Killing me softly with soft cost

The main problem with residential solar is that there is a tremendous amount of what is called “soft cost” which are everything other than the direct cost associated with the project. So aside from the actual hardware and take home pay of the laborer, there is overhead, design, sales, supply chain mark-up, installer profit, a partridge and a pear tree, and in mainstream construction, this soft cost margin is around 30%. Solar residential soft costs are far above this figure. It may not be the installer’s fault. In Mississippi, I might design, procure, and install a solar project within seven days start-to-finish. The permit process can take months, with more time spent fighting grid operator obstruction than doing real work. This can create a market where a specialty installer must be used to navigate a time-consuming development cycle, and must charge a huge specialty margin in order to make enough money to simply get by. In other words, the profit made on a one week project might have to last the installation team for two weeks or more. It is no wonder these specialty contractors go out of business whenever there is a policy shift in the local solar market.

 

This soft cost drops dramatically at the utility-scale. But that does not mean that the direct costs of utility-scale projects are substantially less than residential. The soft cost of a rooftop solar project can be brought down substantially through a well-planned design process when there is not substantial obstruction from the local permit authority.

 

Subsidies increase soft cost, yet have a benefit to the project owners by lowering their out-of-pocket expense. Not always – the import tariffs have substantially eliminated much of the tax credit benefit while making solar more difficult to afford for lower income households. Supposedly, the subsidies will vanish with the tax credits and permit offices will realize the bulk majority of residential projects are smaller than the minimum amount of residential electric service mandated by national electric code.

 

But to accomplish solar without reliance on subsidies of any kind, we will have to be smarter about our solar design to reduce those soft costs, which is what mainstream construction

does on a regular basis. That discipline has not yet made it into the solar industry. More likely, building construction experts know little about solar and need to know where to find someone

who knows about solar design, and solar installers are focused on low-hanging fruit retrofit markets rather than incorporating their practices into a larger general construction practice. This is where a smaller solar designer might find an opportunity, working with local architects and engineers to incorporate solar into existing design and construction firms.

Solar Timeline Part II – Tax Credits + Buyback

In 1978, the Public Utility Regulatory Policy Act (PURPA) was passed to clean the electric grid with some low-hanging fruit. On the one hand,m acid rain wabs burning leaves off of trees and choking out fish in the streams.  On the other, the energy crisis of 1973 which had quadrupled the price of crude oil was fresh on the public’s mind. Manufacturers who needed more power for their manufacturing processes than what the utility could provide them from the grid were generating their own power onsite. But to achieve a stable power supply,  the manufacturers were generating more power than they could consume. These were traditional fossil fuel generators, but even gas generators produce fewer emmissions in regions primarily powered by coal. These “qualifying facilities” wanted the ability to sell their surplus power back to the electric grid, but the electric utilities claimed it was not their role to purchase backfed power from their own customers.

PURPA was a compromise between manufacturers and grid operators, requiring the utility to allow generator interconnections and purchase the backfed power so long as the facilities were small (defined as less than 80 megawatts) and generated by power sources cleaner than what the utility would otherwise provide. The compromise was that the forced purchase rate would be set at avoided cost – essentially the raw material cost the utility pays to buy the coal before shoveling it into the powerplant, less an administrative fee. So PURPA established a bare minimum purchase price that the power companies should find acceptable to buy back clean power from their customers. But keep in mind that the definition of a small and the definition of clean were both far behind that of a residential solar array today.  Still, this was not a policy intended for individuals to offset their entire electric bill, but rather more of a convenient arrangement between power companies and large manufacturers to clean the grid without impacting the cost of electricity.

The debate over fair buyback rates between grid operators and their customers still continues to this day, with PURPA being the starting point over what is fair compensation for backfed clean power. Even at avoided cost buyback, PURPA is under attack. There are states like Hawaii which have brought so much solar online that PURPA does not really apply anymore. Homeowners in Hawaii are allowed to interconnect to the grid, but must program their solar arrays to throttle back their output rather than push surplus production onto the grid. This is because enough backfed power appear as a power outage to to “dumb” infrastructure – as the electricity is flowing the wrong direction! Also, in some regions the avoided cost electricity rate is high enough to stimulate utility-scale solar development, which upsets traditional power generation balance sheets due to the first-in-line status given to backfed renewables. A powerplant that was designed for 24/7 operation may find itself without a buyer for its mid-day electricity. These fossil fuel owners may claim they need to increase the cost of electricity to make up for the shortfall. Whether higher night time rates translates into effective increased consumer cost is yet another factor worth consideration, as daytime electricity is traditionally considered to be “peak”. Combining these scenarios, consumer solar advocates may find themselves on the opposite side of utility-scale solar developers, both competing for the limited capacity of backfed power that the grid can handle without upgrade. Even in a world of 100% renewable energy, there will still be debate between “consumer owned” and “Big Energy” stakeholders.

It may come as a surprise to learn that George W. Bush deserves special recognition for contributions to the solar industry. His administration is responsible for reinstating Carter’s solar tax credit in 2005 and uncapping the tax credit as part of TARP in 2008. Additionally, his Energy Policy Act of 2005 required all states to develop develop a net-metering policy, which defines how customer-owned solar consumers are compensated for their outflow at rates above and beyond PURPA. Typically, net-metered solar is constrained to less than five megawatts at the commercial scale or less than 25 kilowatts at the residential level but it varies by each state. Additionally, commerce clause restrictions on Federal power make the Federal net-metering mandate act more like a request rather than a mandate; some states have chosen not to develop net-metering policies without punishment. Perhaps more confusing is the compensation rate – in other countires, a net-metering policy is more akin to PURPA rather than compensation above and beyond avoided-cost.

The spirit of USA-style net-metering is that you are allowed to offset your energy use with what you push back onto the grid, provided that you do not produce more than you consume at the end of a billing cycle, which may be a month, a year, or even unlimited. Traditionally, net-metering policy is set by each state’s public utility commission. Before the era of “smart meters”, the analog meter would simply “spin backwards” when outflowing electricity to the grid – essentially an unlimited net-metering benefit. Digital meters can track the inflow and outflow independently of each other, meaning the instant a solar array begins pushing electricity onto the grid, the value of that electricity can be worth as little as 15% of average retail pricing. Net-metering may increase that value up to as much as a 1-to-1 match for inflow verses outflow. So because net-metering policy is left to the states, the economic value of solar can be completely different in Kansas City, Missouri verses Kansas City, Kansas.This brings a localization to solar design where one must be an expert in regional policy.  

Obama extended and expanded W’s solar programs. The solar tax credit was extended in 2015 (as part of a bi-partisan energy bill which punted on cap-and-trade and expanded fossil fuel development domestically and abroad). The tax credit is 30% of total system cost through 2019,  26% until 2021, 22% in 2021 (a great year to go off-grid), and then the residential credit phases out while the commercial tax credit demains at 10%. It may seem odd that corporations get an added tax benefit above residential consumers, but technically, the commercial tax credit is for energy projects – other forms of energy projects (not necessarily renewable) may also qualify for the 10% Energy Investment Tax Credit. The oil refinery expansion project I was working on while researching the solar industry back in 2006 was a product of the ITC.

One item many do not realize is that if you have already installed a solar array which qualified for the tax credit, you may expand the solar array (such as adding solar-charged batteries or more panels) and have the expansion qualify for the tax credit.

A Solar Timeline Part I

Let’s start with a timeline of human energy use which helps paint the solar industry in a broader perspective. There’s a lot of volatility in in solar, an industry whose individual segments may grow or shrink based on energy policy. For example, the utility-scale market was expected to shrink back in 2017 when the tax credit was originally expected to expire, resulting in numerous projects coming online in 2016. Instead, the utility market continues to grow as the tax credit was extended. Although presently, import tariff decisions are dampening growth rates. Solar is energy and the industry is be driven by energy politics as much as by plain, old-fashioned value. But as we’ll see, solar energy policy actually goes back a very long time, perhaps longer than what we can fully appreciate in a human lifetime. At the same time, our industry policies do not have much to do with environmental politics as you may think.

Solar design is the most lacking skill in the entire industry, in my opinion. There’s a number of reasons for this, some of which have to do with subsidies. United States solar subsidies have been focused on driving projects to market as quickly as possible. When incorporated into a rooftop, solar knowledge is focused on retrofitting, with few people understanding the required scope, resulting in one person wearing many hats on the entire project. While an individual may be very proficient at what they do, a team follows a design review process with specialty division of labor, which can reduce project cost as demonstrated by mainstream building design and construction best practices.

So what’s happened in years past is someone like me, a solar specialist, would manage all aspects of the project: sales, design, procurement, installation, commissioning, and maintenance. But that’s not how mainstream construction manages the project development cycle, and if we want to reap the benefits of transitioning solar into the mainstream, we need to get our design work up to snuff. We need to make it so general contractors can can execute a solar project, along with the rest of the building and electrical scope. This program is focused on those advanced issues, as well as revisiting the basics.

Some background on myself:  I’m a mechanical engineer by degree. I have a master electrician certificate in Mississippi and have served as a master electrician of record for multi-million dollar commercial construction company. I’m also a NABCEP PV installer – what that means we’ll get to later. I’ve taught solar since 2009, and overtime my content has expanded into batteries and policy. Chasing solar subsidies brought me to Mississippi, and when they vanished, I remained to refine my trade, to identify how solar projects might come to market independent of political whimsy. I firmly believe our electric grid will transition to 100% solar, with other forms of energy providing storage and back-up capability. I’m not a fan of “energy baskets”, believing solar is the clear winner in this horse race. Back in 2008, I quit my oil industry job to help advance that belief.  

Back to the timeline, what did people do without solar power?

Hopefully that becomes a tough world to imagine, but actually solar bridges the time span from prehistoric cavemen up until today. During the industrial revolution,  we had oil lamps, but what did we do before then? In cave dwelling times, that oil lamp equivalent would be sticking a stick into some animal fat to making a torch, or eventually, putting the same biofuel into a well with a wick, burning it for light. In addition to wood fire and candle wax, the genie inside Aladdin’s lamp was an oil vessel to refill those floating wicks. What we think as a kerosene lamp didn’t originally burn kerosene, but rather biofuel, but even that did not come to market until right before the founding of the United States. Fossil-fuel-based kerosene didn’t really come to market until right before the Civil War era, after the discovery of massive quantities of crude oil. Like today, coal was difficult and expensive to gassify.

But even before coal was burned to create steam to generate electricity, we had solar rules and regulations on the books. So if energy subsidies of all types cause you to pull your hair out of your head, even if you traveled back to 600 AD you would find laws on the books regarding a human’s right to access sunlight. Solar access property rights might sound stereotypically like a California burdensome regulation, but imagine how you would feel, living in a cave, if if your neighbor built a mud hut in front of your cave window. You’d be pretty upset with them because the sun was your main source of residential lighting. Going back into 600 AD Justinian Code, we find laws on the books preventing you from casting a shadow onto your neighbor’s property.

Expansion into the new world was funded out of a quest for burning timber of Virginia’s forests as much as a desire of the pilgrims for religious free expression. Europe was running out of wood, and had passed laws protecting the King’s forest. The major industry in colonial New England was tree-felling, chopping down timber to ship back to Europe. It was only natural to build boats out of the timber, creating an economy of experienced sailors well-familiar with ship building. Before the benefits of fossil fuel were known, our world was powered by “surface carbon” with our energy portfolio coming from wood burning. Our first energy regulations in the United States were based on the ability to cut down trees. Our first building codes were bans on fireplaces inside the city when constructed from wood.

The “wild west” style oil lamp was invented right around the founding of the United States, a relatively new invention less than 300 years old. The lamp could burn oil derived from animal fat or vegetables, so you could imagine in the 1780s when this new lamp technology came to market, it created an insatiable appetite for whale oil with New England being uniquely positioned to exploit. So the invention of the oil lamp led to the whaling industry, which today might be called “free-range biofuel”.

We had coal, but the ability to extract gas from coal (called coal gasification, the same process used in generating “clean beautiful coal” today) was expensive. The mainstream kerosene lamp market originally burned gas derived from crude oil, rather than coal-based kerosene and that didn’t get off the ground until the 1850s. So with the whaling industry coming online in the 1780s and 1790s, and petroleum not being discovered until the late 1850s, society faced a problem as the demand for whales outstripped the supply.

In fact, by the 1830s, society was headed towards yet another pre-fossil fuel energy crisis and had begun to revert back towards other animal and plant-based biofuels, less expensive yet also less clean, healthy, and safe than whale oil. America’s energy costs were on the rise and

Entrepreneurs were using cottonseed (whose availability was accelerated by slavery, railroads, and the cotton gin) as well as pine-tree derived turpentine to produce ethanol. In other words, the Southern United States was positioned to become a biofuel powerhouse just as the debate over slavery was leading it towards Civil War.

Ethanol was cheaper than coal-based kerosene and whale oil had been essentially priced off the market. But a major discovery of crude oil in Pennsylvania brought a new technology to market: crude-oil-based kerosene, which at its discovery, leveraged the existing oil lamp research and development to immediately become just slightly more expensive than ethanol. Ethanol was problematic as it produced poor light, was prone to explosion, and left dirty suit inside the homes of its users impacting their health. When the Civil War officially started, the IRS was founded to raise money for the war effort. It’s very first tax was a 300% tax on alcohol, which was not only a vice tax but also had the effect of pricing ethanol off the market. In other words, the very first tax of the IRS was an energy tax that promoted more expensive fossil fuel over existing biofuels, in the interest of public health, safety, and welfare.

Maybe this is not the most tactful way to begin an introduction to solar, but the point is that no matter how far back you go in history, you will find politics shaping our energy markets in one way or another.

I did not start out being a solar advocate. My early career was in oil and gas, being an engineer from Houston, TX. In college, I was not part of any solar car team.I was more of a computer nerd and worked in computer repair. Moving away from politics, there’s a missed overlap between the computer sector and the solar sector that gets lost in the weed of our polarizing debate over accounting for the full lifecycle cost of our energy consumption,

In the 1940s, vacuum tubes were helping us create newfangled electronic calculators. Photovoltaics were an electrical hobby dating back into the 1800s, without much use, but in the process of developing silicon transistors to replace vacuum tubes, it was discovered silicon was a good photovoltaic material. In the 1950’s, Bell Labs created a silicon cell to generate electricity to power remote applications whose logistical costs outweighed the atrocious refining costs of solar power (even today, an expensive off-grid home might be more economic than building the grid out to the point of use).

Silicon is a semi-conductor, meaning that it can conduct electricity when energized. All semi-conductors are photovoltaic, meaning that in pure enough form, light particles from the sun, called photons, can cause it to convert energy from the sun into conductive electricity. So for the same reason that silicon computer chips could replace vacuum tubes, that silicon can also produce electricity. Albert Einstein published a paper describing this “photovoltaic effect” phenomenon in 1905, which would later win him the Nobel prize. But these costs to refine semi-conductive material to the point where there photovoltaic properties became useful remained uneconomic for decades thereafter.

In the 1960s, NASA and its military predecessors used solar power to develop extra-terrestrial applications of silicon technology. It should be noted that solar power was considered reliable enough to power satellites, where maintenance would be quite expensive.

Regardless, imagine yourself a silicon refiner in the 1970s with two options: manufacture silicon to make computers or spend even more energy cost to make photovoltaic silicon to compete with coal, oil, nuclear, hydro, wood, and all other forms of electric power generation. Obviously computers are the more profitable application, and the electronics industry underwent exponential growth in the 70s, 80s, and 90s. And that’s exactly the decision silicon refiners made in the the first 50 years of shovel-ready solar power. Solar technology was only used for the most remote applications and any other silicon coming to market went into consumer electronics.

But by the the end of the 1990s, exponential growth in the semi-conductor industry crashed. Electronics were getting smaller. New technologies were replacing old technologies rather than creating new applications. So the same silicon refiner says, “Look we’ve enjoyed decades of

growth with computers, but now we need to find new markets. There’s far more silicon in a solar panel than in the electronics it could power, so how much money would it take to scale up the industry to the point this solar power stuff actually becomes a mainstream power technology?”

In fact, there was substantial investment in silicon refining in the early 2000s and this production capacity began to come online by the end of the decade. The oil and gas company I worked for helped build some of these early dedicated-solar silicon refineries between 2003-2006, and suddenly in 2007, the price of the solar panel began to drop – a trend which continues today.

The drop has been so precipitous that rather than embracing free trade, USA Republicans and Democrats have thrown up substantial protectionist import tariffs to prevent cheap solar from coming to market, policies which largely set environmental considerations aside. All this to say that what’s driving the solar market today has less to do with “green energy” and instead, the main motivation of solar growth is more closely related to the fact that silicon refiners are supporting a new market for their silicon beyond computers.

There’s plenty of silicon dioxide in the world. It’s the most abundant mineral in the Earth’s crust, which makes silicon the second most abundant element we can affordably access today.