Brad Mattson is CEO of Solexant, a DBL portfolio solar startup. He is also a renowned entrepreneur from the semiconductor industry. Starting at Applied Materials, he later founded and scaled both Novellus and Mattson Technology, and to date is the only founder of two publicly traded semiconductor equipment firms. Most recently, Mr. Mattson was a Partner at Vantage Point Venture Partners working in the cleantech area, leading the solar sector, but also focusing on lighting, transport and scaling. Mr. Mattson holds twelve patents in semiconductor technology, and in 2005 he was listed as one of the top 50 most influential people in the semiconductor industry.
He’s penned a piece about what he calls “Solar 2.0,” or the “real” birth of the solar industry, which ran today on Greentech Media’s GreentechSolar page, and can be read (along with some great data visualizations) here. The article is reprinted below.
As odd as it may sound, this is an exciting time to be in the Solar Industry. It is an industry poised for massive growth. Unfortunately, the doom and gloom surrounding events like Solyndra and other failures are masking an epic positive change in the energy industry. The very cost and price reductions that are causing all the angst are also driving up demand. As we reach grid parity in an ever-increasing segment of the global market, we are witnessing the true economically driven birth of a global Solar Industry.
As we enter this Brave New world of what I refer to as Solar 2.0, there are significant opportunities where the U.S. has real competitive advantages and can succeed. This article will focus on the first part of what I hope will become an on-going dialog on the topic of a “U.S. Roadmap for Success” in solar. In this first part, I will suggest that we have passed the tipping point and solar is becoming the renewable energy of choice globally.
First, let’s look at the current situation. Much of the current negativity is due to the impact of massive overcapacity on the market, but this overcapacity is actually a normal part of growing pains. Sure, these growing pains feel particularly agonizing, but they are not unprecedented. For many who were involved in the semiconductor industry, you have seen this cycle before….in fact many times. Shown below is one representation of the Semiconductor Memory business cycle. I personally went through at least 5 of these cycles.
The cycle can start whenever there is over-enthusiasm for a market (Robust Market). The over-enthusiasm can exist for many reasons, but my observation is that it is particularly pronounced when a technology or business area is deemed strategic by industry, by governments or both. The strategic nature drives capacity additions (Capital Equipment Expansion) over and above what might be seen as economically necessary. As new entrants come in and existing companies expand in order to maintain or increase market share, excess capacity is inevitable (Excess Capacity). This over-capacity drives prices down (Price Softening) as companies try to reduce inventory. Companies cannot maintain profitability, and cash flow problems slow down or halt the expansion (Weak Market). Manufacturers stop buying equipment and some even go out of business (Capital Equipment Contraction). As a result, the supply slows down, stops, or even reverses as capacity comes off-line (Little Capacity Added).
Now, in parallel with these dynamics on the supply side, the “Price Softening” three steps back also has an impact on demand. As with any commodity market, lower prices increase demand. This is certainly true in the energy industry. As demand increases with supply softening, we begin to see prices firm up (Price Firming and Stability). As manufacturers see prices stabilizing, profits come back and the market looks good again. The greed overcomes the fear and companies once again look at capacity expansion in order to gain market share. Thus, the cycle starts over.
It appears to me that the current panic in solar might be amplified somewhat because this is our first real cycle, and people that haven’t experienced this feel like “the sky is falling”. As an industry, we do not yet understand that these are just normal growing pains. We could, of course, learn from the past and not repeat these painful cycles, but that is unlikely. Solar is a strategic industry, and large multi-national corporations as well as entire governments get into the mix with policies and incentives that drive what seems like irrational behavior. That is still happening in China, so we are not through the bottom of the cycle yet. Some capacity is coming offline and prices have firmed a little, but there is still significant excess capacity so we have another year or so before we get back to “Robust Market”. The demand is there, but not yet enough, and the profitability needed to enter the next capacity expansion cycle doesn’t yet exist.
Still…do not despair! It is this cycle, with its consistent and relentless price decline that is now driving the “real” birth of the solar industry. Let’s look more closely at cost, as it is cost (and resulting prices) that drives industry growth. You have probably heard of the concepts of learning curve and tipping point. Let’s look at how each of those relates to costs and how that drives the solar industry.
The chart below shows the solar price reduction over time in the traditional “learning curve” format. In this chart, modules ASPs (average selling prices) came down from ~$26/watt in 1980 to ~ 2.60/watt in 2009. This is an amazing 10X reduction in about 30 years. Breaking it down to smaller increments, it is a 16.6% reduction for each 2X increase in cumulative volume.
But this is only the beginning of the story. You can see in the chart the “hump” from 2005 to 2009. This was a one-time industry situation based on polysilicon pricing. This transient in poly pricing is a story all in itself, but suffice to say it was only a temporary diversion from the cost reduction trend. Once the poly shortage was rectified, panel costs resumed their downward plunge, only this time things were different.
The difference was China. China had been dabbling in solar for a while, but by 2005 they were having a huge impact. Much has been written on this, so no need to belabor it here, but China decided that solar was a strategic resource and embarked on an ambitious program pushing production capacity at several levels in the food chain. Even with significant overcapacity in place in 2009, Chinese PV companies continued to add capacity in 2010 and 2011. The resultant excess capacity has driven prices below costs as suppliers try to clear out inventory to generate enough cash to keep afloat. The crazy price decline of Tier 1 module suppliers that started a few years ago is shown below. Of course the decline didn’t stop, but continued in 2010, 2011, and 2012. Module prices may have stabilized somewhat recently, but are well below $0.70/watt even for top tier suppliers.
Because solar is a commodity, as China (the lowest cost producer) goes, the whole world goes. Over the last four years, the price of solar panels has dropped an amazing 85%. Not ½, not ¼, but almost 1/8th of the price. We essentially fell off the learning curve. This abrupt change in the curve was pointed out recently quite nicely by Dick Swanson, founder of SunPower. There are many ramifications to this “once in an industry life-cycle” occurrence, including the industry tipping point, resultant growth rate, competitive shifts, industry consolidation, vertical integration, economic and trade policy, viable future success scenarios, and maybe even the competitiveness of the U.S. economy ! All of these topics are important and interesting, but the balance of this article will focus primarily on the tipping point and its impact on growth.
There is a fine book by Malcolm Gladwell, “The Tipping Point: How Little Things Can Make a Big Difference”, that introduces the concept of tipping point. We can only get into a somewhat limited analysis in this forum, but the short story is this writer believes we have passed the tipping point in solar.
It is not so much that solar is already economically competitive with traditional sources of energy, although it is in many, many cases. It is more that the momentum has shifted so far and so fast, that it is unlikely that any other renewable energy source will be able to catch up. To put a sharper focus on the issues just look at the possible scenarios for 30–50 years from now:
1. There is little chance we can continue to use fossil fuel to satisfy our growing energy needs.
2. Hydro is great, but will be limited by geography.
3. Wind is great, but blows at night when we don’t need it, and grid storage is really tough.
4. Nuclear is…..well even if it makes sense no one wants it in their back yard. You can’t site it.
5. Solar is clean, abundant, works at any scale, is easily distributed, and now it is cheap.
I’m sure the quick summary above does not do justice to the world of renewable energy, but from the 30,000 ft. level, it looks like solar is really ready to take off.
Let’s look in more detail at that last statement….”now it is cheap”. It is the price of solar and its comparison to the existing cost of electricity that drives industry growth. This is the concept of “grid parity” where: cost of solar electricity = cost of grid electricity
Attached is the summary of a study done by NREL to determine when and where we hit grid parity in the United States. It should be noted that this chart is using the retail price of electricity. That is, the prices that you or I pay at the meter at our home or the price businesses pay at their factories. This retail price, of course, is much higher than the cost to generate electricity. For example, in Monte Sereno, CA I pay $0.28/kwh for electricity. This electricity probably only costs $0.08–0.10/kwh to generate. Of course, the electricity generators are typically many miles from my home, so there is also the cost of transmission and distribution… and of course PG&E has to make a profit.
Some would say we have not reached grid parity until we hit the wholesale, not the retail, cost of electricity. I disagree. It just depends on who the customer is. As a paying customer for grid electricity (from PG&E), I can tell you that we are at grid parity at my house. I am a believer that the future of U.S. energy independence will come through more distributed (solar on roof tops) generation. That battle between distributed and centralized generation is yet another important topic that we don’t have time to cover here.
So, with the caveat that we are talking about retail, we can look at the NREL data. The figure on the left shows the status of the United States in 2008. The dark red areas are where we are already at retail grid parity. You can see it is a fairly small portion of the map on the left. But, this level of grid parity is based on an installed cost of solar of about $8.00/watt, or roughly the cost in 2008.
The chart on the right shows the anticipated areas of grid parity if the install price of solar is lowered to $3.50/watt. This is an amazing increase in coverage. So…when will we get to $3.50/watt? The answer is we are already there in some states and will be there in many others soon.
Let’s try to translate that into GW demand. Some great work has been done by Richard Keiser at Keiser Analytics. He went through each state, country and even area code in the U.S. to determine cost and demand for electricity at each price point. There are of course some simplifying assumptions that need to be made to translate installed cost into the LCOE (levelized cost of electricity), but without getting into complicated LCOE discussions, it seems that reasonable assumptions have been made. Figures are given with and without the government ITC subsidy (Investment tax credit). Here are the estimates made of demand at each level of installed cost:
Installed With Without
Cost ($/w) ITC (GW) ITC (GW)
$5.50 3 0
$5.00 5 1
$4.50 20 1
$4.00 33 2
$3.50 99 4
$3.00 308 20
$2.50 493 53
As you can see, at the $3.50/watt install cost, where much of the map above goes red, there is almost 100GW of demand in the U.S. To put that in perspective the U.S had a record breaking year in 2012 for solar installations with ~ 3GW installed. Obviously, we have just scratched the surface. Of course this depends on maintaining the investment tax credit. But even with no government subsidy at all, we just need to get to $2.50/watt installed cost to see more than 50GW in demand.
Now, just to clarify what is possible, let’s look at Germany. In Germany during 2011 the average installed cost was only $2.25/watt. They passed $3.50/watt a long time ago and passed $2.50/watt as well. It is true that Germany has about 10X more solar installed than the U.S. and is therefore further down the learning curve, but can we be that much further behind? We have access to the same panels, inverters, and all other components needed to install a system, so we should have the same materials costs. Germany’s labor rates are actually higher than in the U.S. so we should have equal or lower labor costs. So, what is the difference ? Why aren’t we below $2.50/watt already?
To be honest, when it comes to solar, Germany actually has a cooperative government that has a more intelligent, rational energy policy than the U.S. And I am not just talking about the FIT (Feed –in-Tariff) that stimulates demand, although that is relevant. The FIT affects demand, not costs. I am talking about the streamlining of the bureaucracy that allows solar permitting to be done in days or hours, as opposed to weeks or months. The difference in these “soft costs” between Germany and the United States is ridiculous, and it accounts for almost all of the inflation of our installed cost.
Call me crazy for believing in our government, but I truly believe we will fix this paperwork problem. You have to hand it to Steven Chu, our Secretary of Energy. He is a Nobel Prize winning, world-class scientist, and even he saw that the soft costs are a killer. Through the DOE, an agency more known for exciting technical programs, he instituted a program to reduce soft costs. Bravo Steve!
We have yet to see the benefits of these soft cost reductions, but the following data from GTM research supports that we are definitely tracking towards Germany’s costs. While the average residential cost in the U.S. is still shockingly high (almost 2X Germany), this data shows it is dropping fast, about 5–10% per quarter recently. This translates into about a 30% yearly reduction. That would achieve the $3.50 price on the NREL chart sometime next year. I expect we might see it even sooner.
The success of the SolarCity IPO is highlighting this “downstream” part of the solar value chain, and we are seeing billions of dollars going into the installation, or “solar power plant”, side of the business. Look no further than Warren Buffett, considered by many the wisest investor of our time. He has just invested $5B in solar power plants. With this much money coming into the downstream part of the business, it is inevitable that competition increases just like it did in the upstream (panel) segment years ago. There are few barriers to entry in the installation business, so with little differentiation there will be an intense focus to drive the costs out of every part of the installation process including soft costs.
So, with a combination of focus from the DOE, Warren Buffet, and IPOs like Solar City, the soft costs will come down. The U.S. should not only get to the $3.50/watt installation cost and therefore “create” the red map on the right soon, but we should be able to catch up with Germany and get to $2.50/watt which would drive over 50GW of demand even with no government incentives!
Pulling this all together, when reviewing the solar industry, sure we see tremendous overcapacity and corporate failures left and right. If we look at this with some perspective, though, we see that the current events are part of a cycle. The same overcapacity that creates a sense of “doom and gloom” or makes us feel that the “sky is falling” is also driving down prices at an historic rate. In fact, the drop is so fast that it looks like we are falling off of the learning curve. Sure, there is still some cost reduction to be done in the downstream part of the business, but that is happening now. Overall, there is a strong feeling of momentum. There is so much money, people, supportive data, policy, even entire countries behind solar, that I feel it has become a fait accompli. We have passed the tipping point and we are witnessing the “true” birth of the Solar Industry. These are very exciting times.
In the coming months, I hope to engage in a dialog with those who might share some of this optimism to discuss a roadmap for that success, and how the U.S. has real competitive advantages and can, must and will succeed in this Brave New World of Solar 2.0.