Solar’s economics are increasingly attractive yet often poorly understood. Does solar have an image problem?
Businesses small and large – but particularly those with high electricity costs – can achieve considerable savings and create long-term price certainty by installing a solar electric system instead of purchasing electricity from their utility. In fact, every business with a minimum of space (for the solar system) and high electricity costs should examine solar’s potential to reduce overhead in the short- and long-term.
Economists generally take a dim view of such claims. Why, they would ask, is commercial solar uptake still relatively light if business owners truly stand to benefit? Are they not rational actors with every economic incentive to reduce their costs?
These skeptics have a point. Even in California and New Jersey – the top two solar markets – fewer than 5,000 individual businesses in each state utilize solar electric systems. Despite the solar industry’s significant growth (our own company REC Solar currently has more than 20 megawatts of commercial projects under construction) few forecasts suggest that commercial solar will experience explosive or exponential growth in the near future.
How then do we understand this conflict? Why does solar adoption seem to lag behind what the often-attractive financial returns would otherwise suggest?
Let’s knock off the low-hanging fruit first. Many businesses of course have limited electricity demand, little useable space, don’t own their facilities, or lack either tax liability or the ability to finance or lease solar. While these aren’t disqualifiers in every situation, they complicate the process (and economics) of going solar.
With that in mind, let’s examine the remaining population of businesses which use reasonably-high amounts of electricity for lighting, cooling, machinery, or electronics, have the necessary amount of space on a rooftop or elsewhere, and which own or control their facilities. Solar makes the most economic sense for these businesses, so why wouldn’t they at least look closely at solar energy?
The answer, the evidence suggests, is comprised of the above-mentioned factors combined with a significant lack of consumer awareness. Polling suggests that while most in this country hold generally positive feelings about solar – one recent study found that 92 percent of Democrat and Republican voters feel the U.S. should develop and use more solar energy – other data (including our own consumer-focused research) finds that while many understand that solar benefits the planet and the economy generally, a far-smaller subset of the population understands that solar also provides real economic benefit to a household or business. Customer acquisition costs in the solar industry tend to be extremely high, reinforcing the notion that solar sales and marketing professionals expend significant resources educating potential customers before closing deals.
Thankfully, solar’s early adopters have a meaningful, positive impact on their peers’ feelings and knowledge regarding solar. Anecdotal evidence for this statement abounds. Business owners which have invested in solar frequently discuss the money-saving benefits of solar with their partners and competitors, with sometimes-surprising results. The picture above shows two virtually-identical 1.1 Megawatt systems built by our company for separate (but adjacent) cold-storage facilities in California’s San Joaquin Valley. Once the first facility owner shared information about the financial benefits – savings of more than $300,000 per year and a 20-year post-tax IRR of more than 14 percent – solar became an easy proposition for the neighbors.
Additional support comes from New Jersey, the second-ranking solar state in the nation. Thanks to an aggressive solar mandate enacted in 2010, solar installations exploded from virtually nothing to more than 350 per month by mid-2011. At this same point, however, industry analysts began to note that installed capacity would soon outpace the ability and willingness of the state’s electric service providers to pay relatively-high amounts for the renewable attributes associated with all of this solar electricity. Many industry analysts and pundits predicted a slowdown of the New Jersey solar market by end-of-year.
In fact, the opposite happened. Despite rapidly-declining financial incentives, New Jersey solar installations took off like Usain Bolt, peaking in January 2012 with an incredible 624 systems and 84 Megawatts built in a single month. That’s almost twice the solar capacity installed in Texas in all of 2011. This impressive growth in the face of reduced governmental support can be attributed to many factors – among them the many solar companies which had established a foothold in the state – but paramount among them is the fact that solar’s newfound visibility in densely-populated New Jersey contributed greatly to consumer acceptability and interest.
Further evidence that consumer awareness is key to solar’s growth comes from a recent Yale and New York University study, “Peer Effects in the Diffusion of Solar Photovoltaic Panels,” which found that residents are clearly more likely to install solar if other solar systems are already present in their area and on their street.
“We looked at the influence that the number of cumulative adoptions – the number of people who already installed solar panels in a zip code – had on the probability there would be a new adoption in that zip code,” said Kenneth Gillingham, the study’s co-author and Professor at the Yale University School of Forestry & Environmental Studies. “Our approach controls for a variety of other possible explanations, including clustering of environmental preferences or marketing activity.”
The study also showed that the visibility of the solar system and word-of-mouth were both critical in generating interest. “If my neighbor installs solar and tells me he’s saving money and he’s really excited about it, it’s likely I’ll go ahead and do the same thing,” said Gillingham.
This is simultaneously a simple concept – people need to actually see firsthand and hear from people they trust about the real-world benefits of new technology – and a maddeningly complex one – even after enormous effort to make commercial and residential solar simple, accessible and without upfront costs, there are still fundamental awareness issues to tackle.
One can perhaps debate whether solar companies have developed the right product yet – after all, MP3 players were widely available (if not widely popular) before the IPod and ITunes revolutionized the digital music scene – but regardless, there’s a clear takeaway here. Policy matters. Economics matter. Technology matters. The solar industry has made enormous progress in recent years on these fronts. Above all, people matter. If solar can get the human element of solar just right, we’ll be making an enormous step towards our country’s clean energy future.
Ben Higgins serves as the Director of Government Affairs for Mainstream Energy Corp., where he works closely with company and industry leadership, as well as state and federal policymakers to craft policies that make for a more stable, sustainable business environment for solar. Higgins has over a decade of experience working in the legislative and regulatory arenas.