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Renewables at a Crossroads

Investment opportunities in an evolving environment.

Fortnightly Magazine - June 2011

net present value.

Going forward, the continued growth of smart grid companies and energy storage providers will play a critical role in enabling the next wave of renewables development. Successful development of economical energy-storage technologies would solve many of the intermittency challenges faced by wind and solar, improving project economics. Similarly, the widespread adoption of smart meters and variable pricing will make solar power more attractive, given that its greatest output is during the day, when demand is at its peak.

In addition, investor-owned utilities likely will begin to diversify upstream into new parts of the renewables value chain. Companies such as Duke Energy and Exelon have already acquired large asset ownership and development positions. Utilities that build and own the renewable generation and transmission infrastructure, as opposed to simply purchasing energy through PPAs, will have more balance-sheet flexibility than smaller renewables financial players do in building the new transmission lines required to bring renewable power from remote areas to load centers.

Further, the introduction of innovative business models—particularly those that address the technology’s sometimes steep up-front costs—likely will decide the pace at which renewables are deployed in the marketplace. One of the most important drivers of growth in commercial solar installations was the introduction of long-term, fixed-price contracts for electricity. SunPower and other companies have introduced new pricing structures whereby they install solar panels on customer rooftops and charge monthly fees—similar to SolarCity’s lease arrangements—rather than requiring customers to incur large, up-front capital expenditures.

Similar approaches will be needed if the sector is to fully tap the potential in the residential and small commercial market. Different segments of the market will have different wants and needs, but the features are likely to include quick and economical installations, predictable power prices with no up-front investment necessary, and more elegant designs. A number of companies already are offering more sophisticated commercialization and marketing, but more business model innovation will no doubt occur as the renewables market matures.

The same is true for the way technologies are applied. Gone are the days when solar PV panels were considered only for small rooftop systems. Increasingly, renewables technologies are broadening in scope when it comes to their potential application.

For instance, many solar PV manufacturers remain singularly focused on megawatt-sized projects, but some thin-film rivals are pursuing breakthroughs in off-grid applications in a range of markets.

New consumer goods—such as briefcases with solar power chargers for mobile phones—are expected to spur a compound annual growth rate of 30 percent in the $300 million market for flexible thin-film PV modules.

The military is another likely channel for future growth. The energy demands of the military are considerable: For every gallon of fuel that reaches Afghanistan, six gallons are expended getting it there. Solar PV has the potential to substantially alter the military’s dependence on fossil fuels.

PV modules also could bring electricity to many locations in the developing world where the grid is underdeveloped and consumer electronics such as mobile phones have leapfrogged the infrastructure built to support them.

Much work remains to make these markets commercially