 Thank you. I guess this is a seamless transition from fossil fuels to renewable energy and I guess a day like an uncomfortable a day like today Reminds us of the urgency of that Transition at least it does for me So I presume this audience does not need much of an introduction to the solar PV industry We all read about it a lot in the papers For those of you who are coming to Stanford from other parts of the US or other countries Also chances are you're going to read a lot more about it when you get here Not only do we have a couple of the major solar companies in our backyard? But perhaps equally important Many of the corporate heavyweights in our area have recently made and continue to make major investments in solar power that includes companies like Google Apple and also on Stanford University that decided fairly recently to make a major Investments in solar to satisfy the electricity needs here on on campus. Okay so Perhaps here's a graph that I think Everybody has seen in some form or another That's sort of the title of the talk the rather phenomenal growth in solar PV worldwide over the last 15 years And if I hope also the ones in the back and sort of did see the different colors clearly Basically on the bottom you see Europe which took an early lead in this but has leveled off recently But nonetheless, this is a very steep very convex curve in which basically the Americas And that means largely the US at the moment and Asian countries are have picked up the slack that has been created Okay, so here is Just to reinforce this a little bit what you see on the left are annual installments of new capacity in 2014 alone You see the US has sort of moved into third place there was about six gigawatt that accounts for actually about one-third of all new Capacity installed in the US last year so solar accounts for that at this point already Countries like Germany to have slowed down and we can sort of talk about this a little bit why that's happening But perhaps the biggest story other than the US is China which in the past has been a major producer of the hardware in particular the solar PV modules The panels if you want to those that country now also is Installing them at an increased pace in the past they have been largely producing them and exporting them to other countries They still continue to do that, but now you have them also as a country that install solar pop, okay? So what I would like to talk to you about in the next 20 minutes or so is the question. How should we interpret? This growth story solar is still small In terms of electricity generation all together if you look at all Electricity generated, but the growth rates are pretty phenomenal and then the natural questions are what has been? what have been the drivers of that growth and is it likely to continue if we sort of extrapolate from what we know at this point That is is this trend sort of here to stay? So that's something I've been working on over the last couple of years And I want to give you sort of some a feel for the work that we have been doing at the business school in this area so Several sort of what you may call drivers or Explanatory factors are being mentioned frequently in terms of what's behind this growth Perhaps first and foremost Technological improvements and cost reductions really at every level of the value chain from modules To of the cost that are being incurred in installing solar systems Including labor hours at the very end that it takes Companies have reorganized themselves in this industry that would probably take me a little longer to to explain But there is a lot in the way of vertical integration of companies that before sort of operated separately Another aspect is financial innovation. We're seeing more and more a model in which the parties that are consuming the solar power The off-takers if you want to are no longer the owners But we have third-party ownership And many people or companies nowadays lease their solar panels And that has led to a new sort of set of innovations that ultimately also have helped to reduce The cost of capital in this area, okay? And finally and this is really what I want to focus on the most in this talk For the US in particular, but also for some of the other countries, notably the European countries Public policy support in the way of tax incentives so in 2009 US Congress authorized a 30 percent Investment tax credit What that basically means is if a company or an individual has a tax liability You get a 30 percent break or refund on this if you make an Corresponding or an eligible investment in a solar facility In addition, there are ways to write off these Investments in a faster way so an accelerated form of depreciation Which once again lowest effectively the cost and those are the two main things at the federal level and then in addition We have seen in different US states Really movements in the way of renewable portfolio standards, which basically provide incentives coders if you want to for renewable energy And related to that here in California the California solar initiative Which was basically just a cash rebate to new investors in solar all of these things have Contributed at least in the US but also similarly in other countries to the boom in solar power so the interesting thing then is sort of to sort out what are really the major drivers here and In particular when it comes to the federal investment tax credit one thing to note is this has a Sunset provision such that at by the end of 2016 the Investment tax credit for corporations is scheduled to go down from 30 to 10 percent And for individual homeowners so for non corporations is supposed to go away in its entirety So as you might expect the solar industry is lobbying Congress Very actively and saying you know don't let this happen So the question that we have sort of have been looking at and I want to share with you a little bit is what would be the impact if That really does happen and what are also possibly alternatives To what's currently on the books in terms of the tax laws So in particular I want to look at three questions here Where are we in the current environment when it comes to cost competitiveness of solar? And I want to sort of look at this at a slightly more granular level here going by Individual states I have picked a sample of five u.s. States which collectively account for about two-thirds of all installations in the u.s And then also by segment So I mentioned earlier some of the big players here those typically invest in what's called utility scale facilities But much of the growth actually has come either at the commercial level where individual companies put solar Panels on their rooftops say of their warehouses or their office buildings and of course the last segment being the residential segment Individual homeowners and individual rooftops. Okay, so let's look at these separately and then also by state So that will sort of provide a if you want to a grid of measures of cost competitiveness So that's sort of an assessment that I'm going to give you in a moment. Where are we now? Or where are we going to be very shortly? and then the question really from a public policy perspective if Congress were not to change its mind and Let's the investment tax credit go down from 30 to 10 percent What would be the impact on cost competitiveness at that point in time? And as the very last thing if I get to it on time Perhaps sketch an alternative scenario that would rather than stepping this down in one big step gradually Reduce that public support that investment tax credit hoping that in the intervening years the industry continues to innovate and reduce cost And we would sort of maintain the current status of cost competitiveness That's sort of the idea and we can sort of quantify this You know relatively easily once we have sort of the the first pieces in place Okay So what's the way to measure cost competitiveness? There's a metric in the industry That's not used just for solar but really across different Energy platforms in fact one of its advantages is that you can compare say the energy Generated from say electricity generated from a nuclear power plant versus a renewable source versus a coal fired power plant and what you do is You basically calculate a unit cost measure which in this industry is called the levelized cost of electricity or also levelized cost of energy so roughly the way to think about this is an Entrepreneur a company that asks itself should I invest in solar or some other type of electricity generation source What would I need in overall revenues? Per kilowatt hour over the whole life cycle of this facility say the next 25 years So that at the end of this process, I am breaking even on this investment. It's a decent investment for me Okay, so Basically what you're comparing is a stream of revenues at this levelized cost in your that must cover And you get a stream of revenues at this levelized cost and that must cover your actual Cost in terms that you are incurring both initially when you make the investment and on an ongoing basis so Conceptually you can break this into three components one being the fixed operating cost for solar on an annual basis Maintenance replacing certain parts that are giving out over a number of years The big component is this unit cost of capacity. That's basically Your overall Systems price that you're paying initially and you must sort of distribute That's where the word levelized comes in levelized that cost over the next 25 or 30 years Whatever your assumption is and then the third thing that we need in those types of calculations is that are the tax considerations Because that's where public policy investment tax credits and all these kinds of things come in So fortunately, you can represent this in a somewhat separable fashion where you can take this tax factor Think of this as a markup somewhere around say 1.3 for conventional but much much smaller for solar that sort of Acts on this cost of capacity Okay, just to give you a flavor of this So here are some numbers This is I'm already fast-forwarding the tape a little bit to 2016 be record because remember 2016 is the year that things are supposed to change and This is my grid in the rows. You see that five different states and in the columns the three segments and Within each cell if you want to I have three numbers one is the cost the levelized cost of solar on a per kilowatt hour basis in The current environment or in 2016 if we still have a 30 percent investment tax credit So that's where the subscript 30 is under the LCOE, okay Contrast this with what I call the comparison price That's sort of what solar needs to beat in order to be cost competitive and then the third Column has what this levelized cost at the end of 2016 would be if Congress doesn't change its mind and the investment tax rate. It really drops off to 10% Okay, so what do we get? Well, let me first say the comparison price differs greatly across the three segments and the reason for that is simply if you're building a utility scale facility Say a utility itself builds it pretty much what you have to compete with our whole sale prices for electricity Those of course are much much lower than retail prices Conversely if you're a company would you have to and you ask yourself should I put solar panels on my rooftop? The relevant comparison is well, what does my energy service provider? Possibly the utility charge me our business on average per kilowatt hour, so I need to beat that Okay, that's still lower than what individual households You all will be paying when you when you're here I guess Stanford takes care of Heard of many for you, but it doesn't for me So I pay roughly 16 cents 16.5 cents per kilowatt hour here in California That's sort of the retail average retail rate in PG&E Pacific gas and electricity territory. Okay So What do we take away from this? Well in the commercial and residential segment solar is in the current environment That is with the current incentives. It is pretty competitive in many of the states New Jersey is always difficult. We'll talk about New Jersey separately perhaps in a moment, but in the others. It's pretty much There say if you look at California Commercial, you know, that's a sizable difference We're sort of projecting at the moment a levelized cost of 10 cents But it costs the business on average 15 cents at the moment So that's part of the explanation why we have seen this boom It makes sense for a lot of parties to do these kinds of investments Okay, and An exception to what I just described happens over here on the utility side There you see if I compare the levelized cost at the in the current environment Against the comparison price that is wholesale prices for electricity Basically, we're out of luck Generally the comparison prices in all of these states are lower than our calculations For what solar accounts for at this point So but nonetheless, we've seen phenomenal growth in these markets. What accounts for that? Well, that's where we get to the state level incentives States have been running their own programs as I mentioned before renewable portfolio standards Which if we get back to the example of New Jersey have become at some point incredibly valuable But that was really sort of a particular thing to New Jersey at some point okay now What would happen if once again the investment tax credit were to drop off and go from 30 to 10% These are the numbers in red and I've marked them in red just to indicate for you and you can verify it immediately There we're basically underwater across the board by a Precisable margin so the conclusion is Even if things improve a little bit here in the in the coming years Costs are going to fall a little bit and that's already baked into those numbers for 2016 if Congress doesn't change its mind Many of us and I agree with those assessments are predicting that there's a serious cliff for the solar industry coming Unless the states were to step in and increase the state level incentives for for solar in this environment So that leaves the question and really What to do about this? is there What we have is a overall a dynamic in which things have been going a lot better for solar costs have been coming down Congress at some point in the US and also in other countries Jumpstart at the industry It has worked out exactly the way it was intended but the timing is off a little bit here because At this point the cost reductions that have been achieved are not yet sufficient to sustain the industry Without the public support. Okay, so that's where we are on this Let me spend a moment here talking a little bit about Future cost reductions, so if we do not just go to 2016 But we're mapping it out try to map it out for another say 10 years all the way to the mid to the mid 20s Can we do that? Well, that's something ultimately sort of a forecast here Looking at past observations and past improvements that we have to do if we want to sort of inform policymakers on this And that's sort of our goal with this line of work So this here is a well-known chart in the industry. It was first presented here at Stanford in a seminar in 2011 by Dick Swanson who was the founder of Sunpower one of those solar companies here in our backyard and all he did was graph really plot prices against Production volume in this industry. So think of this as total megawatts installed and both on both prices and Quantities that is megawatts produced are on a logarithmic scale But the thing that's standing about this curve is It fits beautifully as you can see in its logarithmic form. It's almost a straight line And there was this little blip here that was typically attributed to a Change or a shortage of polysilicon a number of years, but then things got pretty much back to that curve very quickly So when that was presented here in 2011 you know people were saying this is spectacular You know we came from 33 dollars per watt to a dollar to a dollar and 81 in just Those 30 years, but this got to end. This has to level off well Here's what happened ever since Here's pretty much the curve up to 2010 this was the last graph and this is what has been happening in the last Three to four years if you by now we also have some of the 2014 data And this has sort of held steady in the first part of 2014 and recently has sort of fallen off again But the important thing to take away We have actually now beaten sort of this 80% learning curve So things have gotten even faster Than what was predicted even though people were worried that ultimately this industry would slow down So that of course raises the question. Well, what's happening here? another thing that has been happening is there has been a lot of Entry into this industry from China Largely which have Chinese players have really upped the capacity in that industry And so people have been trying to say well, perhaps those price reductions are not so much a question of cost but more a question of Price pressure because this industry expanded too quickly and people got into to Had sort of two rosy expectations in terms of making those investments so that's something that in terms of the research we're trying to do here is to Disentangle this and try to really divide to what extent are the prices that we have seen a Consequence of continued cost reductions and to what extent is this really a function of Basically excessive capacity for the industry for a number of years and If you do that you basically get sort of a new line here, that's the green line That is a prediction of what we call an economically sustainable price This is what the industry would have charged based on the cost figures that we have examined If they had not been sort of too much optimism and people wouldn't have jumped in too quickly into this industry, okay? So you put all of this together And you do something similar over on the so-called balance of system cost what I just talked about was just the module part and You get to the following consideration in this and this is then where I'm going to wrap up There is Good reason to believe that cost not just prices but also costs are going to continue to fall at a particular pace That's pretty impressive But as I tried to indicate early on by 2016 we're not far enough on this learning curve So this raises the question could you do something more in between that is could you say well in 2016? We're not going to step down the investment tax credit from 30 to 10% But we're going to go somewhere in between my red line here And then you would play this one more time for the period 2020 to 2024 and Then ultimately you would go to zero So the calculation here is in terms of taxpayers and Congress as a proposal You give the industry a little bit more in the next five years when it really needs it But on the other hand there are reasons to believe it doesn't need all those subsidies the continued subsidies at 10% investment tax credit and Accelerated appreciation forever because the tax the tax code at the moment says those remaining subsidies will be in place forever So there's in my mind a possibility of a deal here to be made where the industry gets a little bit more and now when it Needs it, but you're cutting it back to zero in the very long run and that's works out if you do the numbers I think Lee showed to me that I'm sort of out of time. Let me just leave this graph here I know this has a lot of colorful bars looks a little bit just like the physics experiment, but think of it this way if on the Red line we see what the investment tax credit these again levelized cost for California at a utility scale This is what would have happened if the 30% investment tax credit had remained in place the alternative put solar Basically makes it uncompetitive for a number of years and the alternative path that we are sort of sketching here Would basically mitigate this. This is sort of what you what what I call the phase down scenario Where you're sort of seesawing your way But you're remaining with those purple curves pretty close to the comparison prices the black line Which are the forecast? Wholesale prices in the state of California, which basically those types of investments would have to be would have to be Most importantly the projections for 2025 if at that point you took all of this away We're projecting that in another 10 years Solar at this scale would really reach great parity. That is if you took all the incentives away both federal and state It should be able to beat those prices that are forecast for 2025. Okay, so that was a quick tour of some of the work that we're doing over at the business school and Largely as you could see a cost policy and economic angle to renewable energy So I'd be happy to entertain some questions Two questions. I guess I stepped over time. Go ahead They're wondering under a ICS phase scenario If if I had the magic wand and I got to choose as I would always go for basically what the California Solar initiative did which was cash rebates. I think those are the cleanest to supplement these things Obviously a short answer to a complicated question over there That's a good point and so we have in all of this sort of basically been I've been listening to my engineering colleagues 25 years is sort of the usual Framework that but I've also heard people say that there is after 25 years likely to be still a considerable residual value That makes the numbers a little better, but on the other hand from an economic cost perspective Because you discount the future You know what you get in those last five years between years 26 and 30 isn't really worth all that much anymore But nonetheless noted this can change things a little bit on the margin And I've heard some people sort of say when things looked a little dire that they were banking that Ultimately it would actually be longer than than just 25 years One more Good Yeah, and have to get out of that fan here. Yeah I mean Yeah, good point obviously I've been focusing on the US California in particular because California has been also Proactive and that's why we've seen a lot of growth here different countries have adopted different policy support mechanisms Germany the feed-in tariff that was mentioned a moment ago Spain had those also for a number of years I think there's an active debate, you know, which of these mechanisms are more effective But one thing that was clearly seeing in Germany at the moment when I showed you the second slide Germany first jumped on the gas pedal now really went off it because it cut back those feed-in tariffs and The consequence was Germany has really slowed down now in terms of these things So basically in all the countries in which we have seen sort of fast growth over the last couple of years There has been some kind of not necessarily a tax mechanism But another policy mechanism in place solo on its own even under ideal conditions does not seem to be able to do this yet Okay