The Future of Solar Energy in the US: A Technological, Political and Financial Enquiry

Brandon Garcia

Arvind Iyengar

Hannah Kenagy

Cara LoPiano

Madhav Seth

Brian Yan

Table of Contents

I. Abstract2

II. Introduction 3

III. Solar Technology Analysis6

IV. Political Economy of Solar Energy20

V. Financing of Utility-Scale Solar37

VI. Solar Energy Economic Model50

VII. Conclusion57

VIII: References58

Abstract

Solar energy is one of the highest-potential sources of renewable energy, yet so far, its contribution to the US energy mix has barely reached 1%. Solar faces immense technical (increasing efficiencies and developing a method of storage), political (downward pressure from conventional energy power companies) and financing (optimal mix of public and private sources) challenges. In the backdrop of these challenges, we provide a review of the existing technologies in the solar industry as well as an analysis of the most promising technologies going forward. We then look at the political-economic framework within which these challenges must be addressed, finding that any analysis of the future of solar policy must center on energy lobbies. We look at the financing options that are currently available for solar companies, and provide a recommendation of what the best financing options are.

Introduction

Solar energy has garnered significant interest in the United States due to the potential for substantial economic, environmental, and social benefits that can be realized with widespread adoption. Although there are several competing renewable energy sources (predominantly hydropower, wind, and geothermal) vying for a larger share of the U.S. electricity market, solar holds the greatest promise due to the abundance of solar radiation and technological advancement thus far. Certain estimated economic benefits include lower electricity prices, temporary and permanent job creation within the solar industry, and positive externalities from solar investment in the form of technological progress. The estimated environmental benefits are also significant, including reduced reliance on nonrenewable energy sources (fossil fuels, coal, timber, etc.) and a curtailment in the emission of pollutants. The social benefits of solar energy are closely intertwined the economic and environmental, including job creation, energy empowerment, and a cleaner environment. However, several barriers exist that provide a substantial challenge towards the widespread implementation of solar energy. By taking into account these current significant challenges, it is possible to approach the issue of solar energy through a Technological, Political, Financial, and Economics lens in order to develop a cost-effective economic model that accurately predicts the use of sustainable solar energy in the upcoming years and that assists in the implementation of solar energy for the United States.

There are major technological and economic obstacles that hinder the rapid development of solar energy in the United States. Solar panels are expensive and have long payback periods for consumers that are looking to cut electricity costs in the near future. Although progress has been rapid in solar energy technology, levels of efficiency comparable with traditional electricity-generating alternatives have not been achieved. Major issues including outdated grid capacity, inefficient power distribution networks, and inadequate storage technology all reduce the potential for solar to be efficient on a large scale. From an economic perspective, utility-scale solar infrastructure projects, whether photovoltaic or concentrating, are capital intensive and require an intricate network of sponsors, investors, creditors and developers at different stages to bring the project to fruition. Government loan guarantees and subsidies have helped to reduce the number of previously cost-prohibitive projects, however, financing challenges still remain. Given that many solar projects would not be possible without substantial government assistance, another economic concern is reducing the costs associated with solar energy technologies to reduce market distortions and ease the transition to commercial viability for developed projects.

Additionally, social and political opposition to solar investment and funding challenge the long-term development of the industry. Grassroots political movements and solar lobbies directly oppose government subsidies, tax-breaks, and incentives for the development of rooftop and utility-scale solar projects. Environmentalist concerns over ecosystem disruptions from large solar utility projects hinder available space and distribution networks. However, there are numerous pro-solar lobbying groups and environmental organizations that strongly support solar energy investment and development, reducing the negative sociopolitical opposition impact.

Although there are barriers that challenge the future implementation of solar, the advances in the Technological, Financial, Political, and Economic fields has made it feasible to conduct analysis to estimate the development of solar energy in the United States. These different, yet closely related fields are able to converge together to form an economic model, which utilizes a growth function to provide a US regional electricity generation coupled with a levelized cost of energy for projecting a cost-effective US solar energy use in the upcoming decades.

Plenty has been written about the solar industry, though the bulk of it has focused on single aspects of the solar industry (for example either technological or economic). Zhao et al. (1998) have written about the technological challenges the industry faces going forward. Beck (2009) has looked at some of the economic challenges. In one of the few cross-disciplinary studies we could find, Fthenakis et al. (2009) have provided a technical, geographic and economic feasibility study of solar energy in the US[footnoteRef:1]. We find our paper to be unique because it helps fill the cross disciplinary gap within the solar energy literature by addressing the political and financing elements to the solar puzzle as well as the technological aspects. In addition to detailing the political, financing, and technological considerations regarding the future of solar energy in the US, we illustrate the implications of each of these variables using an economic model. We use the perspective of electricity distributors making profit maximization decisions to analyze the comparative statics of the growth rate of solar capacity up to the year 2040. Our model incorporates technological efficiency, government subsidy, and given projections of cost and electricity prices. Ultimately, we use our model to understand how different ranges of these variables affect the growth rate of total solar capacity in the US from the optimality decisions of our representative firm. [1: Fthenakis et al, 2009 ]

Solar Energy Technology

1.1.0. Intro to renewables & why solar?

Every hour and half, the Earth is struck by 4.8 * 10^20 Joules of energy, more than the entire human population uses each year (4.6 * 10^20 Joules) [footnoteRef:2]. Estimates suggest, however, that the Earths recoverable sources of fossil fuels will only be able to provide 1.7 * 10^22 Joules of energy, a finite source equivalent to the amount of radiation from the sun that strikes the Earth every 1.5 days [footnoteRef:3]. [2: Crabtree and Lewis, 2007] [3: Crabtree and Lewis, 2007]

Moreover, the Intergovernmental Panel on Climate Change has assessed that letting average global temperatures rise more than two degrees Celsius above pre-industrial levels would result in dangerously disruptive climate impacts. However, to have a 50% chance of maintaining global average temperatures below this level, only 1,100 gigatonnes of carbon dioxide can be emitted between 2011 and 2050[footnoteRef:4]. Burning all of the known recoverable fossil fuels, though, would result in three times this level of carbon emissions. Therefore, burning all of the known fossil fuels would likely lead to far greater than two degrees Celsius of warming. [4: McGlade and Ekins, 2015]

McGlade and Ekins estimate that one third of oil reserves, half of gas reserves, and more than 80% of coal reserves must remain unused through 2050 in order to keep global warming under two degrees. Thus, in order to maintain close to current levels of energy use and prevent dangerously disruptive climate impacts, alternative energy sources are needed. Solar is one such energy source, which has the potential to provide energy without the dangers of greenhouse gas emissions.

Solar is also a much safer energy source than many conventional sources. According to a Forbes study, the global deathprint of coal is 170,000 deaths per trillion kWh, of oil is 36,000, of natural gas is 4,000 and of biofuels are 24,000 deaths per trillion kWh. Solar energy, on the other hand, has a deathprint of only 440 deaths per trillion kWh of electricity production. Thus, solar causes three orders of magnitude fewer deaths than coal, two less than oil and biofuels, and one less than natural gas per unit of electricity production.

1.2.0. Basic explanation of how PVs work

Photovoltaics, the primary technology for transforming solar energy into electricity, are made of light-absorbing semi-conductors. If incoming photons of sunlight are of sufficiently high energy, they will ionize the semiconductor. Each photon will create an electron-hole pair: a free electron and a mobile hole, which acts like a free electron, but has a positive charge.

When an electric field is applied to the material, electrons are separated from the holes, creating a potential difference. If recombination of the electrons and holes occurs in an external circuit wire, a flow of current is created.

The electric field is created by dissolving a small amount of impurities in different areas of the semiconductor. Donors are put in what is called the negatively charged n-type region. Acceptors, on the other hand, are put in the positively charged p-type region. The area between the p-type region and the n-type region is known as the p-n junction.

[footnoteRef:5] [5: http://photovoltaicell.com/photovoltaic-cell-p-type-n-type-2/]

The efficiency of a photovoltaic is calculated as the percentage of the incoming solar energy that is successfully converted into electricity. In other words, the energy conversion efficiency () of a photovoltaic solar cell can be represented by:

[footnoteRef:6]. Efficiency is usually measured under standard test conditions: 25C and incoming light of 1000 W/m2 (ASTM G 173-03). Such conditions correspond approximately to a PV cell pointing directly at the sun during solar noon at the vernal and autumnal equinoxes in the continental US. [6: DOE, Photovoltaics Cell Conversion Efficiency Basics]

No PV cells, unfortunately, operate near 100% efficiency due to a number of factors. First, most materials do not absorb all of the incident light. This incomplete absorption is usually a result of reflection. Additionally, if the photogenerated carriers (the freed electrons and the mobile holes) recombine in an area of the PV cell where they do not contribute to production of a current flow, the efficiency of the cell will decrease. Moreover, series resistance between where the photo-induced ionization occurs and the external current-carrying circuit will cause a voltage drop, leading to decreased efficiency.

1.3.0. The Technologies

Our discussion will now turn to the varieties of technologies and strategies that are being implemented to harness solar radiation for electric energy. Each technology will be described, along with a basic description of how each works. Then, each will be evaluated based on its laboratory efficiency, practicality and its environmental impact in production, maintenance and disposal. Through a comprehensive analysis, this section seeks to identify top technologies to consider for the expansion of solar power in the American power grid.

1.3.1. First Generation Silicon Photovoltaic Cells

First-generation photovoltaic cells became possible following the work of Chapin, Fuller and Pearson in the 1950s. Their work led to a patent filed in 1954 for the creation of a P-N junction, an innovation key to the development of photovoltaic technology[footnoteRef:7]. The P-N junction made the channeling of electrons, a key to silicon based solar power, possible. As previously described, P-N junctions work reliably when there is available solar energy. Though early P-N junction had very low experimental efficiencies, design changes and optimizations have made solar more feasible. [7: Chaper Fuller Pearson, 1957]

The original silicon PV cell has undergone a number of modifications before becoming the economically viable typical photovoltaic cell that is most closely associated with solar power today. The first two types of cells that will be discussed are silicon based cells, namely monocrystalline and multicrystalline. Multicrystalline photovoltaic cells, a common type of cell used, are formed with a honeycomb texture, which reduces loss of energy through reflection and allows the cells utilize insolation in wavelengths near but outside the visible spectrum[footnoteRef:8]. Though the output of multi-crystalline solar cells is lower than the measured capacity of mono-crystalline solar cells, 20.8% to 25.6% respectively[footnoteRef:9], differences in production and quality of silicon required to produce the cells has caused multicrystalline cells to be more considered and researched for wide scale implementation. The production of a photovoltaic cell is also dependent on the manufacturing of quartz into a workable form of silicon, as elemental silicon is not common enough to be considered a viable source for the production of photovoltaic cells. Instead, two routes have been created to convert quartz, a highly abundant compound containing silicon, into workable elemental silicon to be used in the construction of cells. A.F.B. Braga and colleagues conducted a literature review that investigated the processes by which various large corporations were producing silicon that could be made into photovoltaic cells. They highlighted two particular processes, a chemical production of silicon and a metallurgical route. The researchers note that these production methodologies are suited for the creation of multicrystalline cells, as the quality and purity of silicon may not be sufficient for a monocrystalline structure. [8: Zhao et al, 1998] [9: Green et al, 2014]

An issue with the processes that arose in the Braga research, and persists for our purpose, is the toxic byproducts created in the metallurgical process and energy intensive nature of the chemical process[footnoteRef:10]. Despite the eco-friendly motivation behind much of the development in the solar energy industry, the process through which the silicon cells are produced can have dangerous by-products. Some large corporations involved in the production have taken measures to explore better methods of silicon production, but the training and care needed to handle the dangerous by-products of manufacturing pose a challenge to increasing the production of solar capacity. While it is not necessarily prohibitive, it requires careful oversight to ensure that there is no contamination or other major hazard posed by the process. [10: Braga et al, 2008]

1.3.2. Thin Films

Thin film PV cells are considered the second generation of solar cells. They have a relatively simple production and thereby low production cost, but they also have fairly low efficiencies[footnoteRef:11]. Electricity production from thin films crossed under $1.00 W-1 in 2008, and estimates suggest that the cost will drop to $0.50-0.70 W-1 by 2020. Thus, the cost of thin films is a factor of 2 lower than that of multi-crystalline Si-based PV cells[footnoteRef:12]. [11: Hosenuzzaman] [12: Fthenakis et al., 2009]

Thin film solar cells do, however, require more surface area than many other PV cells. Nevertheless, a thin film PV plant uses less land than does a coal plant during their respective lifetimes[footnoteRef:13]. Thin film PVs also have advantages for distributed power generation, as they are particularly suited for rooftop install. They currently make up 2/3 of the rooftop solar market[footnoteRef:14]. [13: Ibid.] [14: Ibid.]

Manufacture of thin films involves both rare and hazardous materials[footnoteRef:15]. The metals used in thin films include tellurium (Te), indium (In), germanium (Ge), cadmium (Cd), and selenium (Se). All of these are generated as the minor byproducts of extraction of copper, zinc, and lead. Thus, the generation of the metals needed for thin film manufacture are innately tied to the production of the base metal, which can limit their availability. [15: Hosenuzzaman]

There are also concerns about greenhouse gas and toxic air pollution production during reactor and cleaning operations of thin films. For example, cadmium-telluride (CdTe) thin films emit about 20 g CO2/kWh, although this is more than a magnitude less than the 500-1000 g CO2/kWh produced by fossil fuel burning plants. During their lifetimes, CdTe thin films also release sulfur dioxide, various nitrogen dioxides, and particulate matter, all of which are air pollutants hazardous to human health. However, these are produced at levels equal to 2-4% of the levels produced by fossil fuel burning[footnoteRef:16]. Some concerns have also arisen regarding leaks of Cd from CdTe thin films, but CdTe thin films release about 0.02 g Cd per GWh of electricity produced, whereas coal burning releases 2 g Cd per GWh of electricity produced[footnoteRef:17]. Thus, electricity production with CdTe solar cells decreases the release of Cd by two orders of magnitude. However, it is important that recycling efforts take place for these cells at their end of life to prevent further release of toxic heavy metals. [16: Fthenakis et al., 2009] [17: Ibid.]

1.3.3. Multijunction

Multijunction photovoltaics have the highest efficiencies of all PVs[footnoteRef:18]. Multijunction PVs are made of layers of different materials, each of which absorb a different range of wavelengths of light. By maximizing the absorbable wavelengths of light, multijunction PVs are able to achieve very high efficiencies. Their high efficiency coincides with lower land usage requirements, as each unit of land occupied by a multijunction PV cell can produce more electricity than an equal area occupied by any of its less efficient counterparts. Yastrebova et al.[footnoteRef:19] estimate that, if combined with concentrators, will become cost-competitive with other PV technologies, assuming improvements in manufacture. [18: Yastrebova, 2007] [19: Ibid.]

[footnoteRef:20] [20: http://science.nasa.gov/science-news/science-at-nasa/2002/solarcells/]

1.3.4 Perovskite

Perovskite PVs first emerged in 2012. By 2013 they reached efficiencies of 16.2%, and by 2014 they reached efficiencies of 17.9%[footnoteRef:21]. Perovskite cells are particularly attractive for their relative ease and simplicity of fabrication, low processing costs, strong solar absorption, and low non-radiative carrier recombination rates, particularly considering the simplicity of their structure[footnoteRef:22]. [21: Green et al., 2014] [22: Ibid.]

Green et al.[footnoteRef:23] note that there is still a significant amount of diversity in the creation of perovskite cells, indicating that there is still a lot of room for improvement. They suggest this may lead to lowered processing costs. Additionally, this diversity may allow perovskite cells to be more easily integrated with other technologies to create high-performance tandem type cells[footnoteRef:24]. [23: Ibid.] [24: Ibid.]

In terms of cost, perovskite cells compete primarily with CdTe thin films, but are simpler to manufacture. By 2017, their manufacturing cost in the United States is estimated at $0.38 0.41 W-1[footnoteRef:25]. [25: Ibid.]

However, all reasonably high-performing perovskite cells to date have involved lead (Pb). Since lead is an environmentally hazardous heavy metal, this raises concerns about toxicity during all aspects of the PV cells lifetime: during its manufacture, its deployment, and its disposal. CdTe PV cells have similar toxicity issues, but it has not been a major hindrance for them. Additionally, Cd or Pb are used in some CIGS and Si modules at similar levels to those in perovskite cells.

1.3.5 Newer Developments: Biohybrids and Photoelectrochemical PV Cells

In addition to these implemented technologies, there are many pioneering technologies that utilize the mechanisms comparable to photosynthesis and other alternative methods to utilize solar energy. There is a suite of bio-hybrids still in stages of research. Experimenters are looking to design a replacement for the dyes used to move electrons using the same vesicle systems used in photosynthetic processes[footnoteRef:26]. While they have relatively low efficiency currently, researchers hope for increased efficiency and the ability to be commercialized. [26: Woronowicz et al, 2012]

Photoelectrochemical PV cells have also been proposed as a way to generate hydrogen fuels. These function through the photolysis of water into molecular hydrogen gas (H2) and oxygen gas (O2) as follows:

These are also still fairly early in the development process, however.

1.3.6 Thermal Concentrators

Source: National Academy of Sciences

In addition to the work done to improve silicon cells, there are many other devices that convert solar energy into electric current. Thermoelectric generation using solar energy is a highly versatile technology. In this essay, the focus will remain on the production of commercial energy, though a compelling utilization of this technology is in refrigeration. Thermoelectric generation is based on similar principles to silicon based cells, counting on a heat gradient and the conductivity of the elemental metal or alloy. This technology is also often used in conjunction with solar concentrators. Concentrators use the heating power of solar energy to generate electricity by heating a fluid using metal concentrators that have a trough shape. Each of these technologies have undergone extensive testing for the optimization. The results of this and other solar technology optimizations strive to bring commercially implemented solar technologies up to laboratory efficiencies and make the energy cheaper per watt generated.

A considerable disadvantage to the use of thermoelectric solar energy generation is the usage of toxic materials. Like the processing of silicon, the creation of green technology is not always as simple and green as desired. Optimized thermoelectric systems can involve the use of cadmium and telluride to best create a heat gradient and generate electricity. In addition to issues of toxicity in production, this technology needs to be recycled. This opens interesting questions regarding the regulation of the production and recycling of solar technologies. As of this writing, many sources have indicated that companies utilizing these technologies have been proactive in having recycling programs for their products.

1.3.7 Summary Table

Technology

Efficiency

Unique Benefits

Risks and Hazards

First Gen. Si PV

20.8%

A well established technology, contractors and consumers familiar with installation

Hazardous environmental by-products

Thin Film PV

21%

Relatively simple production

Manufacture involves rare and hazardous materials

Multijunction PV

38%

Very high efficiencies, coinciding with lower land usage requirements

More expensive; need to be combined with concentrators to be most cost competitive

Perovskite

17.9%

Relatively simple and easy production; lots of diversity in their creation indicates lots of room for improvement

Require lead (toxic heavy metal)

Biohybrids

N/A

Has potential for better efficiency

Still being actively researched, not yet commercially viable

Photoelectrochemical

N/A

Generate hydrogen fuels through photolysis

Still under development; not yet commercially available

Thermal Concentrators

12-25%

Can be installed to track solar motion, potential for industrial scale generation

Highest efficiencies associated with more pre-requisite infrastructure

Sources: National Academy of Sciences

1.4.0 Batteries and Storage

Though the collection of solar energy in the most efficient way possible has been a focus of development of solar technologies, there are other technological components that will be important for the widespread implementation of solar energy. Because insolation is a diurnal cycle, solar cell systems require a way to store energy so that a user is not limited to electric power only in the daytime. Additionally, calculations of solar insolation indicate that everyday there is enough solar energy striking the earth to more than fulfill humans energy consumption, yet the curvature of the Earth means that this insulation is clearly not equitably distributed[footnoteRef:27]. To solve this problem, all solar systems should be equipped with a storage unit, so that energy generated during the day can be used during periods of low insolation, or even transported to regions that may lack ideal insolation levels. [27: Crabtree and Lewis 2007]

There have been some solutions presented to the necessity of solar energy storage, but most encounter problems such as the degradation of the battery materials or low efficiency. A survey led by Juan Carrasco and colleagues[footnoteRef:28] for the Institute of Electrical and Electronics Engineers studied grid integration and storage of renewable energies enumerated on the different storage mechanisms commonly used for photovoltaic cells. Among those are lithium batteries, common among residential users, and increasingly connecting small scale photovoltaic systems directly to the grid. The United States Department of Energy has put out literature and informational web sites to encourage home solar energy users to put their excess energy back into the grid. Discussion of the grid will be continued later, but it serves as an interesting and extant solution to dealing with excess energy production. The solution to easily store and transport solar energy is one of the most formidable technical barriers to the implementation of solar energy, and is an active area of research. If continued research can be done to facilitate better storage, the feasibility for solar energy in the United States becomes significantly more viable. [28: Carrasco et al, 2006]

1.5.0 Funding

In order to realize the full potential of all the solar technologies described here, there needs to be continued monetary support for research, development and optimization of these technologies. Funding and investment in solar energy has come from many sources, such as the U.S Department of Energy, which operates several incubators through an initiative called SunShot. This program has a goal of reducing the cost of solar energy to $.06 per kWh over the life of the collector, and has given our over $2 billion for photovoltaic research and implementation[footnoteRef:29]. Additionally, the National Science Foundation has recently awarded millions of dollars for solar energy technology development in fields such chemistry, engineering and biochemistry. Currently, there are multiple subsections of the NSF taking proposals and awarding grants for research on sustainability and energy[footnoteRef:30]. All of these funds are focused on scientific research and technological advancement, and do not include outside research and information that would be important in holistically assessing the feasibility. While these types of grants typically fund developmental research, there are also many privately funded projects to develop solar energy systems, which will be discussed later in this paper. [29: Sunshot Initiative, 2015] [30: NSF.gov, 2015]

Research by non-governmental groups such as the Solar Energy Industries Association have recorded optimistic gains by the solar industry in increasing capacity and decreasing costs over the past ten years, with continued growth projected into the next few decades. However, these gains, while impressive, have tremendous amount of growth needed to become a serious competitor with coal and other fossil fuels used for electricity. Additionally, despite some of the most promising and feasible solar energy technologies being presented above, technology is not the only or perhaps most important component to the widespread implementation of solar energy in the United States.

As a cross-disciplinary approach, this paper will now examine political and economic factors that contribute to the funding and feasibility of developing solar power, including the specific sociopolitical challenges proponents of solar energy will face in implementing solar energy in the United States. We have divided our political analysis into two sections - international and political. We first look at the effect of international organizations and treaties on US solar policy, following which we look at the domestic determinants of US domestic solar policy.

2.0. International Political Economy of Solar Energy and US Solar Policy:

The implementation of solar and other renewable energies has increasingly become the focus of many countries and multinational alliances outside of the United States. As concerns of the ramifications of climate change and industrial combustion of fossil fuels, many countries, as well as the United Nations, have begun to call for the development of sustainable technologies and promotion of sustainable development in countries such as China, India and many African nations. In regions of high insolation, solar energy has proven to be a strong contender for electrical development and reduction of carbon emissions.

Multilateral organizations such as the Intergovernmental Panel on Climate Change have researched the global feasibility of implementing solar energy and other renewables globally as the result of anthropogenic climate change. In the Kyoto Protocol, mention of renewable energies is brief, with most focus placed on the reduction of emissions. However, the Kyoto Protocol was never ratified by the United States and did not include many nations that were considered developing and have become major contributors to global carbon emissions. Subsequent U.N. Conference of Parties (COP), such as those in Copenhagen and Paris, have continued to focus on cutting emissions and the development of low emission development strategies. Solar is, in the written accords, not explicitly mentioned, but many nations committed to the development of clean technologies focused on the implementation of renewables as a way to cut their gross tonnage of carbon emission in their individual pledges.

While COPs are often surrounded by grandiose pledges of commitment to the environment, these negotiations have done little to influence domestic policies on renewable energies. Many large nations have been reluctant to sign any agreement that is both legally binding and stringent enough to make a serious impact on global climate change, as they fear the economic ramifications of committing to more sustainable practices. While many other nations have exceeded the standards for renewable energy set forth by agreements such as Kyoto and the Copenhagen Accord and by nation-specific initiatives, the United States has lagged behind and continues to be one of the highest carbon emitters per capita, and does not appear to be swayed by the voluntary agreements of the international community. Perhaps the only place where international organizations have played any sort of direct role in shaping US policy has been in the creation of the American Solar Energy Association (ASES), an offshoot of the International Solar Energy Association. ASES has played an important role in the dissemination of international research and information among the US polity, and has managed to slightly color the nature of the solar energy conversation. However, we find that domestic political actors have done far more to catalyze the development of solar energy in the United States.

3.0. The Domestic Political Economy of U.S. Solar Policy

An analysis of the solar industry requires an analysis of the political context within which the industry is being shaped. As an extremely capital-intensive industry, entrepreneurs in the solar production sector require the assistance of the government in order to smooth their costs. In fact, nascent capital-intensive industries are frequently established only after they have received considerable government support[footnoteRef:31]. Solar energy is such an industry, as the initial research and development costs, coupled with the high level of infrastructure investment required to make the technology scalable are too high for individual entrepreneurs to bear[footnoteRef:32], and too risky for established energy corporations to invest too heavily in. The industry therefore requires the intervention of the government, which in turn brings a number of political dimensions to the issue. [31: Westphal, 1981 ] [32: Beck, 2004 ]

This section first tries to understand the key political actors in the solar energy industry, which are broken down into consumers, producers and the government. It looks at their various preferences and relevant actions in the solar industry. It then looks at the dynamic interactions between these actors, after which it provides a range of outcomes that seem plausible based on these interactions.

3.1. Key Actors in Solar Energy in the US

3.1.1. Consumers

Consumers can be broken down in into three main categories: residential, commercial and industrial. The main categories of consumers are as follows:

Residential

These are household level consumers who make use of solar energy by installing solar panels on their rooftops that convert solar energy to electricity, or by directly receiving heat energy generated by solar panels. Residential consumers benefit from solar because their monthly electricity bills are greatly reduced. They do, however, have to pay for the installation and maintenance costs of solar energy (which can range from upwards of $10,000 for the lifecycle of an individual installation[footnoteRef:33]). Residential consumers can be incentivized to demand solar energy for price reasons, such as solar energy being cheaper than conventional energy, or for non-price reasons, such as an individual preference for perceived greener technologies. A key possibility to note here is that households can sell the excess electricity generated from their solar panels to the grid[footnoteRef:34], creating a lower effective price per MW of solar energy relative to conventional energy. [33: Solar Power Authority] [34: Payne, 2000 ]

Commercial

These are firm-level producers who make use of solar energy through similar means as residential consumers. Commercial firms face the same incentives with regards to solar energy - they may adopt solar energy for both price and/or non-price reasons. Current famous examples of firms using renewable energy include large technology companies such as Google and Apple, as well as Swedish furniture manufacturer and retailer Ikea[footnoteRef:35]. [35: Bloomberg Business, 2015; CleanTechnica, 2015.]

A key aspect of both residential and commercial is that they both experience convex adoption rates[footnoteRef:36]. In other words, the installation of solar panels has peer effects - the adoption of solar energy by a household or firm is likely to induce further individual actors to demand solar panels, which in turn induces yet more actors to adopt solar energy. Thus, the adoption of solar panels by highly visible consumers such as firms like Apple can help contribute to the increased demand for solar panels. [36: Bollinger and Gillingham, 2012]

3.1.2. Producers

In the US, the producer side of the solar market is divided into four broad categories. First, there are solar cell manufacturers, who compete both with each other, as well as foreign solar cell manufacturers. Second, there are solar cell installers, who install solar panels on residential or commercial rooftops, or assist in the construction of utility-scale solar energy production. Third, there are solar leasers and financiers, who help consumers with the financing of their solar purchases. Finally, there are utility-scale solar energy providers who purchase or rent huge swathes of land and install an extremely large number of solar cells in a centralized location before distributing the energy that is harnessed. Each of of these categories of producers has its own supply chain (going as far back as raw materials/mining for solar manufacturers). Furthermore, companies do not strictly fall into any single one of these categories - it is possible for a company to be entirely integrated and manufacture, install and service its solar panels[footnoteRef:37]. [37: For example, First Solar Inc.]

Despite the varying nature of producers in the solar energy industry, each one of them faces certain core problems. While some might be in the business for perceived environmental reasons, all of them want to maximize profits and/or minimize costs. Given that solar energy requires a large amount of initial capital costs, producers require incentives from the government to engage in production in the solar energy industry to help them increase their revenue or decrease their costs.

3.1.3. Government

Finally, the third actor is the government. Given the high initial costs and long gestation periods explained earlier in the paper, the US government plays a key role in shaping the solar energy playing field. Highlighted below are four of the key federal policies the US government is undertaking to support the solar energy industry[footnoteRef:38]. [38: Solangi et. al, 2011; EPA, 2015]

Renewable Portfolio Standards (RPS)

RPS requires electric utilities and other retail electric providers to provide a specified percentage or amount of customer electricity with eligible renewable resources. RPS tend to establish incremental targets that increase over time - for example, a state might mandate that its electric utility companies increase their renewable generation by 2% a year over ten years, resulting in a 20% renewable generation portfolio at the end of the mandate. Most RPS does not necessarily specify what type of renewable generation utility companies must use - however, some RPS may have specific requirements called carve-outs, or a minimum percentage or capacity, for distributed generation or certain types of renewable energy. There are currently 18 states that have solar carve-outs within their RPS.[footnoteRef:39] These carve-out have massive effects - estimates account them for having caused 30-50% of new additions in solar capacity[footnoteRef:40]. [39: SEIA, 2015] [40: Barbose, 2013 ]

Net Metering

Net Metering enables residential or commercial customers who generate their own renewable electricity (e.g., solar photovoltaic panels) to receive compensation for the electricity they generate. Net metering rules require electric utilities in a state to ensure that customers' electric meters accurately track how much electricity is used on site or returned to the electric grid. When electricity generated on site is not used, it is returned to the grid; when on site generation is not sufficient to meet the customer's needs, the customer uses electricity from the grid. On average, only 20-40% of a solar energy systems output goes into the grid[footnoteRef:41]. [41: SEIA, 2015 ]

Property Assessed Clean Energy (PACE)

PACE is a voluntary program in which a home or business owner will receive financing from a local government to cover the up-front cost of qualified energy improvements, and in exchange, will repay the up-front cost through a special assessment on their property tax over a period of years or decades. The financing is secured with a lien on the property. This means that in the event of a foreclosure, the financing must be repaid before other claims against the property. The repayment obligation also remains with the property, so if a solar customer sells their home, the new owners simply take responsibility for the remaining payments as well as ownership of the solar array[footnoteRef:42]. [42: SEIA, 2015]

Financial Incentives

Grants, loans, rebates, and tax credits are provided at both the federal and state level to encourage solar energy development. While there are quite literally hundreds of different solar energy policies across the US in different states and localities, one of the most powerful and popular policies is the federal Business Energy Investment Tax Credit (ITC), which allows a taxpayer to claim a credit of 30% of qualified expenditures for a system that serves a dwelling unit located in the United States that is owned and used as a residence by the taxpayer[footnoteRef:43]. This tax has been extremely helpful in the setting up of solar enterprises[footnoteRef:44] - however, it is set to expire in December of 2016, with a lowered tax credit of 10% to take its place. [43: Title 26, Internal Revenue Code, Section 48.] [44: Sherwood, 2007 ]

These policies were not implemented in a vacuum. Rather, they have been shaped by the efforts of a multitude of actors across different sections of American society. We now examine how the different actors stated above have tried to influence U.S. solar policy.

3.2. Domestic U.S. Solar Policy

As a democracy, the US government is accountable to its constituents, who are both consumers and producers of solar energy. These constituents also include conventional energy producers and employees (such as those in the coal and natural gas industries). The policy of the US government, on both a federal and a state level is therefore a reflection of the weighted aggregation of the preferences of these constituents. This aggregation of preferences leads to the political framework that shapes the economic context within which the solar industry exists. The key focus of this section of the paper is to demonstrate that this aggregation is dynamic - it is constantly evolving under pressure from different constituent parts, and that a prediction about the future of solar energy in the US must attempt to predict the dynamics of the political-economic processes that affect the industry.

The pressure democratic constituents apply on their legislators can be through organized actors (such as lobbies) or as unorganized actors. We define organized actors are defined as groups that have clear preferences, a clear perception of the actions required to satisfy those preferences, a relatively smaller group sizes and a hierarchical group structure, while unorganized actors lack one or more of these characteristics.

Past research has strongly suggested that lobbies have an extremely large amount of influence over the US government in the formation of policy[footnoteRef:45]. Indeed, some members of the relevant actors listed in the previous section are organized in some lobby or the other. We therefore aim to look at some of the key solar lobbies in the US today and examine their role in the formation of solar policy. [45: Drutman, 2009 ]

3.2.1. Pro-solar Lobbies

There are two main national-level organizations that lobby the US government (on both a federal and state level) in support of solar energy[footnoteRef:46]. These are the Solar Energy Industries Association (SEIA) and the Solar Electric Power Association (SEPA). [46: Lacey, 2015 ]

SEIA

The SEIA is a bonafide lobbying group - a 501(c)6 organization that is organized the same way as a traditional lobby group such as Americans for Prosperity or the American Wind Energy Association. The SEIA represents the entire solar industry - from manufacturers to researchers to installers, and has been involved in some of the landmark policy decisions regarding the solar industry since 1973[footnoteRef:47]. A recent example of this is SEIAs successful effort to convince the Federal Energy Regulatory Commission to allow the fast-tracking of the interconnection of solar projects with the electricity grid[footnoteRef:48], saving solar companies huge amounts of time and money. SEIA expressedly funds political efforts on the local, state and federal level by organizing conferences, workshops and meetings between legislators and solar representatives. [47: SEIA website] [48: Resch, 2014]

SEPA

The SEPA by contrast is a think tank - a 501(c)(3) organization whose main purpose is educational in nature. SEPA primarily aims to convince utilities of the value of solar through academic endeavours such as research, surveys and summits. SEPA publishes its research in the form of various reports and publications. SEPAs conferences and seminars tend to bring together representatives from the solar and conventional power industries, and focus on how the industries can complement each other rather than competing with each other (for example - solar could be a viable long-term strategy for power companies, while power companies provide the grid that allows solar power to reach people beyond rooftop installers). It generally tries to steer clear of endorsing politically controversial topics such as the ITC, net metering or RPS in order to remain (or be perceived) as completely unbiased[footnoteRef:49]. [49: Lacey, 2015.]

While both SEIA and SEPA have a common interest in the promotion of solar energy across the US, they do sometimes wind up in conflict through the different means they employ to achieve their interests.

One of the areas where the two organizations come into conflict is when short-term action is required to either promote or preserve a key solar policy. Recently, this conflict was manifested when the US Internal Revenue Service announced that the solar ITC was set to be reduced from 30% to 10% after December 2016[footnoteRef:50]. The SEIA aggressively campaigned for the ITC to be extended - it even publicly called out to SEPA to join it in committing financial resources to push for a credit extension. As of the time of publication, SEPA has chosen not to involve itself in the advocacy the SEIA is asking it to. [50: Title 26, IRS, Section 48]

3.2.2 Anti-solar lobbies

To our knowledge, there is no lobby in the US that is openly centered on suppressing state support of solar energy. Rather, the bulk of pressure the solar industry faces is from power companies that use conventional energy and industrial lobbies that could see solar as a threat to their long-term profitability. For convenience, we refer to these lobbies as anti-solar lobbies in the rest of the paper. Prominent anti-solar lobbies include:

American Legislative Exchange Council (ALEC)

ALECs website describes it as the USs largest nonpartisan, voluntary membership of state legislatures with a stated mission of limited government, free markets and federalism. Nearly one-quarter of state legislators are members of ALEC, and many prominent members of the organization have gone on to become Members of Congress or Governors of their states. ALEC does not have an official view on solar energy as industry, but it does seem take issue with most federal and state policies that aim to support solar energy. In particular, ALEC takes issue with the policy of net metering, and has published many reports that it has distributed to its members[footnoteRef:51], which many analysts contend has been one of the key drivers in getting new solar consumers. ALEC tends to exert its influence by organizing policy workshops or hiring lobbyists that communicate with state and federal level representatives and help bring about policies that either remove support for solar energy, or enact policies that are expressedly anti-solar, such as charging consumers with rooftop solar panels higher rates for grid electricity (citation). [51: ALEC, 2014.]

Edison Electric Institute (EEI)

EEI is an association of all the shareholder owned electric companies in the US. EEIs mission is to ensure members success by advocating public policy, expanding market opportunities, and providing strategic business information. The EEI, like ALEC is not officially against the adoption of solar energy - rather, it takes particular strong views against rooftop solar energy and policies that promote it. Rooftop solar is a long term competitive good for utility companies because it creates the threat of them losing their customers. Thus, most EEI efforts related to solar are concentrated on trying to remove government programs that support solar energy (such as RFS or net metering), as well as trying to lobby the government into implementing policies that actively inhibit rooftop solar from expanding (such as allowing them to charge customers with rooftop solar panels higher rates for power from the grid)[footnoteRef:52]. EEI argues this is fair practice because utility providers must continue to pay the fixed costs of running their power station and that rooftop solar prohibits utilities from regaining their cost of business. [52: Kind, 2013; EEI, 2013. ALEC 2014 ]

Americans for Prosperity (AFP)

AFP is America's largest center-right grassroots organization (Americans for Prosperity website). AFP is known for its vocal opposition to most things government. AFP argues against RPS, believing they drive up the price consumers pay for power, as well as arguing that government intervention distorts the energy market by circumventing individual liberties and placing an undue financial burden on taxpayers.[footnoteRef:53] [53: AFP, 2013.]

It is worth noting that, like in the case of pro-solar lobbies, these lobbies tend to interact with each other. Thus, the EEI often sponsors ALEC[footnoteRef:54], which in turn is able to use its relationship with state legislators to lobby for policy the EEI may want enacted. the EEI may also lend its research to AFP to support AFPs grassroots campaigns that are meant to mobilize its members into pressurizing their representatives into enacting the kind of legislation they want to see. [54: PR Watch, 2014.]

3.2.4 Political grassroots lobbies (left vs. right)

Curiously, while climate change is heavily contested by the left and right in America, solar energy receives support from grassroots political lobbies on both the left and right of the political spectrum in the US[footnoteRef:55]. Left-leaning political lobbies tend to support solar energy because of its positive effect on the environment, while right-leaning political lobbies tend to support rooftop solar energy because they see it as a lowering of the role of the state. This bipartisan support for solar energy at the grassroots level holds immense potential for the future of pro-solar policy in the US, as these pressures have a strong tendency to diffuse up the political hierarchy. [55: Slate, 2014]

3.4. Future of Solar Policy in US:

We now assume certain aspects of the behaviour of the actors in the solar energy arena in order to aid our analysis of what the future of solar policy in the US might look like.

To perhaps state a truism, solar energy companies have very strong interests in promoting pro-solar policies in most forms. RPS by definition increases the minimum market size these companies have, net metering reduces the real price of their product for the consumer without affecting the price they set, and government financing initiatives allow them to scale at affordable rates.

Consumers, which basically includes the entire US household market, have incentives to use solar energy if price relative to conventional energy is lower. It is impossible to say when solar energy will be able as affordable as conventional energy without government intervention (given that the technology is prone to rapid advancements that cannot be forecasted). However, we can say that non-price factors could play a significant role in increased demand for solar energy in the US. Political leanings can play a big role for consumers in supporting solar energy. Left-leaning environmentally concerned citizens are likely to support solar because of its positive effects on the environment, while right-leaning citizens concerned with the role of government are likely to support solar because it means independence from state-owned utilities monopolies.

Conventional energy companies do not have systemic interests against solar energy as a whole, as not all solar energy is a direct competitor to their business. For example, assuming that technology wasnt a barrier for a moment, a utility company could set up a huge field of solar panels and then distribute the energy generated from that field to its customers. Here, solar energy would simply represent a change in the technology used by these companies. Utility companies do however have strong interests against their consumers setting up rooftop solar energy, as this directly eats into their market size and makes an industry that is premised on scalability less competitive.

3.4.1 Future of U.S. Solar Policy

With so many moving parts in the solar energy case, it is impossible to come up with a single case that describes the future. Rather, we list three cases here that show what the future might be assuming certain things happen.

Case 1: Bull Case

In this case, we assume that grassroots political organizations on both sides of the political spectrum are able to effectively organize, outvoice organizations with a narrower member base such as ALEC and EEI, and lobby the government into supporting solar energy. We assume that SEIA and SEPA are able to make use of this grassroot level political support and use their own network of political networks to promote pro-solar policy. As a result, the ITC is extended for another 5 years (a stated goal of the SEIA[footnoteRef:56]), and current efforts to gut metering and increase the power rates rooftop solar consumers pay fail - leading demand to rise at an increasing rate. We assume that RPS carve-outs for solar expand as they have been doing for the past 3 years[footnoteRef:57], leading to increased mandates for solar energy, stimulating further supply and allowing increasing returns to be realized. We also assume that increased investment into solar technology research leads to increased improvements in efficiencies and decreases in cost of energy production for the existing technologies, and even leads to the commercialization of solar technologies that are currently in the early stages of development. Thus, the overall market size of the solar industry greatly increases by 2020, making the industry more profitable. This in turn attracts more financing, which places solar on a solid foundation to grow even faster in the future. [56: SEIA, 2015] [57: Barbose, 2013]

Case 2: Base Case

In this case, we assume that both pro-solar and anti-solar voices are able to influence in the government. This leads to tax credits being extended but weakened (currently an outcome that seems extremely likely[footnoteRef:58]), which diminishes the profitability of solar projects, which attracts less private financing in the future than does Case 1. We assume that RPS and carve-outs stay constant, and while net metering is allowed, power companies are able to charge solar consumers high power rates[footnoteRef:59], causing demand to rise at a decreasing rate as there is now an added cost to using solar energy. This case involves more limited funding for solar technology research, meaning efficiencies rise only slightly, and costs decrease minimally. In this business-as-usual case, the solar industry grows at a similar rate to what its been growing at over the past 5 years. [58: Financial TImes, 2015; Wall Street Journal, 2015 ] [59: ALEC, 2014f ]

Case 3: Bear Case

In this case we assume that anti-solar voices are able to dominate future policy discussions. This leads to tax credits not being extended, and a steady decrease in RPS. We assume that the EEIs argument that the costs of net metering are greater than its benefits, and net metering is not allowed. Funding for solar technology research decreases tremendously, and few to no improvements in efficiency and cost are made. In this case, given that the costs of production and consumption of solar rise extremely high, the demand for solar (at least in rooftop form), begins to fall. The lack of tax credits as well as decreasing RPS lead to a smaller and less profitable market for solar, which in turn attracts less financing. This leads to a contraction of the solar energy industry.

Of the three cases, we argue that the 2nd case is the most likely, with the caveat that the extension of the 30% ITC is still possible. Power companies have legitimate arguments in saying that net metering forces poorer people to pay higher power rates (to offset the price they must pay solar installers power companies charge higher overall rates) and that it allows solar users to get away with paying for the fixed costs required to keep power plants operational. This, combined with the EEIs political clout make it likely that net metering is unlikely to exist in the future as it does today.

It is important to note that these cases are not accounting for further developments in alternative sources of renewable energy, which might affect the market for solar in huge ways. A good avenue for further research would be attempting to forecast the future of solar energy in relation to developments in alternative renewable energy methods.

Given that the ultimate goal of solar policy is to make it profitable enough to attract private financing, we now turn to the financing section of the paper and will then begin to show how each of these seemingly disparate disciplines merge together with regards to solar energy policy and the United States.

4.0 Financing Utility-Scale Solar Power Projects

There are two important investment components for financing large-scale solar projectsdebt and equity. Equity capital is provided by the project developers as well as by equity partners (institutional investors, hedge funds, private investors, individual firms, etc.) and this contribution serves as the initial seed capital that allows the project to start. This equity capital is usually between 15-20% of the total capital investment, however, the contribution is not made until debt financing is secured (without lender/creditor commitment to finance the rest of the project, providing the initial equity capital can be highly risky).[footnoteRef:60] Equity contributions are used to cover initial due-diligence expenses, which can broadly be categorized as legal, technical, and financial in nature; undertaking these due-diligence efforts is essential for project development. The cost of the preliminary legal assessment of necessary permits and contract terms (for engineering, construction, operations, and management) and technical due-diligence (ensuring the feasibility of the solar project and that permits and contracts accommodate the technical requirements of the project) will almost entirely be borne by the equity sponsors.[footnoteRef:61] Lender financing will only come into play once the equity stage due diligence is complete; debt capital will be used to support the more comprehensive legal, financial, and technical due-diligence required to begin project development. Given that loans are the most crucial component in solar project finance, it is important to understand how this capital will be deployed by private sector participants and under what conditions. The following sections will outline the current salient government incentive programs, partnerships, and financing structures that will allow solar infrastructure projects to progress from the equity stage to commercial viability. [60: IFC, 2012] [61: IFC, 2012 ]

4.1.0 Department of Energy Loan Programs

The Department of Energy Loan Programs Office has currently committed $30 billion across a diversified portfolio of loans, loan guarantees and commitments.[footnoteRef:62] Currently, the DoE LPO has over $40 billion remaining in loan and loan guarantees that can be deployed through two programs.[footnoteRef:63] The first program is the Innovative Clean Energy Projects (Title XVII) which provides loan guarantees for energy technology, ranging from advanced fossil fuel to nuclear and renewable energy.[footnoteRef:64] The terms of Title XVII loan guarantees (which are not direct loans by the LPO) strictly require that projects must use a novel technology or provide a high value-add to existing energy technology.. Additionally, the projects must avoid, reduce, or sequester greenhouse gases, which need to be quantified to be eligible. Given that the LPO is providing loan guarantees, it requires that all eligible projects are based in the United States (to directly capture the benefits of reducing greenhouse emissions and realize the economic benefit of investment in jobs and infrastructure) and that the projects have a reasonable prospect of repaymentafter all the government guaranty transfers the risk of default to the LOP portfolio from participating non-government lenders. The other program under the DoE LPOAdvanced Technology Vehicle Manufacturing (ATVM)is not directly applicable for energy investment, given that it is geared towards improving vehicle manufacturing facilities in the US.[footnoteRef:65] [62: DOE LPO, 2015] [63: DOE LPO, 2015] [64: Energy Policy Act, 2005] [65: Final Rule, 2008]

Source:Department of Energy Loan Programs Office

Of the $41.5 billion remaining in direct loans and loan guarantees under the Loan Program Office, $16 billion is destined towards the Advanced Technology Vehicles Manufacturing program.[footnoteRef:66] This leaves $25.5 billion for the innovative energy technologies, of which $21 billion is committed towards existing non-renewable energy sourcesfossil and nuclear energy.[footnoteRef:67] At the moment, only about 11% ($4.5B) of the $41.5 billion availability for government funding is destined towards renewable energy. [66: Canis & Yacobucci, 2015] [67: DOE LPO, 2015]

Source:Department of Energy Loan Programs Office

These loan guarantees can best be described as incentives for solar infrastructure projects, however, these are distinct from public-private partnerships which hold promise for future solar infrastructure development (given that the current level of loan guarantees and incentives is low relative to what is required to hit federal and state mandates for solar electricity generation).

Source:Department of Energy Loan Programs Office

The effectiveness of the Department of Energys Loan Guarantee program has been questioned since the bankruptcy of Solyndra, a solar panel manufacturer who received a $535 million loan guaranteed by the Department of Energy.[footnoteRef:68] The controversy surrounding the default was not focused simply on the bankruptcy event itself, but rather, the failure of the government to conduct the proper due-diligence to review the claims made by Solyndra developers. In a report released by the Energy Department inspector general, Solyndra was found to have misled lenders (and the government) regarding the prices it was able to charge for its solar panels and the condition of its financials. While the company was responsible for fraud in this regard, the report also claims that the loan guarantee was approved due to political pressure and the resulting due-diligence process was unable to uncover the irregularities of the Solyndra financial statements and projections. [68: DOE Special Report, 2015]

Source:Department of Energy Loan Programs Office

The Energy Department report also suggested that another failure (due to poor government due diligence) on the scale of Solyndra could seriously undermine the [Department of Energy Loan Guarantee program] and its goals, perhaps even leading to its termination. [footnoteRef:69] Although the program appears to have stabilized and currently has a low default rate across its loan portfolio (2.28% in losses as a percentage of total commitments as of September 2014), future defaults could further reduce the limited availability of loan guarantees for solar photovoltaic infrastructure projects.[footnoteRef:70] While the risk of future solar photovoltaic project defaults cannot be dismissed, it is also worth evaluating some of the current solar projects that have been successful within the Department of Energys Loan Guarantee portfolioDesert Sunlight, Mojave, and Ivanpah. The following sections are case studies of these successful projects and detail the costs, benefits, and financing mechanisms used to bring the utility-scale projects online. [69: Special Report, 2015] [70: LPO Financial Performance, 2014]

4.1.1. Desert Sunlight Photovoltaic Case Study

Desert Sunlight is the second largest solar PV project in the LPO portfolio with nearly $1.5 billion guaranteed by the DoE.[footnoteRef:71] The loan was guaranteed for issuance September 2011 for construction of a 550-MW PV solar generation plant in Riverside County, California.[footnoteRef:72] One of the remarkable aspects of this project is the amount of financial institutions involvedfourteen in total. The DoE notes in Desert Sunlights project summary that the loan guarantees helped attract new lenders into the utility-scale photovoltaic market and provided them with experience financing utility-scale photovoltaic projects.[footnoteRef:73] Given that the project was financed as a syndicated loan with NextEra Energy, General Electric & Sumitomo of America as project owners, it provided substantial underwriting experience for all the lenders involved and set the stage for future syndicated loans of solar PV projects. The DoE also noted that an additional 17 PV projects with capacity greater than 100MW had been financed without loan guarantees and many of them by banks that LPO had worked with through [Financial Institution Partnership Program].[footnoteRef:74] [71: Desert Sunlight, 2015] [72: Desert Sunlight, 2015] [73: Desert Sunlight, 2015] [74: Desert Sunlight, 2015]

Source:Department of Energy Loan Programs Office

The Desert Sunlight can be deemed a success due to the fact that the project reached full commercial viability in January 2015 and is currently generating electricity. Given that the Department of Energys Loan Guarantee program is judged based on the economic impact of the projects in its portfolio, it is also worth noting that 550 temporary construction jobs were created for the DS project along with 15 permanent jobs. In terms of environmental impact, 614,000 metric tons of annual carbon dioxide emissions are projected to be reduced due to the electricity generated by Desert Sunlight (annually 1,060,000 MWh).

4.1.2. Mojave Concentrating Solar Power Plant (CSP) Case Study

Mojave is another successful solar project in the LPO portfolio. With 250-MW capacity, the parabolic trough concentrating solar power plant (CSP) in San Bernardino County, California reached commercial viability in December 2014, barely three years after the $1.2 billion loan guarantee necessary to begin construction was secured by the DoE ($1.2 billion was guaranteed of a total investment of $1.6 billion).[footnoteRef:75] The project owner was spanish multinational Abengoa S.A. and its solar construction subsidiary, Abengoa Solar, LLC.[footnoteRef:76] [footnoteRef:77] The plant assets are currently owned by Abengoas YieldCo (a term to be defined later in the financing section of this paper); Mojave is expected to generate 617,000 megawatt-hours of clean energy annually and reduce 329,000 metric tons of carbon dioxide emissions per year. It is also important to note that the loan guarantee decision was aided by the fact that Abengoa had agreed to a 25 year power purchase agreement (PPA) with Pacific Gas & Electric (for the sale of energy produced by Mojave).[footnoteRef:78] Despite the PPA and estimated economic impact (830 temporary construction jobs, 70 permanent jobs, local tax revenues from electricity sales), the project was received with much opposition from politically conservative groups and environmentalists in the wake of the Solyndra debacle.[footnoteRef:79] [footnoteRef:80] Unsubstantiated accusations of waste, corruption, and illegal activities were attributed to Abengoa, however, none of these accusations have been addressed by politicians or government officials. By all accounts, the project is currently a success, as it is at full operational capacity and generating electricity. [footnoteRef:81] [75: Mojave, 2015] [76: California Energy Commission, 2015] [77: California Energy Commission, 2015] [78: Abengoa, 2011] [79: Maloney, New York Times, 2011] [80: E360, Yale, 2010] [81: Mojave Solar Project, 2015]

4.1.3. Ivanpah Concentrating Solar Plant (CSP) Case Study

Our final case study of solar projects is Ivanpah, a 392 megawatt concentrating solar power (CSP) plant located in Ivanpah Dry Lake, California. The Department of Energy issued three loan guarantees in April 2011 covering a notional amount of $1.6 billion in loans; January 2014 marked the beginning of Ivanpahs commercial operations.[footnoteRef:82] When completed, Ivanpah was the largest CSP plant in the world and according to the DOE, Ivanpah nearly doubled the amount of solar thermal energy produced in the United States in previous years.[footnoteRef:83] The economic and environmental impact of Ivanpah in the region is staggering, with annual electricity production of 940,000 megawatt-hours, 500,000 metric tons of carbon dioxide emissions prevented annually, 1,000 temporary construction jobs created with 61 permanent jobs. In recognition for its technological innovation and economic impact, Ivanpah was named Plant of the Year by POWER Magazine (a publication that has covered the power generation industry for over 130 years), given its status as largest solar thermal plant in the world and being the first commercial-scale solar project to use power tower technology.[footnoteRef:84] [footnoteRef:85] As is the case with Desert Sunlight and Mojave, Ivanpah is currently a successful project within the Department of Energys loan guarantee portfolio. As aforementioned, the Department of Energy currently has around $4.5 billion of available loan guarantees earmarked for renewable energy (not specifically solar) under Section 1703 of Title XVII Innovative Clean Energy projects. As we have seen with the case studies discussed in this section, even partial loan guarantees of solar mega projects (>250MW capacity) can result in highly successful economic and environmental impacts to the community, exceeding the risk of default in guaranteeing loans (which for large-scale commercial power projects is much lower early stage unproven technology companies). Additionally, loan guarantees result in further financing transactions without loan guarantees, as investment banks and financial institutions gain experience and familiarity underwriting and syndicating solar power infrastructure projects. [82: Ivanpah, 2015] [83: Ivanpah, 2015] [84: Power Magazine, 2015] [85: Energy.gov, 2015]

4.2.0 Public-Private Partnerships

Public-private partnerships are generally collaborative agreements between the government (usually federal and/or state) and private sector participants (investment banks and institutional investors) to develop long-term infrastructure projects. These projects are usually extremely costly to build and development takes several years to bring the project to full completion.[footnoteRef:86] Given the high initial capital costs and delayed payback period (toll roads/utilities that only begin earning revenues upon completionafter multi-year construction period), the entire project poses significant risk for any one party to bear.[footnoteRef:87] Through public-private partnerships, the private investor still bears a significant amount of risk (along with substantially all managerial responsibilities/costs), however, the participation by a government entity decreases the size of the burden.[footnoteRef:88] The government entity can choose to either finance part of the project directly (assuming it has the funds available to do so) or it can provide the private party with an agreement to allow the private investors to receive the operating profits of the infrastructure project.[footnoteRef:89] [footnoteRef:90]This agreement can contain royalties to be received by the government or revenue-sharing models, both of which are increasing in proportion to the government entity with initial government capital contribution. [86: Deloitte] [87: World Bank, 2015] [88: IMF, 2008] [89: Deloitte] [90: World Bank, July 2015]

4.2.1. Power Purchase Agreements & Public-Private Partnerships

Specifically, when it comes to solar infrastructure projects that are expected to generate significant electricity, power purchase agreements can serve as the government contribution towards the partnership (while providing little to no direct capital upfront and the private investor(s) bearing the entirety of the initial capital cost).[footnoteRef:91] The importance of power purchase agreements for electricity-generating infrastructure is easy to seeinvestors undertake the task of financing a project with heavy initial capital costs and sustained cash outflows with a delayed payback period. The uncertainty of future revenues dissuades investors from committing their capital; the risk of realizing inadequate (low or negative) returns is high when there is no agreement in place for securing future demand. The power purchase agreement eliminates the uncertainty as project financiers can guarantee baseline future demand to cover their fixed costs (including costs of entry) as well as their variable costs of production.[footnoteRef:92] PPAs benefit both parties, as the government utility (party directly purchasing electrical output) secures future supply of electricity that conforms with government mandates while the private sector investors realize a return on their investment via the guaranteed purchases. [91: World Bank, May 2015] [92: World Bank, April 2015]

4.3.0. YieldCo Structure and Financing Capabilities

Yield Companies are financing vehicles that are very different from government loan guarantees, tax credits, and public-private partnerships. While Yield Cos. are often the beneficiaries of the aforementioned financing mechanisms and incentives, their structure and purpose is different from project finance. All the previous financing opportunities described in the previous sections have mainly dealt with project finance, which occurs in the development stage of solar power infrastructure projects. This concerns all the early stage equity and debt capital necessary to begin development due diligence and eventually construction. However, Yield Cos take advantage of the public capital markets once projects have been fully developed and are fully operational. Investors seeking dependable dividend income turn toward these investments (Yield Cos) with the expectation that the cash distributions increase over time.[footnoteRef:93] [footnoteRef:94] Typically, a solar power company (e.g. Abengoa, SunEdison, etc.) will bundle its solar power operating assets (PV, CSP facilities, etc.) into a non-subsidiary entity.[footnoteRef:95] These operating assets will be expected to generate consistent income from selling electricity to utility companies, usually under long-term contracts (>15 years) or long-term power purchase agreements.[footnoteRef:96] Yield Co.s are structured similarly to Master Limited Partnerships (an investment vehicle used extensively in the oil & gas industry for midstream assets) and Real Estate Investment Trusts (commonly used to bundle commercial real estate assets) in order to be tax-efficient and to maximize the cash flows from the operating assets. The parent companies that create Yield Co.s are typically large players, whether unregulated arms of utility companies, independent power producers, or specialist (pure-play/independent) solar project developers. In creating a Yield Co., the parent company is able to immediately monetize long-term operating assets (which normally would take several years to pay back the initial capital invested in the project before providing the company with a return), which allows it to redeploy that capital into new project developments. The Yield Co. is then spun off and publically traded as an independent entity, with an agreement in place for the parent company (which maintains an ownership interest in the Yield Co) to continue to pass through (sell, lease, etc.) operating assets to the Yield Coinvestors require this agreement in order for their cash distributions (dividends) to increase over time. The Yield Co. finances the purchase of operating assets from the parent through a combination of debt and equity. The tax advantages of Yield Cos are very important to the parent company and public shareholders of Yield Co. shares; due to the special organizational structure of Yield Co.s, there is only taxation at one level (individual shareholder) rather than at two levels (company and then individual shareholder) as is the case with corporations.[footnoteRef:97] This allows Yield Co.s to reinvest more cash by saving on taxes and allows shareholders to re-invest in the Yield Co. to generate more dividend income. Within the broader umbrella of financing mechanisms available for solar power projects, Yield Co.s allow large project developers to monetize invested capital from existing operating assets (while realizing a return) and to redeploy that capital into new projects (which will be financed through project finance as described in the previous sections). [93: NREL Gov, 2014] [94: Global X Research, 2015] [95: Third Way, 2014] [96: NREL Gov, 2014] [97: Chadbourne, 2015]

Although companies developing utility-scale solar projects have several financing alternatives to choose from, it is important to identify those that will be the most prominent for future projects. Given that the Department of Energy Loan Guarantees are nearly at their guarantee limit for renewable projects (and by extension, utility-scale solar) it is unlikely that this program will serve as a meaningful financing source for more than 2-3 utility-scale projects (>250 MW). With this in mind, Public-Private Partnerships and late-stage YieldCos. serve as more pragmatic sources of funds for companies developing utility-scale solar projects. Public-Private Partnerships can help finance projects early (assuming DOE Loan Guarantee limits are not increased) and the YieldCo. structure can provide early-stage investors with an exit for their investment. One indirect benefit of the Department of Energys Loan Guarantee program was the direct underwriting experience it provided to financial institutions (incentivized by the governments loan guarantees) that would persist beyond the life of the loan guarantees. As the DOE program is phased out (assuming no extension of the loan guarantee limitscurrently an uncertain prospect), the experienced financial institutions have continued participating in the financing of solar projects, which can be expected to continue in the future. The larger solar companies that are developing utility-scale solar projects can negotiate their purchase-power agreements and bundle the renewable assets attractively for sale to its YieldCo., distributing the funds received to early-stage equity investors and using the remaining balance towards new capital investments (utility-scale solar or otherwise).

5.0. Electricity Distributor Model[footnoteRef:98] [98: We discussed this model in detail with Jing Wu]

We now use a basic electricity distributor model to illustrate a utility firms profit maximization decision. Our analysis is done in two stages. First, we aim to illustrate this representative firms choice of solar capacity up to 2040 under assumptions of projected electricity price and capital cost of increasing capacity. Then, we analyze the comparative statics of this choice of solar capacity under different ranges of assumptions on government subsidy, technological capability, and returns to scale of added capacity. By modeling these comparative statics, we examine the effects of the different possible outcomes of the technological, political, and financial situations detailed in this paper.

5.1.0 Assumptions

Our representative firm wants to maximize profits over a 25 year horizon, or in other words is making its decision based on information up to the year 2040. To model this consideration, we use a dynamic profit function:

Note that the profit each year is given by the revenue, electricity price (pi) multiplied by electricity generation (yi), minus the cost, a function of total solar capacity (si), plus government subsidy. The firm considers the net-present value of future profits, given by discounting by the risk-free rate (r).

We make the assumption that the electricity price will not remain constant. Looking at the historical prices over the past 10 years, prices grew 25% and exceeded the natural inflation rate of 21%.[footnoteRef:99] Thus, we use the U.S. Energy Information Administrations (EIA) projected electricity prices to capture this non-inflation price increase. We use the EIAs reference case for oil price, economic growth, and oil and gas resources up to 2040; these assumptions formulate the EIAs electricity price projection.[footnoteRef:100] [99: US inflation Calculator, 2015] [100: Conti, 2015 ]

We also model the firms costs as a function of its total solar capacity. As described previously, the predominant cost is the capital cost of solar installations. We want to capture the relationship between these capital costs plus operations costs and the number of utility-solar installations. However, the privatized nature of these installations make it difficult to get data on the number of installations each year; instead, we use total solar capacity as a proxy for measuring the number of installations. Furthermore, it is not standard to measure costs per total capacity. Cost more commonly given by levelized cost of electricity (LCOE), which is measured per electricity generation (yi) rather than total electricity capacity (si). Thus, it is necessary to define the relationship between capacity and generation:

This serves as our production function. Ai is a measure of technological efficiency, or in other words the capacity factor of the solar installations. According to literature, the current maximum capacity factor for solar is about 25%.[footnoteRef:101] Note also that in order to solve our maximization problem, the production function cannot have increasing returns to scale. We make the assumption that doubling total capacity will increase generation by less than double; intuitively, simply increasing the available capacity does not mean that all of that will be utilized in the presence of other sources of electricity. Thus, we have the following constraints: [101: "The Electric Power Monthly." 2015]

Now that we can express generation in terms of total capacity, we can define our cost as a function of generation:

Note that since LCOE is measured as the cost per unit of generation, we can express the cost as LCOE multiplied by generation. LCOE represents the per-megawatthour cost (in real dollars) of building and operating a generating plant over an assumed financial life and duty cycle. Key inputs to calculating LCOE include capacity factor (Ai), capital costs of total capacity (Ki), and variable maintenance and operations costs (Ni).[footnoteRef:102] As we did for electricity prices, we use the EIAs projections for LCOE up to 2040 for our model.[footnoteRef:103] [102: "Levelized Cost of Energy Calculator." 2015] [103: "Levelized Cost." 2015]

Next, we define the rate at which total solar capacity grows. Since our representative firm makes its choice of total capacity based on information up to 2040, we assume that the firm will plan its capacity expansion at present (i=0). Further, we assume that the firm will execute its expansion plan at a rate such that the growth rate is constant. Intuitively, we do not expect total capacity to increase by a constant lump-sum each year. We expect that as more solar installations are made, the lump-sum additions from year to year will rise. From literature, certain projections suggest that capacity growth will be exponential.[footnoteRef:104] For the sake of accuracy, we make the more conservative assumption that the growth will be linear: [104: "The Continuing Exponential Growth Of Global Solar PV Production & Installation. 2014]

Finally, we define government subsidy as a function of generation. As detailed previously, the government has a number of policies supporting solar. For our model of the representative firms decision, we define government support as a per unit subsidy on generation:

This formulation is preferable to a lump-sum subsidy, which would not be distortionary on the firms decision. Further, we prefer using generation rather than total capacity since key government policies, such as RPS and net metering, focus on generation.

We rewrite our maximization problem as:

5.2.0 Profit Maximization

To solve the general form of our profit maximization, we first factor and substitute in the production function:

We also iteratively solve our capacity growth relationship to get:

We define the following for simplicitys sake:

We now differentiate with respect to n to find the optimality condition:

Having found our optimality condition, we can now examine the firms choice of n under assumptions on Ai, gi, r, and , along with given pi and LCOEi. As a base case, we make the following assumptions:

Solving for optimal n, we get:

Intuitively, we can understand why the optimal growth rate is negative by comparing the projected prices and costs. As shown in the chart below, the projected price does not exceed the projected cost until 2040. Since the firm is considering the net present value its profits up to 2040, there is no growth rate that allows the firm to achieve a positive profit. Under these assumptions of no government subsidy, the firm will not choose to increase its solar capacity under optimality.

5.3.0. Comparative Statics

Having made this observation that the firm cannot profit without government subsidy, we proceed by analyzing the relationship between optimal n and different values of g. From our optimality condition, we know that:

This is easy to see intuitively: the more government subsidy, the more the firm will want to grow its solar capacity.

Next, we want to understand what level of government subsidy will incentivize the firm to choose a positive growth rate. We hold the same assumptions as before, except we vary g. We define that government subsidy is constant in all periods:

We vary our x, beginning at 0 and incrementing by .001, to build a piece-wise curve illustrating the relationship between n and g. We introduce the following constraint on n to eliminate negative and infinite growth:

Intuitively, this limits the firms growth rate such that it can at most double its capacity in one year. As shown below, the firm will choose not to grow for all values of g up to .951, after which it will always choose the maximum growth rate of 1. This is the smallest g at which the firm will be able to profit; in our further analysis, we will call this point the optimal g.

The above result indicates that perhaps our assumption of = 1 is unrealistic; this defines a production function with constant returns to scale. Instead, we want to understand the relationship between n and g under a production function with decreasing returns to scale. Thus, we take the perspective of the government and search for the optimal g for each level of . The graph below describes the relationship between optimal g and ; the dotted exponential trend line has an R2 of almost exac