Our field research suggests that the following basket of topics merits deeper examination. In all cases, we suggest that the examinations focus on three challenging questions:

• What is the ideal state of affairs in each area defined?

• Who—currently or potentially—are the most important individuals and institutions able to effect changes?

• How can those people and organizations move PV toward the ideal endpoint?

In short, the explorations described should state who has to do what to ensure that the recommended changes occur.

As the topics we identify below frequently overlap, REPP will ensure that the authors periodically share their perspectives and progress throughout the process.

A. GOVERNMENT BUY-DOWNS FOR THE RESIDENTIAL MARKET:

At about $6/Wp (including installation), rooftop PV systems continue to cost much more than grid power. The solar industry probably needs to halve that price to establish rooftop PV systems in the residential market, implying a drop in module price from $3.75/Wp today to between $1.00 and $1.50/Wp. Some experts therefore favor a government "buy-down" program which would use public funds to make up the difference between the price of PV systems and the price of grid power. For example, Bob Williams of Princeton University suggests that buying down the price of PV systems to $3.00/Wp might require subsidizing 80 MWp worldwide at a total cost of only $60 million.¹⁵

The Federal government might structure a buy-down program in various ways. For example, in late March of 1998 the California Energy Commission opened a four-year program that will subsidize emerging renewable energy technologies (defined as fuel cells, small wind turbines, solar thermal electric technologies and PV) with $54 million allocated from charges levied on ratepayers as part of the state's comprehensive electric industry restructuring settlement. The state will pay up to $3.00/Wp for installed residential PV systems during the project's first phase, gradually reducing the subsidy to $1.00/Wp.¹⁶ The program aims to encourage PV firms to build additional manufacturing plants, thus increasing their economies of scale and of mass production, and lowering unit costs and prices. Contrary to Williams' optimistic suggestion described above, program officials doubt that the market provided by the California program will by itself achieve the target module price of $1.50, but hope that the program will send a positive signal to the industry.¹⁷

REPP recommends as the first research topic an exploration of the suitability of a national PV buy-down program. The investigation should emphasize a frank discussion of the following issues, asking who would have to do what to make a buy-down program successful:

• Market signals: Some solar business leaders and many potential lenders remain skeptical of subsidy-based markets, fearing that governments will suddenly withdraw the subsidy, stranding manufacturers with idle capacity, outstanding debt and the threat of bankruptcy. Whereas the unique circumstances of the California restructuring settlement provides a known sum of funding over four years, one of our interviewees told us half-humorously that investors discount appropriation-based Federal commitments to 2%, and tax-funded programs to 50%, no matter how well intentioned or committed the government may be in announcing the program initially.¹⁸ How, then, might the Federal government structure a PV buy-down program so as to give manufacturers and potential investors the confidence they need to expand manufacturing capacity, rather than simply maximizing the use of existing capacity and raising prices? Can policy makers ensure that prices will indeed drop? Above all, can they be reasonably certain that a buy-down program will prove beneficial in both the short and long terms?

• Picking winners: Many think that the Federal government has a poor record at creating technology winners and deploying them in the market. A buy-down program would indeed create artificial demand, and it need not (indeed, should not) specify varieties of PV technology. But several of our informants noted that the buy-down concept still rests on policy-makers' identification of rooftop residential systems as the best use of PV, rather than the judgment of the market. Is this a valid concern?

• Filling in the value chain: Some of the experts we interviewed suggested that the photovoltaic industry suffers not only from small size but from inappropriate structure. That is, the industry lacks sufficient marketers, distributors and installers, and most manufacturers continue to sell photovoltaic modules as a commodity rather than actual consumer-ready products. Will a buy-down program encourage the emergence of a healthy industry structure, able to evoke consumer enthusiasm in the absence of subsidies?

Recommended authors on buy-down programs: Tom Starrs and Vincent Schwent

B: POLICIES TO SUPPORT A DISTRIBUTED ENERGY SYSTEM:

Several energy analysts find the environmental attributes of photovoltaics almost coincidental. For these observers, solar will succeed because of its amenability to small-scale, distributed installation close to where consumers actually need energy. They envision a system incorporating diverse, mass-produced, distributed resources, all of which function well in decentralized settings and all of which are fairly clean. These might include energy-efficiency retrofits, fuel cells, energy storage measures, cogenerating gas-fired micro-turbines and the like, alongside renewable energy technologies such as PV systems. Yet, for such a system to emerge, certain other elements will also have to be in place.

We recommend that a second component of the "Expanding PV Markets" project examine the mechanisms that can facilitate the incorporation of PV into the emerging distributed energy system. This examination should include, at least, discussion of the following measures, with a stress on who has to do what to make the measure a reality:

• Net metering: Where electric companies consent to purchase homeowners' excess solar-generated electricity, they prefer to do so at (low) wholesale, rather than (higher) retail, rates. "Net metering" policies require utilities to buy back homeowners' excess power at retail rates, in effect spinning the meter backwards as the home system feeds power into the grid. Utilities often object to the practice, pointing out that most of the price of electricity reflects the cost of transmission and distribution, and that homeowners should be paid only for generation. Twenty-one states currently offer net metering provisions. How can policy makers most satisfactorily and fairly design net metering programs? Should Congress pass a national net metering standard?

• National interconnection standard: Currently, electric companies design their own individual standards for physical interconnection with the electric grid. This prevents manufacturers of solar projects from designing products with national appeal. Several governmental and non-governmental organizations are now considering a nation interconnection standard. Who needs to do what to institute such a standard? Likewise, utilities, which may be unaware of the needs of small-scale decentralized generation, often place unreasonable non-technical demands on customers wishing to install their own generation, for example, exorbitant liability insurance. In other cases, local zoning and other codes hamper solar installation. How might utilities and other relevant entities institute a reasonable national protocol?

• Distribution rules: In certain areas and under certain conditions, distribution utilities ("discos") will find it in their interests to promote distributed PV. In others they will not. What market rules for the operation of discos would best foster distributed PV, while not unduly penalizing the disco itself?

• Covenants: Several communities and housing developments have articulated covenants that prohibit building owners from modifying the external profile of their structures. Such agreements impede installation of residential PV systems. How can the solar industry best respond to this problem?

Recommended authors on distributed energy issues: Tom Starrs and Howard Wenger

C: UNSUBSIDIZED MARKETS

Much of the United States' PV manufacturing capacity serves subsidized markets (largely in Japan and Germany).¹⁹ The president of Siemens Solar recently dismissed two-thirds of the world PV market as unnatural, in that no need exists for which customers are willing to pay, and he warned against the volatility of subsidy-dependent markets.²⁰ Several people with whom we spoke suggested that the PV industry should instead concentrate on those markets where their wares can compete today. In the United States, these include, for example: telecommunications and signals; systems for farms, boats, campers and isolated home; parks and forests; cathodic protection; etc. In addition, PV can provide economic residential power today in areas where the grid has not yet reached.

Such a strategy raises important questions. We recommend an investigation of who would have to do what to build unsubsidized markets:

• Current and potential size of unsubsidized markets: Where will future markets that do not require subsidies for viability likely emerge? One clue to their existence might be a large body of capital stock ready for turnover, for example aging, remote irrigation pumps. Another might be industries under pressure to reduce environmental impact, for example natural gas pipelines, some of which now contemplate installing electric compressors for economic and environmental reasons.²¹ Can analysts articulate general metrics for identifying such opportunities? Can we guess their size?

• Adequacy of unsubsidized markets: Solar firms exploiting existing markets can certainly operate profitably. Yet the interests of solar firms and supporters of solar energy may not be congruent: if given a choice, many solar enthusiasts would prefer firms to sell high volumes at low margins, rather than the reverse, for environmental and other reasons. Meanwhile, some firms might prefer higher profits brought by high demand and manufacturing plants operated at high capacity. Will niche markets in fact open broader markets? And if not, will niche markets prove environmentally sufficient?

• Industry structure: To exploit unsubsidized markets aggressively, the PV industry may require a new structure. A number of our respondents contended that today's photovoltaic industry combined large, engineering-driven manufacturing firms that produce PV as a commodity with small, mom-and-pop installers and weak distributors. To succeed, some of these critics suggested, solar firms must produce consumer-ready solar products and integrate installation, maintenance and perhaps financing into their operations. Others felt that firms would not vertically integrate, but that different players must emerge to fill all the links in the value chain. Most agreed, however, that installation and servicing must grow more sophisticated, and that many small solar firms in business today were barriers to the evolution of the market. Does any evidence—e.g., the experience of other industries—suggest that certain industry forms can promote successful exploitation of unsubsidized markets? What forms could the PV industry take to succeed as a producer of unsubsidized consumer products?

Recommended author on current unsubsidized markets: Eric Ingersoll

D: CAPITAL FORMATION

Throughout the interview process, our respondents raised and came back repeatedly to the question of capital formation: how can solar endeavors attract sufficient financial resources? A response to this challenge might include the following topics, with a stress on who has to do what to accelerate capital formation in the PV industry:

• Where in the value chain? Different respondents remarked on the finance needs of different aspects of the solar value chain, and the inappropriate emphasis on "project" finance models to the exclusion of other capital needs. For instance, some talked about home construction loans for builders wishing to incorporate solar into their structures, others mentioned the financial needs of solar manufacturers, others discussed building a solar component into homeowner mortgages, and others suggested a federal "Sunny Mae" program to aggregate solar mortgages and thus reduce lender risk. Can all such needs be addressed simultaneously? If not, which needs merit higher priority?

• Lenders and borrowers meeting each other's needs: Several respondents reported that renewable energy entrepreneurs know very little about the different requirements of different classes of lenders, for example investment banks, boutique financial houses, venture capitalists and corporate financiers. How can renewable energy businesses learn to structure deals more palatably? Equally important, many lenders know very little about solar. How can appropriate information reach them?

• Packaging: To attract financing to solar deals, it may be necessary to package them so as to reduce risk. This could be done by aggregating solar loans nationally, as in the "Sunny Mae" idea mentioned above, so as to reduce lender risk. It might entail packaging solar with other energy products, for example natural gas backup. It could even encompass non-energy projects that offer either technical synergies—e.g., telecommunications—or that require an environmental component—new construction. What is the best way to package solar energy for financiers?

Part D1)
Recommended author on domestic capital formation: Eric Ingersoll and Bob DiMatteo

Part D2)
Recommended author on international project finance: Brooks Brown

E: RURAL PV IN THE DEVELOPING WORLD

Many observers look to the huge energy gap in the developing world to save—and be saved by—photovoltaic technology.²² For many poor rural people, grid-extension remains beyond hope. PV could provide these people with basic light and radio, relieve reliance on expensive and dirty alternatives such as kerosene, facilitate education and women's self-employment—the list goes on. And, if a large multilateral development fund such as the World Bank would spend a fraction of its energy budget on a massive purchase of PV, such people suggest, the PV industry would be able to lower prices appreciably to the benefit of all.

We advise a frank examination of the relationship and possible complementarities between the goals of rural development and those of expanding PV markets, with a focus on who could do what to make rural development an effective part of the PV industry's expansion strategy. In particular, the following issues should be addressed:

• Absorption rate: While most observers remain optimistic about the eventual emergence of a rural PV market in the developing world, most also acknowledge the huge variety of local conditions²³ and the unique vexations²⁴ of crafting a successful technology transfer program. Bob Williams, for example, suggests that grid-connected, utility-scale applications remain the only way for developing country markets to absorb large quantities of PV quickly.²⁵ It seems certain that a well designed introduction of PV can meet many development goals, but can that process happen fast enough to contribute to the visions of PV enthusiasts?

• Business structure: Many of the successful private-sector PV ventures in the developing world display a different business structure than their cousins in the developed world. Specifically, most are franchise-based, and most lease out the PV systems themselves, rather than metering and selling the electricity. Are PV technology transfer programs taking sufficient note of the different structures appropriate to developing country markets?

• Local content: Increasingly, developing countries insist on true technology transfer rather than merely purchasing products made elsewhere. Some of those we interviewed doubted that PV firms would actually build factories in-country, and commit to remain there as long-term players. To what extent is such a commitment a precondition for expanding PV markets in the developing world, and to what extent are PV firms willing to make such a commitment?

• Finance versus technology: Several people with whom we spoke identified the availability and cost of credit as the factor constraining the PV market in the developing world. These people suggested that lowering the price of the technology itself made would have less effect on the size of the market than making available longer-term credit with lower interest rates. How large a role does finance play compared to technology, and who must do what to expand access to rural finance for PV purchases?

Recommended author on international markets: Mike Philips

F: PUBLIC AND PROFESSIONAL EDUCATION

Nearly all the people with whom we spoke acknowledged that expanding solar markets will require a massive education effort. Many discussed the synergies and distinctions between public education and private-sector marketing; a few suggested that these two endeavors will soon merge. Although most consumers express support for solar energy in general, few have the information they need to locate, size, purchase and install a solar system themselves. Equally important, few professionals—builders, building inspectors, appraisers, mortgage officers, code writers, electricians, realtors and others—have the expertise necessary to deal with solar energy in the course of their businesses. Who could do what to educate the relevant segments of America on solar energy?

• Reaching the public: Building solar awareness might require environmental education in public schools from an early age. What is the likely cost and benefit of such a long-term endeavor, and what institution(s) has a sufficiently long horizon to undertake them? Alternatively, solar education might be more effectively undertaken through regional or even national solar awareness campaigns, aimed at potential customers and tied to the availability of solar products. Education might also include workshops for potential customers, perhaps tied to a "carrot" of financing. What combination of measures could best effect solar awareness? Equally important, what combination of Federal, state, university and foundation funds could be used for this purpose?

• Professional education: Professionals in the building, financial and other sectors need better information and skills in order to integrate PV into their activities. State agriculture and extension offices could also play an important role in this, as could unions, licensing and continuing education requirements, university curricula, and professional societies. Who are the key professionals that must receive this training? How might it be funded?

• Education and marketing: Traditional public interest education campaigns can interact with commercial marketing in interesting ways. What is the appropriate balance of tasks between the two approaches? How can marketing approaches help identify appropriate targets for education campaigns so that public education funds result in the greatest possible installation of PV technology?

Recommended author on public awareness: Larry Shirley

G: GOVERNMENT PROCUREMENT

The Federal government remains one of the largest energy consumers in the nation; state and local governments use large amounts of energy as well. Much of this energy is consumed in government-owned buildings, which range from giant office complexes to scattered supply sheds. A disproportionate fraction of governments' energy bills reflects the high cost of extending the electric grid to reach isolated ranger stations, emergency call boxes along highways, streetlights, and other remote sites. By mass purchases of building-integrated PV systems and stand-alone PV systems for remote uses, governments could help provide a market for this emerging technology.

REPP recommends a deeper look into the use of government procurement as a driver for PV markets, including a discussion of the following topics, asking who has to do what to use government procurement to build long-term PV markets:

• Past experience: Government procurement has helped establish markets for several environmental products, for example recycled paper. How could governments build on such success stories to drive PV markets?

• Procurement as a market signal: In addition to providing a market for PV manufacturers, government procurement should also encourage manufacturers to expand production and lower prices. Equally important, it should make the PV industry attractive to the financial community. How might governments structure their procurement programs so that manufacturers and financiers respond in the desired manner?

• Procurement and market structure: As noted above, several of our respondents identified the current structure of the PV industry as a great weakness. Government procurement could conceivable reinforce that weak structure by further insulating manufacturers from end-use consumers, on whom the fate of the industry ultimately depends. Can governments devise procurement plans that function as a bridge to a robust, market-driven industry which produces and markets products that people want tot buy, rather than locking in a weak industry structure?

Recommended author on government procurement: Virinder Singh with Joel Stronberg

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