Preparing for a PV Future Allan Sindelar c. 1993 Allan Sindelar America currently has a surplus of electric generating capacity. However, the Department of Energy estimates that by the year 2010, 248,000 megawatts (MW) of capacity will be needed for new generation, as well as to rebuild or replace old power plants. Although no one expects PV or even renewables to supply all of this power, PV technology can impact our national energy economy. Each article in this series on utilities and PV will focus on a different aspect of the growing public and private utilities involvement in PV. This article describes some recent national efforts to hasten its commercialization. Recent Beginnings In December 1991, key players from the PV industry, Department of Energy, utilities, regulators, state energy offices and consumer advocacy groups convened in Tucson, Arizona to discuss how to stimulate utility use and commercialization of PV. This workshop was uniqueÄsome have said magicalÄin that these stakeholders met not as adversaries but as potential collaborators. Two major recommendations were drafted at this meeting: that the utilities should form their own users' group, and that collaborative groups should form at the state level. Out of this were formed the Utility Photovoltaic Group and the Photovoltaics for Utilities initiative. The Utility Photovoltaic Group (UPVG) is a new nonprofit national organization of utilities and their trade groups. It is organized specifically to represent the utilities perspective as potential PV buyers. Its mission is "to expedite and facilitate the deployment of cost-effective and emerging high-value applications of PV for the benefit of electric utilities and their customers." To date, the UPVG has just over fifty utility members. Photovoltaics for Utilities (PV4U) has a broader function. It is made up of individual state working groups, and is structured more as an initiative than a formal organization. This is because many of the issues that will be addressed are state- based, and vary substantially from state to state. The investor- owned (or private) utilities are regulated by the states rather than by the federal government, and each state has its own policies and practices. The PV4U state working groups have formed an alliance to communicate with each other and coordinate their efforts. Since no one state has all the ingredients, a collection of states together can form innovative and creative ways to best integrate this technology into their mainstream. About a dozen states have formed PV4U State Working Groups. Membership varies from state to state, but maintains the same basic representation as at the Tucson meeting. Most working groups include member utilities, state energy offices and public utilities commissions, ratepayer advocacy and intervenor groups, and module and balance-of-system (BOS) hardware manufacturers. Some state groups also include federal power agencies and laboratories, commerce departments, universities, and organizations such as the Union of Concerned Scientists and Greenpeace. The Uniqueness of PV Photovoltaics are unlike any other energy source that has ever been available to utilities. PV generation requires a large initial expense, but the fuel costs are zero. Coal- or gas- fired plants cost less to build initially (relative to their output) but require continued fuel expense. Fuel expenses fluctuate and are difficult to predict due to uncertainty over future environmental regulations. Fossil fuel prices will rise over time, while overall costs of PV (and all renewable energy resources) are expected to continue to drop, especially as their environmental advantages are valued. PV is also unique in that its modular nature ignores traditional economies of scale. Systems range in size from a few watts to a megawatt or more, and the value of the electricity produced by a PV system varies according to its location and situation. This allows for distributed generation, where a small amount of power is carefully matched to a specific need and produced close to the point where used. This is worth more to the utility than a larger amount produced at a large, distant power plant. For example, commercial buildings use most of their power during daylight hours, and use much more during summer than winter because of air conditioning. The utility must size its transmission and distribution (T&D) equipment to handle the maximum amount of electricity that will ever be needed, even though the T&D equipment is generally used well below its capacity. If each of these buildings had a PV array on its roof that was sized to offset this peak demand, the entire distribution system serving these buildings could be downsized. This adds the savings in T&D costs to the bulk value of the electricity produced by the array. PV offers many other nontraditional benefits. These solar benefits include improved power quality and reliability, reduced transmission losses, lower maintenance costs, and myriad environmental benefits. But most utility economic analysis is still based on central-station planning. To understand and quantify these benefits requires utility planners to create and use entirely new analytical models that realize the unique characteristics of PV. The Problem Until the 1973 oil embargo, utilities operated on business and economic principles based on "bigger is better". As larger central plants were constructed the cost of electricity went down. Consumers were encouraged to use more electricity in order to lead to further economies of scale. Environmental concerns, rapidly rising fuel prices and high interest and inflation rates in the 1970s abruptly ended this approach. Increasing facility size now raises costs. Most utilities have directed their focus toward transmission and distribution improvements, rather than new centralized generation. Until recently, PV's potential has been seen in accordance with this old model. The expectation was that laboratory breakthroughs would lead to such significant cost reductions that PV would be cost-effective in large bulk power plants. This has not happened: technology improvements have been incremental, and have not contributed to significant cost reductions in recent years. Balance-of-system (BOS) costs, which generally have accounted for about half of total system costs, have been equally slow to drop. Yet production volume can bring costs down through economies of scale, PV prices have averaged a steady decline over the last twenty years as production has increased. Historically, PV module prices have dropped by 20% for each doubling in cumulative production volume. At this historic rate, the amount of production necessary for an additional 20% drop will take five years or more. This pace will not create enough demand to increase PV production enough within the next few years to supply much of our anticipated need for new energy by 2000 or 2010. More than sixty utility applications using low power (5 W to 10 KW) PV systems are cost-effective to utilities today. While the number of these niche applications (which include water pumping and remote small-scale systems) is high, their total KW capacity is small. PG&E of California, for example, is considered the national leader in the use of early cost- effective applications, yet its 1000 systems total less than 44 KW. Crude estimates have placed the total market potential for low power PV at around 100 MW, and a study of 25 rural electric cooperatives in Colorado and nearby states indicates a market potential for remote water pumping alone of 3 MW. While these figures are significant, the consensus within the PV community is that the sum of the current cost- effective utility applications is inadequate to allow module manufacturers to substantially increase production. The demand for modules is not enough for the PV industry to ask their investment community for expansion capital. Occasional large purchases by a utility are not enough to effect price reductions, and may dry up the market and increase prices rather than lower them. All of this leads to the central "chicken or egg" problem facing large-scale commercialization of PV: declining costs require large purchases, and large purchases require declining costs. At current selling prices, the domestic market potential is capped near present production levels, a cap that exists because PV is now competitive only in niche applications. Until production volume increases, prices will remain too high to permit the mass utility purchases of PV necessary to bring prices down. A Two-Tracked Plan UPVG's challenge is to capture the increasing public enthusiasm for utility scale PV use while expanding the market beyond current cost-effective applications. The goal is to create an accelerated market for suppliers of PV systems that allows investments in larger manufacturing facilities. This will reduce PV unit costs through economies of scale and generate even broader market potentials. The UPVG's work will be done through two tracks or themes. The first track focuses on promoting current cost-effective PV applications. Awareness of the use of PV is limited among most utilities, and education will be a fundamental goal of the UPVG's work. This effort can also give traditionally conservative utilities low risk firsthand experience with PV. It can help them to establish procurement procedures, specifications, and follow up support. The real potential for driving PV costs down lies on the second track, in emerging high-value applications. These are larger- scale, grid-connected, distributed generation PV systems. PV technology has a number of indirect attributes (such as reliability, flexibility, lower financial risk, and no military costs) which are not included in traditional utility economic analyses. As new accounting methodologies are adopted reflecting these values, the cost gap will close toward further cost reductions. Most utilities are not yet aware of these high- value applications and their nontraditional benefits, so the first task is educating both utilities and their regulators. The next task will be encouraging high-volume PV purchases. The Diffusion Model The current thinking among progressive utilities includes the "diffusion model" of PV commercialization. Here high-value applications are developed and filled, then the next value level develops in a logical progression. This model suggests that while system costs remain high, utilities will use PV in remote applications where new distribution lines are too expensive. As prices drop, PV will expand into grid- connected applications. Using the distributed generation model cited earlier, PV systems will be placed on residential and commercial rooftops, as well as in ground-mounted, utility-sited installations. Finally, when costs drop substantially, PV may be used for peaking and bulk power in large centralized power plants. Doubts persist whether this level will ever be developed, as it requires major breakthroughs in PV and BOS technology. Both wind power and bulk solar thermal electric power have clear economic advantages over PV for these applications. Three Central Concepts The California PV4U Working Group has developed a model commercialization strategy with three concepts for the production levels and price reductions for PV. The first, called "sustained orderly development", means simply that the solar industry needs a reliable and long term market volume for expansion. This volume will be achieved through multi-year, substantial and sustained utility purchases of PV. The second concept is called "commercialization path life- cycle costing". This concept states that higher costs for early applications are a good investment if they contribute to accelerating lower costs and higher performance. Most utility purchases of generating capacity are based on economic analyses of costs and benefits over the particular project's lifetime. This strategy requires that analyses be based on the life cycle of the entire PV commercialization path. The third concept is termed "proactive leadership to stimulate early adoption". According to this idea, the passive approach suggested by the diffusion model will not result in sufficient purchase commitments to allow the needed expansion of PV production. Utilities and other potential bulk buyers must commit to the proactive role of early and sustained purchases permitting the industry to invest in expanded production. This is not, however, a one-sided utility subsidy to the PV industry. It requires, in return some form of aggressive pricing of modules and BOS components, short term selling prices below manufacturing cost. With sustained purchases of PV, production costs will decline. Manufacturer losses during the early stages will be recouped through ever-increasing sales volumes at prices exceeding production costs. In addition, incremental decreases in PV system prices will make already cost- effective applications more cost-effective and will open new market niches. Thus this strategy intends to assure manufacturers' financial stability and business viability. Opportunities for the PV Industry The market for PV modules is growing about 30% per year. In 1991 U.S. manufacturers shipped about 16 MW of modules worldwide; of these, about 1 MW went to grid-connected applications. This number is tiny compared to overall utility generating capacity, but new sales of a few to tens of MW to utilities represent a substantial increase in volume for PV manufacturers and installers. PV has been a mom-and-pop industry at the distributor and dealer levels. The playing field is changing as utilities begin to get involved. Few of the 3200 utilities in the U. S. will be hiring PV specialists in the near future, and fewer still are large enough to afford to develop custom designs when standard packages could do. Most utilities will use outside contractors to supply packaged systems. The potential market for both small- scale and emerging grid-connected applications presents an opportunity for systems distributors and installers who will service the utilities' requirements. Most utilities do not know how to specify their standards for PV systems, and most suppliers do not know how to serve utility customers. Utilities' needs are very different from those of the typical home power user. Specifically, utilities need complete PV system packages that meet their standards of acceptance. Utilities apply a "turnkey" perspective that includes capital, construction, and operations and maintenance costs, as well as system operability and reliability. They expect guaranteed performance, on-time delivery, package warranties, and industry safety standards. To broaden utility acceptance of PV, the people involved in utility planning, operating, and customer service must be presented with systems that fit their requirements. If the PV industry will be ready to supply a substantially expanded utility market by 2000 or 2010, the process must begin today. Markets develop slowly. Each utility using PV must complete its testing and evaluation processes. Suppliers must learn the utilities' needs at an early stage, to allow themselves time to engineer packaged systems to meet these requirements. Two important considerations must direct the accelerated commercialization process. The first is not to set up false or misleading expectations, as happened with early PV bulk plants. The other is to create a sustainable market that will not die away with another change of administration or policy. Nobody knows whether these commercialization efforts will succeed. This entire strategy could be affected by aggressive marketing efforts by overseas manufacturers, as happened in the consumer electronics industry. Within the PV4U initiative itself some people are pushing a "let's really get moving" acceleration of the commercialization process. Others prefer more of a research work plan than a commercialization work plan, and would rather proceed at a slower pace. These are very different approaches. Personal Observations The potential benefits of large-scale utility PV involvement outweigh the risks. The utilities will both invite and demand the PV industry's maturation, and the benefits of lower costs to the utilities will spill over to home power users. Standard designs and packaged systems will make home systems more familiar to building inspectors and bank lenders. Utility involvement will give PV a mainstream recognition that can be of tremendous benefit to local dealers and installers. This scenario is not without its risks. The widespread availability of reliable packaged power systems in remote areas could open many rural and semi-wilderness areas to residential and commercial development. Also, it is practically inevitable that as the PV industry grows it will attract the interest of big business. Indeed, this process has already begun. Whether this growth spawns a new generation of local entrepreneurs, or small business integrity and personal attention are drowned by the growth of another consumer industry, remains to be seen. The PV business is changing. PV has the capacity to fundamentally change how utilities are structured. The better informed we are of these potential changes, the better we will adapt to them and benefit from them. Many of the ideas and concepts in this article have been compiled from the working documents of the groups I have discussed. These include the Program Development Plan for the Utility Photovoltaic Group, the (draft) California PV4U Commercialization Strategy, and the PV4U State Working Group Handbook. Special thanks to Kay Firor of Blue Mountain Energy and Jane Weissman of PV4U for their assistance with this article. Access Author: Allan Sindelar, 120 Alta Mesa Ct., Moraga, CA 94556 ù 510-284-1368 Photovoltaics for Utilities, 15 Haydn St., Boston, MA 02131- 4013 ù 617-323-7377 Utility Photovoltaic Group: 1101 Connecticut Ave. NW, Washington, DC 20036 ù 202- 457-0868