The Green Vanguard: S is for Solar Panels

In June, SunRun, a San Francisco–based startup that leases solar panels to homeowners, got $55 million dollars from investors. The infusion of cash, led by Sequoia Capital, could be a signal that solar power’s time has finally come. Generally considered the most influential venture-capital firm in Silicon Valley, Sequoia has a history of smart investments—Google, Apple, YouTube, PayPal, Electronic Arts, and many others. Bankers there may well believe that solar is the right thing to do, but their bet on SunRun suggests something else altogether: a calculation that it will be profitable.

But why now? Solar power has always been a good idea. The sun comes up every day, and the technology generates power where it’s needed, unlike conventional energy sources, which require relays and switches and wires to transmit energy from a centrally located, emissions-heavy power plant. And the headlines contain constant reminders—the wars in Iraq and Afghanistan, the BP oil spill, the record-breaking summer—of the not-so-hidden costs of our continued dependence on fossil fuels.

Yet electricity in the United States is still overwhelmingly generated by oil, coal, and natural gas. Solar makes up less than 1 percent of the mix. But that is changing, and SunRun’s president, Lynn Jurich, says the move by Sequoia represents a wager that “solar will be a mainstream consumer product” by the end of the decade. “We’re already on our way to widespread adoption across the states,” she says, citing a Solar Energy Industries Association report claiming that the country’s installed solar capacity jumped 39 percent in 2009, in arguably the worst economic climate since the Great Depression.

It’s no coincidence that SunRun is based in California, which has taken the lead in adopting solar power. In 2006 the Million Solar Roofs Bill began requiring developers to include solar power as an option on new homes they build. The bill also set an ambitious goal of a million solar roofs in the state by 2018. California law now requires utilities to pay consumers back for surplus energy generated from solar arrays. That removes a perverse incentive for solar-equipped homeowners to waste energy so it didn’t revert to their local utility. The state also offers tax credits to encourage the adoption of solar power in businesses and affordable-housing projects, and provides cash rebates for installing panels.

New financing options are also tipping the scales. SunRun and other companies, such as SolarCity and Sungevity, offer consumers the option to lease a solar array or enter into an agreement (called a Power Purchase Agreement, or PPA) to purchase the power the panels generate. The details of the agreements vary—typically a lease requires no money down, while a PPA requires some money up front. But both financing models are cheaper than purchasing and installing a full set of PVs, and thus eliminate a giant obstacle for individual consumers. “Residential solar systems can cost anywhere between $25,000 to $45,000,” Jurich says. “But with PPAs and leases, homeowners can switch to solar for little or no cost and simply pay monthly for their electricity, just like they pay their utility today. It’s familiar and affordable.”

Danny Kennedy, of Sungevity, says he saw business take off when his company started leasing panels instead of just offering cash sales. But for homeowners who have the money or enough equity in their home, buying rather than leasing solar panels could wind up being the smarter long-term option. One reason companies like SunRun are cropping up everywhere is that they profit from government incentives. Homeowners could get that cash for themselves if they had the capital and the cojones. But Americans aren’t used to thinking about where their energy comes from, much less implementing schemes that involve major construction on their homes and filling out endless paperwork. By assuming the risk and hassle, SunRun reaps the financial rewards, collecting cash from government rebates and tax credits.

Making the switch to solar more convenient seems to be working, but as a relatively new technology, solar remains expensive. “Size and scale are the main drivers that make traditional power cheaper,” says Brian Lynch, East Coast Regional Sales Manager of Schott Solar, which manufactures photovoltaic panels. The tipping point for solar may be when it achieves what energy execs call “grid parity,” when “the cost of producing a watt of solar electricity is equal to the cost of producing a watt of grid electricity,” Jurich explains. Still, power-plant-based energy has a mammoth, long-standing infrastructure in place. That advantage, however, may not last. As solar technology matures and more PV panels are produced, the cost of solar will continue to go down. This declining cost was another factor in the timing of Sequoia’s decision to invest.

Leonard Fernandez, an executive at Enfinity, a global energy company, cites a number of factors leading to the falling price of solar, including the expiration of tariff subsidies in Europe. These incentive programs led to increased production; their elimination is now resulting in an oversupply of PV panels, causing the price of modules to decrease. “Finally, economies of scale have kicked in,” Fernandez says. “Worldwide manufacturing of PV panels has grown so much that they are now being treated as more of a commodity, which drives down the price. The global recession has also contributed to reduced costs, as some projects around the world were getting stranded or delayed. If you also factor in higher net energy yields and lower operations and maintenance costs, you see a more than fourfold drop in the cost of solar electricity.”

“At the same time, the cost of traditional electricity has increased,” Fernandez notes, citing factors like the expensive cleanup of the Gulf and even the immeasurable costs of global climate change. And solar panels don’t utilize the transmission infrastructure, the maintenance of which is yet another hidden cost of traditional electricity. According to Fernandez, solar has an edge over other renewables as well. “One of the great advantages that it has over other energy sources, such as wind, is cost of operation,” he says. “Overall maintenance costs are very low. Both in terms of job creation and energy independence, solar is a smart long-term strategic bet.”

The future of solar power in the United States still depends on government subsidies, but that problem is not unique to solar. “Bear in mind that to some degree, almost all fuel sources are subsidized in some way or another,” Fernandez says. “Stimulus money is contributing to solar-power growth and installation rates.” Some incentives are set to expire in 2016 or sooner. But Jurich predicts that by the time subsidies disappear, “the cost of producing solar electricity will be comparable or even less than the cost of producing traditional electricity.”

Jeff Siegel, cofounder of Green Chip Stocks, an independent investment-research firm that specializes in green investments, agrees that grid parity by 2016 is possible, adding: “We have to get away from this illusion that coal and oil are cheap. They’re not. This stuff is prohibitively expensive. Most taxpayers don’t know it because most taxpayers don’t realize a large chunk of their money is being used to keep coal, oil, and gas prices artificially low.”

For a product or technology to be truly sustainable, it has to have a manageable environmental impact throughout its commercial cycle. According to Lynch, solar easily passes this test. “We don’t use toxic heavy metals in our modules, and the energy required to produce the module is offset within the first three months of the material installed in the field. Solar modules, if manufactured responsibly, are a very environmentally friendly energy-production technology. There is some plastic, but it’s minimal. The main materials are glass, aluminum frame, and silicon cells,” all of which are recyclable, he says.

Solar power alone can’t wean us from fossil-fuel dependency. Most experts see the future of energy use as a mixed portfolio of alternative energies, combined with careful management of existing resources. And it’s clear that such a major infrastructure shift won’t happen on its own. But targeted legislation and funding, along with thoughtful policy changes, education, and research into new technologies, could bring us to a dramatically different place a decade from now. “It’s important to note that solar is not meant to replace other alternative energy sources but work with them,” Jurich says. “Harness the wind where it’s windy. But solar power will continue to be a viable technology as long as the sun continues to shine.”