The foundations of tomorrow’s solar industry have to be laid in the developed world. It is here, if anywhere, that the sector will gain the scale needed to become profitable. If solar is to play a significant part in the lower carbon economy, it cannot be a cottage industry. The industry has to think big, make money and become hundreds of times larger than it is today.
In some areas, things are moving in the right direction. Rationalization has left fewer and stronger players on the field. Demand is still growing at more than 20 percent per year. Photovoltaic (PV) cell production grew 32 percent between 2002 and 2003, amounting to $5 billion in sales. But to put that in perspective, 2003’s growth of around 600 MW in solar capacity was equal to the output of one combined-cycle gas turbine plant or a relatively small coal plant.
Cost reduction is taking solar power toward parity with conventional power. Indeed, the cost of installed systems has dropped more than six-fold in 20 years. Generally, however, we’re still looking for a halving or more of installed cost to enable solar to have mass market potential.
Building the market and building scale require government support now, by way of incentives and policy. It’s instructive to examine how these requirements have been interpreted in different countries. Through a market guarantee program, for example, Japan has nearly completed a journey most countries have only just begun. Japan produces 60 percent of the world’s PV cells and has the highest annual growth rate, at 45 percent. Installed capacity has grown from 31 MW in 1994 to nearly 1,000 MW today. Prices are nearing break-even on a life-cycle cost basis and are half what they were 10 years ago. A robust supply chain is emerging, with solar suppliers no longer manufacturing totally in-house.
With the exception of Germany, where incentives have created a large and viable market, the rest of the world is fragmented, with many different models, some more successful than others. The current framework – characterized by an unpredictable mix of government and private shareholder support – must be revamped if solar is to compete in mass energy markets.
We need to see cost reductions in technology, manufacturing and business processes. We need higher profile and larger marketing campaigns to make solar a mainstream consumer product to create customers within markets. We need market stimulation by governments. These factors taken together will enable the industry to build scale.
Obviously, from a corporate BP perspective, we want to create a thriving business for our solar products. But that can only happen if we operate in a thriving market. And we cannot create that alone. As mentioned earlier, we see only Japan as being within reach of having a fully functioning large-scale solar market. The U.S. market, by contrast, is small in proportion to the country’s size, influence and wealth.
While there has been support at the state and federal levels, the United States needs to be much more consistent and long-term in its thinking. The market needs to move to the next level and become big enough to keep growing. Today, the reverse is happening, with PV production declining by 20 percent from 2002 to 2003. California has been a bright spot, but short-term delays can threaten business even there.
The key for BP Solar, as an investor in the solar industry, is to have a way to manage risk while investing at scale. The industry can no longer invest efficiently in 10 MW lumps. If we can develop a portfolio of markets, we can take bigger steps within an acceptable risk framework. The danger is one of creating a business that favors marketers but discourages manufacturers. Marketing investment can be switched on and off. But manufacturing has to be based where there is minimal market volume risk.
In the United States today, some $500 million of public money is being spent, but on a raft of different and disparate initiatives. Our vision is of a market in which the players from the private and public sectors have a unified strategic commitment for renewable energy, including solar, and a coherent program to implement it.
So what do we see as the priorities for policy-makers? Essentially, we don’t want to be too prescriptive on the nature of the regime, feed-in tariffs, capital allowances, and other incentive mechanisms, but we do look for support that is predictable, consistent and long-term – at both the global and local level.
That’s what we need if we are to have the confidence to build infrastructure, achieve scale and sustain employment. Consistency will nurture this industry, but boom and bust will finish it off.
All of this points toward a point of inflection – a breakthrough moment, the “tipping point” – where solar achieves parity with other energy sources. At that point, the industry will have the strength and scale to compete on equal terms in the grid. It will have built the foundation for significant investment – the kind of expansion required for solar to make a real impact on greenhouse gas emissions reduction.
BP’s aim is to build a profitable and sustainable renewables businesses, consistent with our shareholders’ and society’s dual interests in profitability and sustainability.
We can accelerate the manufacturing and marketing. But this requires a corresponding acceleration in long-term and consistent public sector support.