Monday, January 30, 2012

The economics of solar energy

There is nothing in the real economy more important than energy and its price.  NOTHING!  Not only does energy displace the most unpleasant sorts of human labor, but the lower its price, the more of everything else one can buy.  And of the known energy sources—nothing even comes close to the importance of petroleum.  Nothing is so easy to handle, burns so cleanly, is so easy to transport, and packs so much energy in a tiny space.  Yergin got it right, oil IS The Prize.

Since oil is finite and everyone wants it, at some point it will be impossible to supply the demand.  When that will happen is anyone's guess but it is beginning to become abundantly clear that oil production has peaked.  If seven years without a meaningful rise in production doesn't indicate a peak, it would be hard to imagine what does.

Global Oil Production Update: A Strange Future Has Arrived

Since 2005, European oil consumption has fallen by 1.5 million barrels a day. And, in the same period, US oil consumption has fallen by 2 million barrels a day. If oil was priced at $60 a barrel, rather than $100 a barrel, then a fair portion of that lost demand might return. Instead, since 2005, global crude oil production has been bumping up against a ceiling around 74 million barrels a day. Thus, the tremendous growth in oil demand which emanates from the developing world, in Asia primarily, has been supplied by the reduction of demand in Europe and the United States. Why doesn’t the world simply increase the production of oil to 77, or 78 million barrels a day? After all, that is precisely the history of global oil production: a continual increase in supply to capture the advantage of rising prices. 
Today, in 2012, I observe that many analysts of global oil production—and the interaction between oil prices and the global economy—continue to engage in a guessing game about the future. But, frankly, the future has already arrived. And it is not a random future, but a future that was held to be improbable, if not impossible. For each extra barrel of oil produced over the past seven years from Russia, and Canada, there has been a loss of production from the North Sea, from Mexico, from Indonesia and elsewhere. And in the case of OPEC, there has been a stubborn flatlining of production growth, which, in the true spirit of argumentum ad ignorantium, has been taken as proof of OPEC’s hidden and secret supply. Thus, we are led to the newest and strangest meme of all: the failure of global oil production to grow over seven years, in the face of a phase transition in oil prices, is not even suggestive of peak oil. But rather, proof of oil’s imminent supply resurrection. more
Even the Scientific American, not known for making wild assertions, seems to believe that production has peaked for oil that is easy to extract.  (I know petroleum engineers who claimed that already had happened by 1960 as extracting oil from places like the North Sea was far from easy.)
Has Petroleum Production Peaked, Ending the Era of Easy Oil?
A new analysis concludes that easily extracted oil peaked in 2005, suggesting that dirtier fossil fuels will be burned and energy prices will rise

By David Biello | January 25, 2012

Despite major oil finds off Brazil's coast, new fields in North Dakota and ongoing increases in the conversion of tar sands to oil in Canada, fresh supplies of petroleum are only just enough to offset the production decline from older fields. At best, the world is now living off an oil plateau—roughly 75 million barrels of oil produced each and every day—since at least 2005, according to a new comment published in Nature on January 26. (Scientific American is part of Nature Publishing Group.) That is a year earlier than estimated by the International Energy Agency—an energy cartel for oil consuming nations.

To support our modern lifestyles—from cars to plastics—the world has used more than one trillion barrels of oil to date. Another trillion lie underground, waiting to be tapped. But given the locations of the remaining oil, getting the next trillion is likely to cost a lot more than the previous trillion. The "supply of cheap oil has plateaued," argues chemist David King, director of the Smith School of Enterprise and the Environment at the University of Oxford and former chief scientific adviser to the U.K. government. "The global economy is severely knocked by oil prices of $100 per barrel or more, creating economic downturn and preventing economic recovery."

Nor do King and his co-author, oceanographer James Murray of the University of Washington in Seattle, hold out much hope for future discoveries. "The geologists know where the source rocks are and where the trap structures are," Murray notes. "If there was a prospect for a new giant oil field, I think it would have been found."

King and Murray based their conclusion on an analysis of oil data from the U.S. Energy Information Administration. Looking at use and production trends, the two note that since 2005 production has remained essentially unchanged whereas prices (a surrogate for demand) have fluctuated wildly. This suggests to the authors that there is no longer any spare capacity to respond to increases in demand, whether it results from political unrest that cuts supply, as in the case of Libya's political upheaval last year, or economic boom times in growing countries like China. "We are not running out of oil, but we are running out of oil that can be produced easily and cheaply," King and Murray wrote. more
This leads, of course to the BIG subject which is, How are we going to get along without petroleum?  This is not an if, but a when, question.  And coming up with a substitute will be especially tricky because even in decline, oil is a fearsome competitor—most people would be overjoyed to come up with a substitute even 1/2 as useful.  And there will a lot of broken dreams along any path to a serious substitute.  The reason is simple—the economic model that gave us all the innovation of the Internet and personal computing is hopelessly inadequate to deal with a problem as large as the end of the Age of Petroleum.  In software, a $500 million venture capital investment was a big deal.  In the world of energy, such a sum is barely a rounding error.  It is extremely unlikely a couple of guys in a garage will come up with a substitute for oil.

This is important because while the pirates of Wall Street managed to steal everything in sight and trigger a massive decline in the real economy, only the Silicon Valley model was able to bring new and innovative products to market.  And now we discover that when it come to solving big problems, the efforts by the Silicon Valley venture capital community look pretty pathetic.

Here is how Wired covered this subject for their February issue.  I believe they are actually surprised the big-time NoCal VC community and their can-do attitude were not enough.  Not. Even. Close.  They never quite understood that heavy industry takes very long lead times because it requires so MUCH investment to find out if you are even on the right trail.  There are a LOT of steps between an idea and something that can be sold and each of those steps eat up a fortune.
Why the Clean Tech Boom Went Bust
By Juliet Eilperin
January 20, 2012
Wired February 2012


And as the economy recovered from the dual shocks of the Internet bubble and 9/11, Doerr’s fellow Silicon Valley VCs were already looking to clean technology as the next big thing. What followed was yet another Silicon Valley gold rush, as the firms on Sand Hill Road were pulled along by the promise of new fortunes and the hope that they would be the ones to wean America off of fossil fuels. The entrepreneurs and tech investors who had transformed media and communications were ready to make Silicon Valley the Saudi Arabia of clean energy.

Never mind the fact that green technology had been struggling to achieve critical mass for decades. “You had folks who came in with the hubris to say, ‘I know these guys have been working on this for 50 years,’” says Andrew Beebe, chief commercial officer for Suntech, the Chinese solar manufacturer. “‘But I’ve got $50 million and I can blow the doors off this thing.’”

In 2005, VC investment in clean tech measured in the hundreds of millions of dollars. The following year, it ballooned to $1.75 billion, according to the National Venture Capital Association. By 2008, the year after Doerr’s speech, it had leaped to $4.1 billion. And the federal government followed. Through a mix of loans, subsidies, and tax breaks, it directed roughly $44.5 billion into the sector between late 2009 and late 2011. Avarice, altruism, and policy had aligned to fuel a spectacular boom.

Anyone who has heard the name Solyndra knows how this all panned out. Due to a confluence of factors—including fluctuating silicon prices, newly cheap natural gas, the 2008 financial crisis, China’s ascendant solar industry, and certain technological realities—the clean-tech bubble has burst, leaving us with a traditional energy infrastructure still overwhelmingly reliant on fossil fuels. The fallout has hit almost every niche in the clean-tech sector—wind, biofuels, electric cars, and fuel cells—but none more dramatically than solar.


The major energy bills that passed in 2005 and 2007—which provided tax credits and loan guarantees for clean tech—gave investors further confidence. Venture capital in solar alone rose from $32 million in 2004 to nearly $1.85 billion in 2008. Investment in battery tech rose more than 30-fold during the same period.

Other clean-energy sectors were thriving as well, buoyed not only by VC money but by the fact that the average price of electricity, which had been stable for years, shot up 35 percent between 2002 and 2008. At the end of 2006, the total capacity of all the wind turbines installed in the US was 11,468 megawatts, enough to power 3.2 million homes. By 2010, it was nearly four times that much. “As more entrepreneurs and innovators saw there was capital available in the clean-energy sector, you saw more folks looking into developing solutions and business around that,” says Joshua Freed, vice president for clean energy at the think tank Third Way. “There was a virtuous circle of capital moving to clean energy, and entrepreneurs moving to clean energy because there was a capital.”

One of these was Chris Gronet, a Stanford PhD in semiconductor processing who had been general manager of the thermal processing group at Applied Materials, a firm that provides equipment and software to semiconductor and solar companies. He had come up with a design for a revolutionary new solar module (a module is a light-gathering photovoltaic cell with all the attendant structural hardware and circuitry) that he believed would be vastly more efficient than the flat-panel modules that had dominated the market for more than three decades.

Gronet’s design called for a grate made of rows of cylindrical cells rather than a single panel of flat cells. The sun tracking across a cylinder will always be shining directly on part of it. That meant Gronet’s modules could be mounted parallel to a roof and out of the wind, rather than angled up into it. As an added bonus, the tubular cells would gather not just direct sunlight but also ambient light reflected off of the rooftops on which they were mounted.

At around this time, investors were searching for an alternative to the crystalline silicon used in photovoltaics, which was skyrocketing in price. As more and more manufacturers had been getting into making solar panels, increased demand had driven the price of processed silicon from around $50 per kilogram in 2004 to well above $300 by 2008. When the higher production costs were factored in, the price of electricity from solar firms was 17 to 23 cents per kilowatt-hour, even after subsidies. That was about twice the average price of conventionally produced electricity at the time.

Gronet’s design called for a mix of copper, indium, gallium, and selenium, or CIGS, instead of crystalline silicon. Though slightly less efficient than silicon in direct sunlight, CIGS performs better under cloud cover and in variable light. The technology had been around for several years but was too expensive to be practical. That changed as soon as silicon climbed above $200 per kilogram. Suddenly CIGS could compete. With his cylindrical module and exotic coating, Gronet had a model for transforming the solar industry. He incorporated his company in 2005, first calling it Gronet Technologies but quickly changing the name to Solyndra.

Gronet and his chief financial officer, Jonathan Michael, set out to raise capital for a factory. By 2007, they had $99 million from sources including RockPort Capital Partners and Argonaut Private Equity and were busy renovating an old Hitachi building in Fremont, California. In 2008, Virgin Green Fund, an investment arm of British business icon Richard Branson, chose Solyndra as the only solar company that it would put money into, out of more than 100 that applied for funding. By the end of that year, Solyndra had raised $600 million, boasted more than 500 employees, and had two major orders—$325 million from Sacramento-based Solar Power and $681 million from a German company called Phoenix Solar. “Everyone was pretty optimistic,” recalls Lindsey Eastburn, who was designing factory-automation software for Solyndra. “We were making product, and we were selling it.”

Just as Solyndra was starting to take off and needed more money for expansion, the venture capital climate began to cool. The 2008 financial collapse erased a quarter of the gains VC firms had made between 2003 and 2007, and the sudden paucity of capital—combined with the difficulty of taking smaller companies public—hit renewable startups particularly hard. Venture investments in clean tech fell from $4.1 billion in 2008 to $2.5 billion in 2009.

There was an additional factor at work: impatience. Venture capitalists tend to work on three- to five-year horizons. As they were quickly finding out, energy companies don’t operate on those timelines. Consider a recent analysis by Matthew Nordan, a venture capitalist who specializes in energy and environmental technology. Of all the energy startups that received their first VC funds between 1995 and 2007, only 1.8 percent achieved what he calls “unambiguous success,” meaning an initial public offering on a major exchange. The average time from founding to IPO was 8.3 years. “If you’re signing up to build a clean-tech winner,” Nordan wrote in a blog post, “reserve a decade of your life.”

The truth is that starting a company on the supply side of the energy business requires an investment in heavy industry that the VC firms didn’t fully reckon with. The only way to find out if a new idea in this sector will work at scale is to build a factory and see what happens. Ethan Zindler, head of policy analysis for Bloomberg New Energy Finance, says the VC community simply assumed that the formula for success in the Internet world would translate to the clean-tech arena. “What a lot of them didn’t bargain for, and, frankly, didn’t really understand,” he says, “is that it’s almost never going to be five guys in a garage. You need a heck of a lot of money to prove that you can do your technology at scale.”

Luckily for the clean-tech industry, a much larger investor stepped in to replace the retreating VCs—the federal government.


Solyndra’s Epic Missteps
From Chinese competition to the color of customers’ roofs, the solar manufacturer made assumptions that proved disastrously wrong.—R.S.

Ramp-Up Costs
Gearing up to manufacture a new consumer product is notoriously expensive. In the energy sector, the costs can be crushing, as Solyndra found out: It spent at least $87 million to outfit its first factory and get to market, $290 million in research and development, and $733 million on just the first phase of its second factory, which was necessary to manufacture at the required scale. Per watt, Solyndra’s projected prices were up to double what consumers can now pay for conventional solar power.

Silicon Prices
Traditional solar panels are made from silicon. Solyndra’s next-gen design used CIGS—a combination of copper, indium, gallium, and selenium. When Solyndra launched, processed silicon was selling at historic highs, which made CIGS a cheaper option. But silicon producers overreacted to the price run-up and flooded the market. Prices dropped by as much as 90 percent and stayed there. Solyndra’s business model was based on a price advantage for CIGS that no longer existed.

Shale Gas Output
In 2001, shale gas accounted for less than 2 percent of US natural gas output. Today, thanks to advances in horizontal drilling and the effective though highly controversial technique of hydraulic fracturing, or fracking, it accounts for 30 percent. Meanwhile the price of natural gas has fallen by 77 percent since 2008, and the cost of producing electricity in gas plants is down 40 percent since then. Renewables simply can’t compete.

Chinese Supply
In 2010, China established a $30 billion line of credit for the nation’s solar industry as part of a strategy to bolster domestic production. The result: Chinese firms went from making just 6 percent of the world’s solar cells in 2005 to manufacturing more than half of them today. The US share has plummeted from 40 percent to 7 percent. Solyndra and other manufacturers were simply price out of the market.

Rooftop Colors
Solyndra’s model assumed that its cylindrical cells would generate 15 percent more energy per square foot than flat crystalline-silicon cells. This math assumed that the cells would be installed on white roofs, where their sides and bottoms would absorb reflected light. The company hoped to forge partnerships with roofing companies to facilitate this—and to open new sales channels—but was unable to do so in sufficient numbers.

Another blow to the domestic clean-tech industry was a glut of processed silicon that sent prices back down below $30 a kilogram. That price, combined with the technological simplicity of manufacturing conventional solar panels, opened the door to relatively unsophisticated operators. For example, in 2007, a Chinese textile manufacturer approached Arno Harris, CEO of utility developer Recurrent Energy, to see if he’d be interested in buying solar panels that they hoped to begin making. When the bar to entry is so low that textile makers can churn out solar modules, Solyndra’s expensive CIGS-coated cylinders and other next-gen renewable technologies simply can’t compete.

There was another factor driving down the cost of conventional photovoltaics. In recent years, China has worked aggressively to develop its domestic solar production capacity. National banks have given credit lines that dwarf the federal loans US firms enjoyed; local and provincial governments have provided tax incentives as well as land at below-market rates; and the national government recently established a so-called feed-in tariff, which compels utilities to buy electricity from solar developers at above-market rates to offset their production costs.

Understandably, American firms have struggled to remain competitive. In 1995, more than 40 percent of all silicon-based solar modules worldwide were made in the US; now it’s 6 percent. In less than two years, at least eight solar plants have closed or downsized, eliminating nearly 3,000 American manufacturing jobs, including the 1,100 employees who saw their jobs disappear with Solyndra’s spectacular September 2011 bankruptcy. China now accounts for more than half of global photovoltaic output, and Chinese-made modules are up to 20 percent cheaper than American ones.

Wind has also taken a hit. Not only can the turbines not match the current costs of gas-fired plants, the flood of cheap Chinese solar panels can make them less attractive as a green option, too. The pace of new wind-turbine installations in the US has declined by more than half since 2008. This past October, Cliff Stearns, the Republican chair of the House Energy and Commerce Oversight and Investigations Subcommittee, admitted to NPR what had by then become obvious: “We can’t compete with China to make solar panels and wind turbines.”

And yet, clean tech is far from dead. Certain companies and technologies will emerge from the ruins not only to survive but to thrive, just like they did after the bursting of the Internet bubble.


In at least one respect, these companies rely on a very old-fashioned boost: federal and state subsidies and tax breaks. When they install a solar system on someone’s roof, they take all the government sweeteners that accompany the installation, which helps these firms offer their systems at lower prices. “Between 40 and 50 percent of the system is covered up front,” says Danny Kennedy, founder of Sungevity. “The customer is getting an incredible value proposition: ‘I’m going to save money from day one.’ That’s a hell of a thing. For no investment, I’m going to save money.”

But there is an investor: the taxpayer. Government coffers have been compensating for a number of market challenges solar faces, including the incumbency advantage of the fossil fuel industry and private investors’ distaste for capital-intensive enterprises that will take years to deliver a return. And in 2012, the solar industry may face a sudden reduction in these subsidies, as the post-Solyndra political climate grows less and less receptive to investments in clean energy. Despite the fact that renewable energy received only a quarter of the subsidies that fossil-fuel-based electricity received between 2002 and 2007, it’s wind and solar that are on the chopping block.

Even solar’s biggest allies on Capitol Hill—people like Edward J. Markey, a top Democrat on the House Energy and Commerce Committee—fear the industry’s oil and gas foes may have gotten the upper hand now that the clean-tech bubble has burst. “We are not Panglossian about what lies ahead,” Markey says. “The fossil fuel industry and its allies in Congress clearly see the solar and wind industries as a threat and will try to kill these industries as they have for the preceding two generations. They want this to be a five-year aberrational period.” more
And even the Germans, who have made a major commitment to a renewable future, are asking for a breather while they determine how well their campaign is going.
Solar Subsidy Sinkhole
Re-Evaluating Germany's Blind Faith in the Sun
By Alexander Neubacher   01/18/2012

The costs of subsidizing solar electricity have exceeded the 100-billion-euro mark in Germany, but poor results are jeopardizing the country's transition to renewable energy. The government is struggling to come up with a new concept to promote the inefficient technology in the future.

The Baedeker travel guide is now available in an environmentally-friendly version. The 200-page book, entitled "Germany - Discover Renewable Energy," lists the sights of the solar age: the solar café in Kirchzarten, the solar golf course in Bad Saulgau, the light tower in Solingen and the "Alster Sun" in Hamburg, possibly the largest solar boat in the world.

The only thing that's missing at the moment is sunshine. For weeks now, the 1.1 million solar power systems in Germany have generated almost no electricity. The days are short, the weather is bad and the sky is overcast.

As is so often the case in winter, all solar panels more or less stopped generating electricity at the same time. To avert power shortages, Germany currently has to import large amounts of electricity generated at nuclear power plants in France and the Czech Republic. To offset the temporary loss of solar power, grid operator Tennet resorted to an emergency backup plan, powering up an old oil-fired plant in the Austrian city of Graz.

Solar energy has gone from being the great white hope, to an impediment, to a reliable energy supply. Solar farm operators and homeowners with solar panels on their roofs collected more than €8 billion ($10.2 billion) in subsidies in 2011, but the electricity they generated made up only about 3 percent of the total power supply, and that at unpredictable times.

The distribution networks are not designed to allow tens of thousands of solar panel owners to switch at will between drawing electricity from the grid and feeding power into it. Because there are almost no storage options, the excess energy has to be destroyed at substantial cost. German consumers already complain about having to pay the second-highest electricity prices in Europe. more


  1. I'll recommend your readers read the comments on that Wired article, it expands substantially the green energy discussion well beyond the limited Wired author and word count...which in its main article only adds to the 'impatience' argument it breezed through in the middle.

    Fossil fuels can generate a lot of short-term energy as it goes into its death throes, but a wise man will merely distance himself lest he be smashed while FF spins and thrashes.

    FF is needed while we convert over, but green energy is where we need to commit our attention and resources. Most of the article's references to to failures are due to USA limitations on our commitment and investment, not due to the overall need for and promise of green energy. In other words, short-term investor jitters sinking their own long-term investment gains.

  2. Amen to this Mike!

    I have long maintained that if something is thermodynamically worth doing it should be economically worth doing. If it isn't, then the economic thinking is wrong.

    But you know, we have been through this sort of thing before in USA. Robert Goddard invent the liquid-fueled rocket but because he had to experiment with funds he could raise in the private sector, US rocket technology was a mere shadow of what von Braun had done in Germany by 1945 with government backing. But apparently, we have forgotten the lesson that some projects are just too big to fund privately. The conversion to solar is such a project. So while we are willing to waste almost unlimited money on an SDI project that will never work, we have a political freakout over a lost billion over Solyndra.

  3. The U.S. real economy can not export its way out of problems, because for every dollar of exports of two or three are spent on expensive oil imports. One of the reasons for a lower currency value does not always create economic growth.
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