German Solar Entrepreneurs Assess California

Boris von Bormann (Moderator- accessio): In the United States, it’s undoubtedly utilities-scale solar that’s driving this market and thus the residential and smaller systems. What in your opinion is the trend over the next one, three, five years? We’ve seen a shift from CSP systems to PV, and we’ve seen a shift in the location of the utility markets. Do you see other segments, such as commercial or residential, growing? Or do you still think it’s going to be the utility market? 

Wade Webb (Martifer Solar): In California we’ve seen quite different growth in regards to the industry itself. Martifer Solar is looking at the large commercial utility-scale projects as being really the focus, not only here in California but also throughout the United States. In the commercial market, obviously, these are the big utilities users. They have the expensive electric bills; they have the capability of writing off a lot of the initial investment. There are finance entities that are also very much involved now with these large-scale projects. That’s really what they’re looking for. They’re not really looking to do what we call the RLC, which is “Residential / Light Commercial” projects. Those projects will always be around. But as an industry I do believe we are moving into the utilities scale, and all the marketing data that I’ve read suggests that within 2012-2015 that market’s going to really grow.

Brad Meikle (Silverado Power): Clearly the US is the most rapidly growing market, except for maybe China. We’ll see the utility-scale market go into 6 gigawatts by 2014. I think over time we’ll see, as we’ve seen in Germany, a progression towards a smaller average-size projects because naturally you run out of land that’s adjacent to substations that have the capacity. As we move outside of California the average size project will be smaller. I think the utility-scale is going to have a big five years in the US.

Tom Buttgenbach (8minutenergy Renewables, LLC): It does take several years to get any projects from inception to construction, especially in California. Quite frankly, PV in the California market three years ago was not competitive; the market focus was on CSP. And only with the meltdown in Spain was the birth of solar PV in California possible, when costs for the first time became competitive to the point where the utilities were actually interested in looking at solar PV. If you add two or three years from that period it brings us to right about now. And that’s why you have seen a whole lot of construction going on, and you will see a lot of construction in the next few years. The costs, as everyone’s aware, are declining rapidly. That is great for utility-scale projects. It’s actually a problem in the commercial sector. Incentives that rolled the market a while ago are pretty much all gone. And right now it starts making sense to look at projects without the utility incentives, just based on the IPC. 

I see the trend in California going towards larger projects. Price competition is so intense at a 50-megawatt project, which a few years ago was still a big project. Today it’s hard to make the numbers work because of economies of scale. These are hard to pencil-out compared to a 200-megawatt project. Margins have gotten so thin that we need to squeeze every penny out of the projects. You don’t see projects much bigger than 200 – 250 megawatts because of financeability. I also don’t see projects much smaller than 100 MW going forward. That’s probably not going to be true outside of California, but here we’re combining 50-megawatt projects together to make larger ones.

Boris von Bormann: An interesting standpoint, as we’ve seen companies presenting here that are in a smaller-scale market. You say that it’s almost impossible to make the numbers work in the 5, 10, 15, 25-megawatt range?

Tom Buttgenbach: If you’re below 20 megawatts and you’re in some kind of grant program where you have different kinds of price levels then that may still work. But if you’re competing in the large-scale markets, the LGIAs, you cannot make a 20-megawatt project work right now. 

Rugerro Schleicher-Tappeser (Sustainable Strategies, Berlin): I think the market for large-scale in California is mainly driven by the renewable portfolio standard. The situation changes when PV in some markets becomes competitive and independent of government rule. As PV is able to compete on the retail side too, the whole picture may change when we reach grid parity to some time when the price difference has grown large enough. I think it’s inevitable that in the medium time frame we will see much more development in the small sizes of industrial level for home consumption, not necessarily managed by utilities. 

What actually is utility size? Utility size, conventional projects, we know they are around 1000 megawatts, but we see already in PV and wind that utilities use plans that are much smaller. What will be the business model of utilities in the future? 

All the utilities will be able to integrate more distributed generation and integrate that into their plans for developing the grid. I think it remains open as to which strategies will be developed in the next years. But I think RPS has worked, from the government side, to push until it’s a higher percentage. I think for at least the next 5 years, renewable portfolio standards until 2020 probably will play a major roll, so certainly there will be a market for utility-scale projects. Also, the other side will grow when the utilities push to develop structures to integrate these new developments. 

Boris von Bormann: Boris, I’m very interested to hear what you think on this. Q-Cells has always been involved in development in residential, in commercial, but also, first in Ontario and now all over North America, in utility-scale size projects. Can you close in a little bit on that and connect the dots?

Boris Schubert (Q-Cells North America): I think the best question was, what actually is utility size? Our position has always been that whatever is not behind the meter, or what is on the utility side of the meter, is what defines a utility-size project. This would mean that in California we’ve been talking about utility-size projects when we’ve talked about projects larger than one megawatt. But we’re not talking about one megawatt projects when we are talking about utility-size here. So maybe that’s a distinction from what Brad and Tom were saying. We at Q-Cells are not acting as developers in the U.S. We are a vertically integrated photovoltaic solution provider. We build photovoltaic power plants, but are not actively involved in developing projects or 2050. Therefore, we were not involved in 2007 to develop projects for 2010 and 2011. However, what we are seeing in the projects that we are actually building, specifically two of our projects in California, is that they are somewhere in the range of 20-30 megawatts. So we do see that this is a range that for some developers makes sense. This is where we are quite active. We do see developers going into 100, 200, or even 400 or 450-megawatt projects. However I think the big question is, how many of those projects will—as I think Tom mentioned from a financial perspective—actually be financed? 

I think that’s the fundamental question at the utility-scale. In terms of the non-utility market, behind the meter, on the customer’s side of the meter, we truly believe that by 2014 or 2015 we will see less than 40 percent of the overall market in the U.S. being the utility-scale. Meaning, the residual 60 or 70 percent of demand will be coming out of the residential or CNI businesses. 

Boris von Bormann: Is it true that you can develop a smaller project faster than a larger project? Most of the time what I’ve heard from the utilities is that it’s often not worth the time to put together a five-megawatt project because it takes about as much time and effort to develop a 25 or 50-megawatt project. 

Tom Buttgenbach: It’s true that transmission and interconnections are an issue in California. Part of that is because, as renewable developers, we are being asked to carry the burden of upgrading a network in California that is substandard. This is not comparable to Germany, where the grid has a lot of spare capacity. 

The grid in California right now is basically maxed out. We have population growth in the U.S. of about one percent per year. That’s three million people per year, and our energy consumption in the U.S. goes up every year. So as new projects are being added, the renewable energy developers are being asked to pay for the network upgrades. Therefore, the burden is on us to overhaul this old infrastructure as well as add new capacity to the grid. That is a timely effort, and, quite frankly, there used to be opportunities where you could sneak in with maybe 30, 40, 50 or 60 megawatts by substations where there was still enough room. Those days are pretty much over. 

If you are applying right now and you were in class four or five in the California ISO grid interconnection process, you are looking at upgrading timelines of somewhere between four and eight years. It doesn’t really matter whether it is a 20-megawatt or a 200-megawatt project because you are going to be stuck with having to pay your fair share of some new transmission line. It doesn’t take long to build a transmission line; it just takes six or seven years to permit it in California. So I do somewhat disagree that the trend is towards smaller projects. We go into locations where we can deal with three to four year timelines on upgrades. They do exist. That basically means upgrading or adding additional transmission lines to existing transmission corridors where the permitting is fast. With those projects you just can’t make a small project pencil out. To give you an example, a budget typically for us just to do the permitting, get the PPA, and get all of the legal paperwork done for a 50-megawatt project is about $3 million. For a 200-megawatt project, it’s about $4 million. That’s all pre-construction costs. So the difference really isn’t that big, and once you look at the risks and look at the fact that you can take a 200-megawatt project and partition it and sell pieces of it off, it makes a lot of sense to build big. 

Brad Meikle: I would encourage European EPC movement into the U.S. I think there is only a handful of guys building utility-scale EPC today, and most of them are less than 100 megawatts in terms of actual projects built. I’ve found a dearth of solid quotes and solid experience, so I think there is definitely an opportunity here for guys who have built hundreds of megawatts of their own. 

Tom Buttgenbach: I agree. I think it’s a good thing for European EPCs to come in to the U.S. market. However, I would first challenge their business model. The business model in the U.S. is substantially different from that in Europe. The idea of, “I buy a project, I build it, and then I sell it,” does not really work in the U.S. The U.S. is a market where you have the development up-front, the pre-construction development, then you have the EPC, and then you have the long-term whole, which is basically an IPP, an infinite power producer. On both ends you can make very good money, however, in the middle you get squeezed. If all you do is just build the project, you will get market squeezed down and down. It’s hard for a player to really have significant value added if all you are competing on is cost. 

If you don’t have your own projects that you’ve developed and  don’t have the financing capability to be an IPP, I would encourage all Europeans who come to the U.S. to think about their strengths and how they fit into a business model that actually works here.

We come across as a pure-play developer; we always partner up with companies. Often European EPCs approach us and say, “Do you have a project for us? We want to build something with you. We want to get our feet wet.” We tell them, “Well, it’s going to take two to three years before the project is ready.” There are no projects ready to be built, large-scale ones at least, that you can pick up. If you do, you pay 40 to 50 cents per watt, which is killing your margins. First Solar does that because they make their money in the factory. 

But if you’re just an EPC then you can’t afford to pay those kind of prices. So you tell them, “Well, you have to be in up front. You’ve got to be investing. You’ve got to take some risks on project development and pre-construction development.” Those that are prepared to do that, like our partners, have been very successful. Just a pure-play EPC (which I’m not even exactly sure what that actually is; how is it different from just being a contractor?), you take profit margin without eating up the finance of the project. It doesn’t work in the U.S. It’s just a very different market.