Solar Makes a Splash at Business Competition for Entrepreneurs

PHOTO CREDIT: ERIN MILNES / SOLAR HOME & BUSINESS JOURNAL
The Cleantech Open, a business competition, provides exposure and support for startup companies and has a goal of creating 100,000 new jobs by 2015.

By Erin Milnes

Published July 29, 2010

Solar energy figured prominently in San Jose, Calif., at the first national conference of Cleantech Open, a nonprofit organization supporting clean-technology entrepreneurs.

Entrepreneurs
at conference
hope to be the
next big thing.

Visitors toured almost 100 exhibits of new technology from this year’s semifinalists in the organization’s national business competition, and those of competitors from previous years. Standing-room-only panel sessions covered transportation, water use, the smart grid, renewable energy, green building and energy efficiency.

“We are very pleased,” said Rex Northen, Cleantech Open’s executive director. “We used to run six symposia for each of the categories. This is the first time we’ve put them all together in a single day.”

The conference, titled "Cleantech Entrepreneurship: Can It Put the Nation Back to Work?" was intended to “provide a higher profile for the organizations participating, the exhibitors and the alumni, allowing them to meet sponsors,” Mr. Northen explained. Job creation is one of Cleantech Open’s primary objectives – the organization has set a target of creating 100,000 high-quality green jobs through its programs by the end of 2015. Through 2009, these programs have led to 1,200 new jobs in the clean-tech sector, according to the group’s website.

“Regional events are needed too, but there’s a special energy that happens when you get people together from all parts of the country,” he observed.

Renewable Energy Department

“Clean energy is the Industrial Revolution of our time,” declared Kristina Johnson, undersecretary of energy for the U.S. Department of Energy, in her keynote address. She discussed the Obama administration’s goals for energy and the environment, including a reduction in greenhouse gas emissions of 42 percent by 2030 and 83 percent by 2050, and maintaining the U.S. leadership role in science and engineering.

“We need entrepreneurs to achieve these goals,” she emphasized.

But entrepreneurs require funding to execute their ideas and get companies off the ground. “We need capital deployed, now,” Ms. Johnson said, and she gave an overview of the administration’s efforts to do so.

“The government has been very proactive in helping to jump-start the clean-energy economy,” she said. “The Recovery Act will double in a year or two the amount of electricity produced by solar and wind.” And the Department of Energy is working on how to continue that momentum, she said.

PHOTO CREDIT: ERIN MILNES /
SOLAR HOME & BUSINESS JOURNAL
"Clean energy is the Industrial Revolution
of our time," says Kristina Johnson,
undersecretary of the U.S. Department
of Energy.

One way is aggressive funding of research and development. Ms. Johnson took the opportunity to announce the "Fuels from Sunlight," or photosynthesis program: $122 million is to be spent over five years to create the Joint Center for Artificial Photosynthesis, a California university consortium, whose aim is to master the basic science of turning solar energy into chemical fuel and to develop applications that can be scaled up for commercial use.

The project is one of three "Energy Innovation Hubs" funded by the Department of Energy to develop groundbreaking technologies in energy production and efficiency. The Lawrence Berkeley National Laboratory and the California Institute of Technology were named to lead the program.

The hubs are to be large, multidisciplinary, collaborative teams of scientists and engineers working over a long time frame to achieve a specific high-priority goal. “They will be managed by top teams of scientists and engineers with enough resources and authority to move quickly in response to new developments,” according to a Department of Energy news release. The first hub, for developing breakthroughs in nuclear technology, was announced in May. The third, for energy efficiency, has not yet been selected.

Along with developing energy "hubs," Ms. Johnson said in an interview that loan guarantees for the solar industry are "a huge step forward" for the Department of Energy. President Obama on July 3 announced a Recovery Act-funded $400 million conditional commitment to solar manufacturers in Colorado and Indiana and a $1.45 billion conditional commitment to Spanish developer Abengoa Solar for the construction and startup of a concentrating solar power plant in Solana, Ariz.

But Andrew Hargadon, faculty director of the University of California, Davis, Center for Entrepreneurship, said during a panel discussion that government’s best role is to establish standards and promote stability.

He said that new business models, not new technology, enable acceptance. “Business models are more important than inventions. Innovation is about connecting, not inventing,” he said.

“History teaches us a little-known lesson about innovation: Ideas don’t matter. Good ideas languish all the time. What matters? Execution. It’s everything,” he wrote in the conference’s booklet, a statement that was also quoted by Mr. Northen during the keynote introduction to underscore the role Cleantech Open plays in supporting the execution of breakthrough ideas.

Lesa Mitchell of the Kauffman Foundation, one of the largest foundations in the country and one of the major sponsors of the conference, also cautioned against government funding as a panacea.

“Just putting money out for entrepreneurs doesn’t solve the problem,” she said. Education, training and support are needed. "I believe in Cleantech Open," she added.

The Right Incentives

Repeatedly cited throughout the day as the biggest challenge for broad adoption of solar in the U.S. was cost, a concern about which Ms. Johnson is optimistic.

“Every six or seven years, the price of solar drops by half,” she said in an interview. “I really think there will be an exponential explosion in solar going forward.”

How can costs come down further? How have they come down so far?

PHOTO CREDIT: ERIN MILNES /
SOLAR HOME & BUSINESS JOURNAL
David Arfin, an executive at the
electricity company SolarCity, cited
the importance of maintaining cash
grants in lieu of a federal Investment
Tax Credit as an incentive for
businesses that adopt solar.

“In a competitive market, it comes down to the cost of production and the cost of capital,” said David Arfin, vice president of strategy for SolarCity, in an interview. Reducing the cost of production involves a combination of lower-priced modules and inverters, more efficient labor, lower permit costs and lower cost of customer acquisition, he said.

Policy also has played and will continue to play a critical role in reducing cost, though many of the entrepreneurs and investment experts on the panel lamented the ever-changing policy landscape.

"Policies change all the time and with no warning. You have to be really flexible," Mr. Arfin commented during a panel discussion.

The majority of the panelists agreed that it is the entrepreneur’s job to make sure customers are educated about how government policies affect them and their purchase, and how it all fits together.

"The key of good policy design is visibility and transparency in incentives," said Mr. Arfin. "And sizing the incentive right. If the incentive is too high, there’s a gold rush" and it collapses, which is a "disaster for sustainable growth over time," he added.

As an example, he cited the feed-in tariff problems in Spain.

"Feed-in tariff policies are great if they are priced correctly and have market mechanisms so they are neither too high nor too low," he said. Spain had "really rich incentives which practically bankrupted the government" and so it had to "roll back the incentives because it couldn’t afford them, which jeopardized existing contracts," he explained. "No one will build anything or finance anything in Spain as long as there is a risk of rapid decline or retrospective canceling of contracts."

Mr. Arfin believes the most important policies for solar development have been investment tax credits, under which the federal government pays for 30 percent of a system, and the cash grant program available to businesses in lieu of the tax credit; net metering policies by which unused power is routed back to the grid and credited at retail prices; and the California Solar Initiative.

"Without these, solar would not be a growth industry," he said. He later added that the public utility commissions and rate-setting policies are also critical in reaching greater affordability.

Fellow panelist Michael Laine of MP² Capital in San Francisco also mentioned the program that allows payments in lieu of tax credits, which is slated to expire at the end of this year.

"We are somewhat nervous about the end of the year when that goes away," he conceded. He said that allowing the grant to expire will have a disastrous impact on solar financing because some clients cannot take advantage of tax credit programs given their low tax liability.

Mr. Arfin explained in an interview that he had just flown in from Washington the night before after meeting with legislators all day to try to extend the cash grant program.

"I think the extension of the treasury grant program is critical," he said. "I think it will happen, but I’m afraid it won’t happen until after the November election, which would slow down projects until we have certainty. And that will lead to disruption in a market that should be growing exponentially each year."

Picking Up the PACE

Another solar financing policy in question that came up repeatedly was property assessed clean energy funding, commonly known as PACE, in which a municipality or other jurisdiction finances energy investments, such as the installation of a solar system, with money repaid through tax assessments.

Cisco DeVries, president of Renewable Funding, who developed the innovative PACE model while working for the city of Berkeley, was asked about the program.

"There’s been a tremendous national response," with 23 states adopting PACE programs, many state governors behind it and $150 million of Recovery Act money going to the programs, he said.

Despite initial success, the programs are largely suspended now because of concerns from the Federal Housing Finance Agency, which oversees the mortgage enterprises known as Fannie Mae and Freddie Mac. The two entities notified lenders in May that they would refuse loans associated with PACE financing because in most states the energy lien is attached to the property as a senior lien and takes precedence over existing mortgages in the case of default and foreclosure.

Mr. DeVries, who has been traveling frequently to Washington to try to resolve the problem, told the panel audience, "for the moment, we’re in a holding pattern" and directed those concerned to visit the website www.pacenow.org.

"All the resources are there if you want to get involved," he said.

Ms. Johnson, the Energy Department official, said in an interview that she likes the programs but "sees the problem from all sides."

"The good news about the PACE program is it gets at this problem of, how do you monetize long-term savings in order to afford changes up front?" she said, but added, "Are we putting people at risk of foreclosure?" She has no doubt that the programs will continue, however: "I’m confident they’re going to work it out, but I don’t know what the solution is going to be."

Mr. Arfin of SolarCity finds PACE "an interesting solution," he said in an interview. "We hope it gets implemented, but it’s not the only solution. There’s cash, home equity, solar lease, capital leases. We think that over time customers should have a broad choice of how they go solar. The role of the integrator and industry is to offer a menu of choices."

Mr. Arfin created the first leasing program for solar installations.

"If there is more financing that allows people to go solar, it helps to solve the number one issue why people don’t install, which is that big upfront payment," he said.

Upfront Psychology and Lifecycle Cost

The upfront problem isn’t simply whether consumers have the money for an initial investment that can be large. It is also a habit of not thinking beyond the price tag to the cost of a product over its entire life, something Mr. DeVries called "upfront psychology." He explained that when thinking about how to spend their money on, say, an Apple iPhone, most people make a decision based on the price of the device and omit the cost of the minutes and the two-year contract. Consumers remain in this mindset whether it’s phone minutes, electricity, or financing a new car, even if it ends up costing more than if these things were paid for upfront, he said.

Upfront psychology is clearly damaging for consumers. For products like cellphones, the attitude results in increased consumer spending. When long-term energy cost savings are involved, as in the case of solar installations, the attitude is a significant barrier to understanding or believing the economic argument, hurting solar sales and resulting in increased consumer spending over the long run. Developing financing instruments like PACE, leasing and power purchase agreements is one way to tackle the problem. Helping consumers learn how to evaluate the cost, or cost savings of potential purchases, is another.

Solar is not the only industry affected. The upfront problem is shared by the entire clean-technology sector. In Cleantech Open panel discussions on energy efficiency and transportation, this problem and the related problem of quantifying the cost, or cost savings, over the lifetime of a home or vehicle were cited as the biggest barriers to broad adoption.

How can you predict savings when energy and fuel costs vary unpredictably from year to year?

Ms. Johnson of the Energy Department recognizes the problem. With regard to energy efficiency retrofits and PACE programs, she observed in an interview, "How do you monetize savings over the life of a home? I don’t think anyone has figured out how to do that."

Panelist Michael Jackson, senior director at TIAX, a company that seeks to commercialize innovative technology, responded to a question about claims regarding fuel cost savings on electric vehicle websites, saying, "Consumers have to determine the cost for the lifecycle of the vehicle" and figure out "what payback timeline works for them."

He conceded that the math is very complex because of all the variables, which can leave many consumers at a loss for how to decide whether claims from salespeople about solar, wind, energy efficiency or electric cars are accurate.

But however the lifecycle cost is determined, the panelists agreed that disclosure of standardized energy information is key, with a call for energy labels, like those on appliances, for all buildings and vehicles, not just those in the clean-tech sector. Such labels would enable potential solar and electric vehicle consumers to make well-informed purchase decisions.

Pricing Carbon

Underlying any discussion of the cost of energy is carbon, a theme that Ms. Johnson hit hard in her keynote address and a panel discussion. “A price on carbon is critical for moving energy forward,” she declared. “Without it, there will be no incentive to change.”

Dan Adler, President of the California Clean Energy Fund, a nonprofit venture capital fund, disagreed.

"I’ve never met an investor who is putting money behind a near-term carbon price," he remarked. "If you’re an entrepreneur pitching carbon pricing or even carbon accounting, you’re going to have a hard time right now." But he conceded that this was "not to suggest there’s no value there."

Ms. Mitchell of the Kauffman Foundation said there is broad disagreement on the matter in her organization.

SolarCity’s David Arfin was circumspect on the topic.

"Over the long run, I’d like to see carbon taxed. There are a lot of externalities of energy production that are not accounted for," he said. However, it “depends on what the price is and how strong the enforcement mechanisms are."

Can Big Oil Become a Big Ally?

The possible impact of carbon pricing was acknowledged during the day’s discussions, but the impact of large incumbent energy companies, including one whose red, white and blue logo was splashed across the hall, was less often mentioned.

PHOTO CREDIT: ERIN MILNES /
SOLAR HOME & BUSINESS JOURNAL
Robert Hockaday, president of e^Qsolaris,
a solar startup company from Los Alamos,
N.M., shows off two elements of the
company's product at the Cleantech Open.

How does major sponsorship by Chevron, whose revenue primarily comes from fossil-fuel technology, but which also is an important player in the solar industry, fit with Cleantech Open’s goals?

Robert Hockaday, president of e^Qsolaris, a solar startup from Los Alamos, N.M., and a semifinalist in the Cleantech competition this year, said, "We’d love to convert Chevron. They say they want to be an energy company. OK. Fine. We’re waiting for you."

At Cleantech Open, "We see ourselves as a little bit of a Gorbachev organization,” explained Mr. Northen, referring to the former Soviet leader’s policy of engagement with the West. "We need to be working with all the players in the clean-technology economy. And I really mean all the players. Chevron has a clean-tech agenda. They are investing in biofuels. We want to give them a reason to invest more in this space. We want to work with them to make clean tech important to them, to their brand."

Chevron indeed holds Cleantech Open and its achievements in high esteem. In a Feb. 26 post on the website triplepundit.com, Jim Davis, president of Chevron Energy Solutions, wrote, "This competition is a powerful catalyst for the entrepreneur and it has created a model that warrants wider interest." The company fielded two panelists at the conference and had a page in the conference program booklet explaining its support of the organization.

SolarCity’s David Arfin said: "Nobody could have a bigger impact on the renewable energy industry than the traditional energy industry. They can invest or grow it; they can try to squash it. I hope Chevron tries to grow it."