • The PV industry must support an increasing number of education activities, including paid national advertising campaigns.

   • PV advocates and sympathetic policymakers should pay special attention to including PV and broad renewable energy education in the state funds established under state utility restructuring legislation.

CHAPTER SEVEN: Accelerating PV Markets in Developing Countries

Michael Philips of Energy Ventures International, Takoma Park, MD
Brooks Browne of the Environmental Enterprise Assistance Fund, Arlington, VA

Executive Summary

The developing world represents a very large potential market for PV technology. Especially promising opportunities for expanding PV markets are found in countries with inadequate electricity systems, accessible

There is no “single magical policy” to expand PV markets in developing countries.

rural populations, and a robust enough cash economy to allow families to pay minimum installments on household PV systems. Our accumulating experience from numerous projects and policies promoting PVs makes clear that no “silver bullet” exists to expand PV markets. Rather, past experience shows the need for a varied basket of measures, carried out by a diverse set of actors, if PV is to fulfill its rich potential in the developing world.

The PV community should focus its efforts in developing countries on the off-grid market, where PVs can currently compete best. In particular, the most promising use is in solar home systems (SHS) in rural areas; these range from 30 to 50 peak watts, cost around $300–500, and are installed in individual homes. Other off-grid PV applications, including water pumping, battery charging, and village micro-grids, show promise but have not yet rivaled SHS as the favored approach for off-grid PV project developers, international donors, and the PV industry.

Other, cheaper energy sources currently make it difficult for PVs to gain market share for on-grid applications. However, if PV modules fall below $3 per watt, then grid-connected PVs could compete with conventional fuels on select utility systems. This would be a promising development, since the grid-connected market will dwarf the off-grid market. At present, however, it makes little sense to stimulate the grid-connected market with subsidies: there will never be enough subsidies to allow PVs to outcompete other energy sources.

Even in the competitive off-grid market, past PV projects yield lessons with many more “don’ts” than “do’s”. Problems include excessive focus on limited cash (rather than credit) markets for direct sales, lack of working capital, slim profit margins for dealers, poor financial management, excessively low consumer lending rates, and inadequate maintenance due to insufficient staff training. Further, many projects are actually weakened by subsidies that stimulate PV markets in the short term but then work against the market in the long term. Currently, most PV projects rely on grants or concessional financing from multilateral and bilateral agencies. The PV community has not tapped the much larger private financial market, which tends to shy away from small, capital-intensive projects in nascent industries.

Sustainable expansion of PV markets in developing countries can only take place by means of a healthy PV industry. This will require that every step in the value chain from raw materials to end user (such as assembly, distribution, and retail sales) be profitable. In addition, the industry must have adequate working equity and human capital. Finally, the industry must successfully bridge the gap between direct sales and sales to middle-market consumers, by providing appropriate finance vehicles, including micro-credit. The PV community should take special care with micro-credit programs, as established models tend to lend less money with shorter maturities than consumers require for PV systems. They also rely on credit philosophies that do not fit easily within the collateral-based approach likely to be followed for PV lending programs.

Action Recommendations

Bilateral and multilateral institutions, host governments, nongovernmental organizations, project developers, and project sponsors all will play important roles in expanding PV markets. Each actor should assist in developing a fair policy environment, sufficient human capital (particularly local dealers, developers, and technicians), and adequate investment capital to nurture a healthy private PV industry. Ultimately, the PV industry must be freed from subsidies that artificially distort markets and doom the industry’s long-term commercial development.

1. Multilateral and bilateral institutions should limit their efforts to finance and training: They should discontinue, or at least sharply scale down, their traditional role as grantmakers and subsidizers of PV procurement programs administered by host governments. This does not mean that such institutions should abandon PVs. To the contrary, since conventional energy projects can increasingly attract capital from the private sector, multilateral and bilateral institutions should focus their energy- related actions on PVs and other nonconventional energy projects.

   Multilateral and bilateral institutions should support market-building activities, and scale down their traditional role as grantmakers and subsidizers.

   Key actions by multilateral and bilateral institutions should support market-building efforts such as technical education and financing. Technical education should include vocational training for installers and support personnel; background education for potential users of PVs; and PV-oriented business training for potential entrepreneurs, for example through assessments of promising financial models and business plans. Financing should include partial loan guarantees to multilateral development banks and to private lenders, so as to buy down the risks of lending to PV projects and PV loan pools. Multilateral and bilateral institutions should also fund local development banks and private equity/venture capital funds so they can provide working capital at close to market rates.

2. Host governments must create a non-discriminatory policy environment: Ideally, governments should reduce subsidies for fossil fuels. If that proves politically impossible, they must even the playing field for PVs by inject-ing one-time subsidies to technical and managerial training, initial program administration, and limited equipment purchases. Host governments should also reduce import tariffs for PV equipment, since a healthy local PV market can nurture local manufacturing and service industries. Governments can also consider granting rural concessions to solar providers, who can then install PV systems on homes, take care of all maintenance, and charge the households a monthly fee in the same way that conventional electric utilities charge for electric service. Finally, host governments, along with foreign donors, should ensure that PV projects include consumer financing that will wean firms away from the limited cash market.

3. PV project developers and sponsors must prepare themselves to compete in an open market: They must have access to capital and to strong local partners who can insulate a project from political risk. They should wield financial and project development skills specific to developing nations, technical and managerial know-how, and the ability to transfer their knowledge to a working project. Project developers should not necessarily look to funding from the Clean Development Mechanism (CDM) since PV will have to compete with other potentially cheaper activities such as energy efficiency and forest preservation.

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