Global electricity usage is expected to increase from 14.8 trillion kWh in 2003 to 27.1 trillion kWh by 2025, according to the U.S. Department of Energy’s Internal Energy Outlook 2005. Approximately 65.7% of the world’s electricity is currently produced with fossil fuels. As demand for electricity continues to increase, the electric power industry is facing several challenges:
• Fossil fuel supply constraints. Limited supply and escalating consumption of coal, oil, and natural gas continue to drive up wholesale electricity prices, resulting in higher electricity costs for consumers.
• Infrastructure constraints. In many parts of the world, electricity demand exceeds the capacity of existing electricity generation, transmission and distribution infrastructure.
• Desire for energy security. As political and economic instability in key oil and natural gas producing regions has increased, governments are increasingly focused on developing reliable and secure energy sources.
• Environmental concerns. Long-term use of fossil fuels is associated with a range of environmental issues including global warming, air pollution and water pollution, the increased prevalence of which is driving increased environmental awareness.
Industry and governments are considering alternatives to traditional fossil fuels to address these challenges, including renewable energy sources and technologies.
Renewable energy industry
The renewable energy industry includes solar, hydroelectric and wind power generation, and to a lesser extent biomass and geothermal power generation. As opposed to fossil fuels, which draw on finite resources, renewable energy is generally unlimited in its availability. Hydroelectric power generation, the use of flowing water to generate electricity, is currently the largest source of renewable energy as measured by electricity generation. However, the potential for additional hydroelectric capacity in the developed world is limited due to the lack of development opportunities and environmental concerns over the creation of additional large reservoirs that flood agricultural land and human and animal habitats. Wind power generation, the use of wind turbines to harness and convert kinetic energy into electricity, is one of the fastest growing sources of renewable energy. Today, large-scale wind power is becoming a cost-competitive alternative to wholesale natural gas and coal-fired power in locations with high average wind speeds and sufficient space for large wind plants. However, space constraints, wind speed availability and zoning restrictions in suburban and urban regions limit the potential of wind power systems. Additionally, peak wind availability generally does not coincide with peak seasonal or time of day electricity use.
Due to the constraints on other sources of renewable energy, solar power has emerged as one of the fastest growing renewable energy sources. Solar power has several benefits when compared to other renewable energy technologies, including:
• No fuel price volatility. Unlike fossil and nuclear fuels, solar energy has no fuel price volatility. Although there is variability in the amount and timing of sunlight over the day, season and year, a properly sized and configured system can be designed for high reliability while providing a long term, fixed price electricity supply.
• High reliability. With no moving parts or regular required maintenance, solar power is one of the most reliable forms of electricity generation.
• Environmentally benign. Solar cells generate electricity without air or water emissions, noise, vibration, habitat impact or waste generation.
• Easily located with the end-user. Unlike other renewable resources such as hydroelectric and wind power, solar power can be utilized anywhere there is sunlight and directly where the power will be used. As a result, solar power limits the expense of and energy losses associated with transmission and distribution from large-scale electric plants to the end users.
• Peak energy generation corresponds with peak energy consumption. Maximum sunlight hours generally correspond with peak electricity demand when prices are highest.
• Applicable for a wide range of power requirements. Solar power products can be sized to meet the specific needs of the end-user ranging from very small consumer applications to larger commercial applications.
Solar industry trends
Solar power systems are used for a variety of residential, commercial and industrial applications generally described as either “on-grid” or “off-grid” in nature. The market for “on-grid” applications, where solar power is used to supplement electricity purchased from the utility network, represents the largest and fastest growing segment of the market. According to Solarbuzz, in 2005, the global on-grid segment grew by 42% to 1,262 MW, and since 2001, the on-grid segment has grown at an average annual rate of approximately 55%. We believe the majority of our products are used in on-grid applications.
“Off-grid” markets, where access to utility networks is not physically feasible or economical, offer additional opportunities for solar technology. Off-grid industrial applications include road signs, highway call boxes, communications support along remote pipelines and telecommunications equipment, as well as rural residential applications. Off-grid consumer applications include portable recreational power modules, garden lights, marine lighting and camping equipment. As reported by Solarbuzz, the off-grid market grew at 2% in 2005, to 198 MW, and has grown at an average of 12% per annum since 2001.
According to Solarbuzz, between 2001 and 2005, total annual solar power system installations increased globally from 345 MW to 1,460 MW, representing a compound annual growth rate of 43%, and global installations of solar power systems are expected to grow at a compound annual growth rate of 17% from 1,460 MW in 2005 to 3,250 MW by 2010. Solarbuzz forecasts continued strong growth globally, with sales increasing from $9.8 billion in 2005 to an estimated $18.6 billion by 2010, a 14% compound annual growth rate. Despite this rapid growth, solar energy constitutes only a small fraction of the world’s energy output.
The development and increased usage of solar power is, and for the foreseeable future will be, affected by the existence of government incentives. A growing number of countries have established attractive incentive programs for the development of solar and other renewable energy sources. In 2005, two of the three largest markets for solar products, as measured by total installations per annum, were Germany and the United States, each having significant government subsidy programs for solar power. Other countries in which we sell our products such as Spain, France and Italy also have significant government subsidy programs for solar power. Certain jurisdictions, such as Germany, have subsidy programs that are designed to decline over time.
Similar to other renewable energy sources, the solar industry currently is not cost competitive on a standalone basis and requires government incentives to be competitive with fossil based alternatives. A growing number of countries have established attractive incentive programs for the development of solar and other renewable energy sources. These programs include:
• Net metering laws and feed-in tariffs allowing on-grid end users to sell electricity back to the grid at retail prices;
• Direct subsidies to end users to offset costs of solar equipment and installation charges;
• Tax incentives and low interest loans to finance solar power systems; and
• Government standards mandating minimum usage levels of renewable energy sources.
Germany. Since 2004, Germany has been the leading solar power market in terms of annual megawatt additions. Renewable energy laws in Germany require electricity transmission grid operators to connect various renewable energy sources to their electricity transmission grids and to purchase all electricity generated by such sources at guaranteed feed-in tariffs. Additional regulatory support measures include investment cost subsidies, low-interest loans and tax relief to end users of renewable energy. These programs have encouraged the development of Germany’s solar market, which has grown from annual installations of 79 MW in 2001 to 837 MW in 2005. Subsidy programs in Germany are designed to decline over time.
France. France continues to generate significantly more electricity than it consumes. Today, renewable energy generates only approximately 15% of the country’s total energy supply. However, current plans call for an increase in national renewable energy use to 21% of electricity output by 2010. In April 2006, the government increased feed-in tariffs for solar power by 50%.
Spain. The incentive program in Spain includes a national net metering program and favorable interest loans. The feed-in tariff for solar energy in Spain is fully guaranteed by the Spanish government for 25 years.
Italy. Slow economic growth and increasing national debt has hindered development in Italy’s electrical generation infrastructure. The resulting inability to meet increasing demand resulted in rolling blackouts in the summer of 2003. In 2005, the government enacted legislation normalizing a system of regional solar generation subsidies which sets fixed feed-in tariffs to be paid over 20 years. In the program’s second quarter (October to December 2005) it received approximately 7,500 requests for a total output of 190 MW.
United States. With annual growth rates of 20-30%, the U.S. solar market continues steady expansion. However, renewable energy sources currently contribute less than 9%, or 337 billion kWh, of the nation’s total energy consumption with solar providing only a fraction of that amount. The United States recently enacted a major energy bill that included federal tax credits, purchasing goals and other programs designed to accelerate the adoption of solar power. In addition, a number of states, including California, New Jersey and Nevada, have committed substantial resources to the development and implementation of renewable energy programs. For example, in early 2006, California announced a $2.9 billion, 10 year government incentive program to reach 3,000 MW of solar installations by 2017. The program, will subsidize one-third of the installation costs of all new systems. In California, a customer who has purchased solar energy products can receive a cash rebate from the California Energy Commission, a state tax credit and can take advantage of net metering. The customer’s cash rebate is based on the capital cost of the solar power system, currently set at $2.60 per watt.
Canada. In March 2006, Ontario became the first Canadian province to offer subsidies to homeowners or businesses installing solar power systems under a program whereby the Ontario Power Authority will purchase electricity produced by wind, biomass, small hydroelectric or solar at a fixed price. Electricity generated through solar power systems will be purchased at a rate of C$0.42/kWh compared to the current consumer rate of approximately C$0.08/kWh charged by provincial utility providers.
Japan. Incentive programs in Japan led to the installation of more than 100,000 residential solar power systems between 2003 and 2004. Japan is forecasting the installation of 5 GW of generation capacity by 2010. The Japanese government has implemented a series of incentive programs, including a “PV 2030” roadmap. This roadmap outlines government policies designed to generate between 50 and 200 GW of solar electricity by 2030, as well as the provision of government subsidies for research and development. The program is designed to be self-sustainable for households in 2010 and for businesses and industry in 2020 and 2030, respectively. Japan eliminated its direct subsidies in 2005.
China. In 2005, China enacted the Renewable Energy Law in order to help reach the government target of 400 MW and 1,000 MW installed by 2010 and 2020 respectively. This law authorizes relevant authorities to set favorable prices for the purchase of surplus on-grid solar-generated electricity and provides other financial incentives for the development of renewable energy projects. In addition, the State Council of China and the Ministry of Construction have recently created directives encouraging the development and use of solar energy in both urban and rural areas. For example, in October 2005, the Shanghai municipal government endorsed the “100,000 Roof Project” which calls for 300 MW of installed capacity by 2015.
Principal challenges facing solar power market growth
The solar power industry must overcome several challenges to achieve widespread commercialization of its products.
Secure silicon supply. The strong growth in demand for silicon for use in solar production (from 5,000 metric tonnes in 2001 to 17,000 metric tonnes in 2005 according to Solarbuzz) has led to an industry-wide shortage. This shortage is widely believed to be short-term in nature as significant new production capacity is forecast to come online in the next five years. Compounding this shortage is a resurgence in demand for electrical grade silicon from technology manufacturers. As competition for secure sources of supply increases, access to a secure supply of silicon continues to be a critical factor limiting the growth of the solar power industry. A limited supply of silicon may also create additional difficulties for solar companies as they adapt to the volatility and risk related to their principal supply component. Historically, solar companies have addressed constrained silicon supply through inventory build-up during reduced demand stages of the market cycle. However, with demand outpacing supply, inventory levels are forecast to remain at historical lows until new silicon production capacity is brought online. Further, solar cell and solar module producers must compete with growing demand from the semiconductor industry for which high-grade silicon is also a key input.
Decrease cost per watt to customers. The cost of solar electricity is higher than the cost of retail electricity from the utility network, with solar power systems requiring relatively high up-front costs and relatively low ongoing operational costs. Government programs and consumer preference have accelerated the use of solar electricity, but product cost remains one of the largest impediments to growth. As solar has become a more mature technology, yields, cell efficiencies, manufacturing efficiencies and economies of scale have improved, but continued improvements still need to be made in these areas.
Improve aesthetics. We believe that aesthetics are a barrier to wider adoption of solar cell and solar module products and systems among commercial and residential consumers. Historically, these consumers have resisted solar products in part for aesthetic reasons. Established solar products are heavy, rigid, fragile and non-modular. Solar cell and solar module manufacturers can improve aesthetics by developing products that can be more attractively integrated into building structures, and that are lighter, flexible and modular.
