The Dirty Side of Deregulated Energy

I've written about deregulated energy markets in a previous post.  While every deregulated state is not the same in how they run their energy programs, most often clean energy development needlessly suffers when clean energy tariffs are integrated with generation fees.

Distribution is not the same as generation--this matters to clean energy

To drill into this a little bit, we pay separate charges on our bills based on our consumption for generated energy and for the distribution of that energy to our location (there is also a flat metering charge).  Taxes and green energy tariffs are assessed on top of these fees based on the amount of energy consumed.  In a deregulated market, consumers have a choice of purchasing the generation portion of their bill from companies other than their local utility.  The local utility provides the distribution services (power line maintenance, service for power outages, billing, etc) regardless of where the power is purchased from.  This is good for consumers in that they can get the best price for their electricity and even get added value from companies like Power2Switch.

When clean energy tariffs originally went into effect, legislators associated them to generation which was logical since the clean energy fund was intended to mitigate environmental issues with coal, oil, gas, and nuclear generation plants.  As a consumer used more electricity, they would pay more into the fund to encourage better energy (seems fair to me).  Clean energy funds came about in the context of Renewable Portfolio Standards (RPS) which are self-imposed mandates requiring clean energy to make up a portion of total electrical generation.  With an RPS and clean energy fund, the idea is that more local clean energy systems would pop up to meet the RPS over time.

The sun is setting unnecessarily on some clean energy incentives

The wrinkle in this good plan is that with deregulated electricity, consumers pay money to companies outside of the original clean energy tariff structure for their generation so these tariffs don't get collected.  The consequence is that the funds for local solar and wind projects dry up as is happening in Illinois right now.  The easy fix is to shift the clean energy tariffs to the distribution portion of the electricity bill since that money is paid to utilities within the RPS umbrella.  Rate payers don't pay anymore on their bills than they originally would have and local clean energy gets the boost it was intended to get.

Legislation, like making sausage, is typically an ugly process.  This is a unique example of a simple fix that will have significant positive benefits for us all.  I encourage my fellow Illini to support the bill to fix the Illinois RPS.

A little perspective about Solyndra

My summary of the Solyndra story:

• Company launched in 2005 to create a unique thin-film (CIGS) solar module to avoid using expensive (at the time) silicon as most other solar companies use.  They took a calculated business risk to create an innovative product to address a gap in the marketplace.

Solyndra's technology & value proposition

•  Prices of silicon collapse in 2009.
• Almost overnight, the business case that Solyndra was trying to make completely reverses.  More efficient panels are now the same price as Solyndra's less efficient panels.
• Solar panel manufacturing has been extremely turbulent from the beginning so Solyndra stays the course and attempts to weather the storm.
• On May 26, 2010, President Obama gives a speech at Solyndra headquarters to tout his commitment to American job and clean energy development. This was a company that both the Bush and Obama administrations wanted to associate with for political purposes.
• June 2010: Solyndra is producing 30MW of solar panels per year and is in a tie as the 10th largest thin film manufacturer. 
• November 2010: Solyndra gets a $535 million loan guarantee from the 1703 loan guarantee passed in 2005 by the Bush administration.
• Silicon prices continue to fall hitting a 6-year low in June 2011 (~$50/kg from ~$470/kg).

A solar cell nestled in raw polysilicon

• Solyndra tries to restructure its loans again in August 2011 but is refused and subsequently loses a contract with the US Navy.
• Bankruptcy--September 1, 2011

Solyndra was an innovative company in a dynamic market.  The founders took a big risk in a very risky business.  Like other companies in other industries, they lobbied the government for special consideration and like other companies in other industries, they got it.  Governments facilitate markets and companies participate in these markets.  My view is that clean energy companies should get special consideration because they promote technology and ideas that help society as a whole.  Special consideration doesn't mean direct investment however.

One lesson learned from this story is that governments are horrible venture capitalists.  This should be expected since unlike VCs, governmental decision makers are betting with someone else's money.  While market development is a solid roll for governments, picking specific winners like VCs try to do, should be left to private investors.

Solyndra couldn't keep up with John Boyd's OODA Loop

One lesson to not learn from this story is that solar energy can't compete with traditional energy and that solar is doomed to failure.  Solyndra failed in most part due to falling prices of solar components and a general inability to keep up with changing business assumptions.  While this was bad news for Solyndra, this is very good news to proponents of clean energy.  Solar energy is on pace to be the least expensive source of electricity for most of the world in a decade.  All this political theater over Solyndra will seem pretty silly when that happens.

"The trend is my friend."
-Old adage of market makers