Solar Perspectives: Beware the Positive News from the US Market

by Al Velosa

2009-11-30

Now this can sound a bit funny from a market analyst who lives in the US. But I think it’s only fair to warn all of you – both U.S. based and not – again about the perils of the U.S. market.

Al Velosa is a Research Director at Gartner Inc. focused on the photovoltaic solar market

Let me clarify my rational for you by highlighting three news items that came by my inbox this week.

First, First Solar sold the project it has constructed in Blythe, CA to NRG Energy. Second, MEMC has completed the acquisition of SunEdison. Finally, the Federal Energy Regulatory Committee’s (FERC) issued a declaratory order in effect recognizes it does not have jurisdiction over on-site solar generating systems whose electricity is sold under a power purchase agreement (PPA) contract to a host customer. It is worth quoting parts of this order:

  • “confirming that certain of its subsidiaries’ sales to end-use customers do not constitute the sale of electric energy at wholesale in interstate commerce or the transmission of electric energy in interstate commerce for purposes of the Federal Power Act (FPA),1 nor involve jurisdictional rates for purposes of the Public Utility Holding Company Act of 2005 (PUHCA 2005)”

Now, my dear reader, you may say to me “Al that sounds like good news.” And I would have to agree with you in broad general terms. Lets start with the first two items.

They tell us that the financial markets in the US continue to warm up for PV solar energy even as utilities start to become an increasing part of the PV pipeline in the US. The acquisition of SunEdison effectively gives it a “Daddy Warbucks” (a reference to the rich adopting father in “Little Orphan Annie” for those of you unfamiliar with this term) that will help it raise funds much more cheaply than before.

Further, the FERC’s order helps lower the transaction cost of PV projects sold by IPP firms on a PPA contract basis. To quote the FERC order a bit more in section 7, “SunEdison states that it is bringing this petition because its Retail Operations are drowning in Commission-related paperwork.”

This would be an issue for any PV firm, since the transaction costs are a critical item for PV projects in the US. Note that in the US we do not have the standard Feed-in-Tariff structure that has proven so successful in parts of Europe. Currently the US PV market is driven by sales to non-utility enterprises and to residential homeowners. This leads to a couple of complications that align with these stories. 

  • Each project is negotiated directly with buyers, whether they are the end users or the utilities. Thus the price of electricity for each project may vary significantly, leading to fluctuating profitability.

  • Each project is unique and requires its own set of permits and analysis. The average timeframe for an enterprise project from sales cycle to system activation is 12 to 18 months. Utility projects will require more time, while residential project will require less time.

So these news items make me nervous that folks will start to get too optimistic about the U.S. PV market and start expecting strong sales in the US for 2010 and 2011. European firms entered the US market in large scale over the past year. These companies are expecting strong results to buoy their business.

What they have run into instead is a thicket of problems. There is no US market. It is really a collection of local markets within each state that align to the local utility. Channel strategy is critical in the US market, since the EPC partners who’s sales forces will push your products usually have restricted territories. IE the firms who are dominant in California have a limited presence in New Jersey.

Utility relationships are another area of concern. The PV vendors need to understand which utility is really interested in pursuing projects. Too many utilities are now just paying lip service to adopting renewable energy sources by releasing Requests for Proposals that will go nowhere. And in those utilities who are actively implementing PV solar projects, First Solar and SunPower present formidable competition.

Thus, if a project is not in the sales pipeline already, it will not be implemented until 2011. Many PV companies will be disappointed by their sales and aggravated by the transaction costs they will face in the U.S. If I was the U.S. country manager for a European or Asian PV firm, my number one focus would be sales and business development. A very close second would be lowering expectations back at the home office on sales targets for 2010 and 2011.