Title: How Solar Energy Became Cheap: A Model For Low-Carbon Innovation
Author: Gregory Nemet
Scope: 3 stars
Readability: 4 stars
My personal rating: 5 stars
See more on my book rating system.
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Topic of Book
Nemet analyzes the history of solar energy to explain why the cost has fallen so greatly.
Photovoltaic solar is an interesting case study for how a new technology can gradually transition from an idea to a mass industry. Nemet’s book shows the great extended time frame, changes of funding sources and shifts in market that are often necessary for a technology to be fully implemented.
- Photovoltaic solar has radically dropped in price, increasingly making it competitive with other sources of energy.
- The PV cell was invented by AT&T Bell Labs in 1954.
- After the energy crisis of the 1970s, the American government played an important role in R&D and public procurement.
- Under the leadership of MITI, Japanese became the dominant manufacturers in the 1980s and 90s. They focused mainly on niche markets where cost and low-performance were not an issue. When Japan passed the first rooftop subsidy program, the consumer market began to expand.
- The German feed-in tariffs of the early 2000s dramatically expanded the scope of the consumer market.
- China became the world’s leading manufacture in the 2000s by radically lowering production costs. In 2013 they also became the largest consumer of PV.
Important Quotes from Book
My approach is to look for successful outcomes that might provide models for early stage technologies to follow.
I thus select the energy technology that has improved the most, solar photovoltaics (PV). PV represents the technology effort that involved not the largest investment but the most dramatic technological outcome, the most learning. It is the technology that most clearly shows what support for innovation can achieve.
The costs of solar PV modules have fallen by more than a factor of 10,000 since they were first commercialized and are now cheaper in sunny places than any other form of electricity. Since its first application—on a satellite—in 1957, PV has always found customers who value it. PV has served a sequence of increasingly large niche markets with decreasing willingness to pay.
Five key countries—the US, Australia, Japan, Germany, and China—made distinct contributions that emerged from each country’s national innovation system.
In searching for successful models of energy innovation to address climate change, one should look first at PV. The cost and performance of PV have improved more than any other energy technology.. It is now astonishingly inexpensive. Not only is PV cheap compared to what it cost only a few years ago, but it is also cheap compared to almost every other electricity generation method. It is likely to get cheaper still.
A megawatt-hour (MWh) of PV electricity in 1957, for its first commercial use, cost about $300,000 in today’s dollars. A megawatt-hour is a month’s worth of electricity for the average US household. Today in a sunny location, that megawatt hour costs only $20. Thus, the cost of that electricity has fallen by four orders of magnitude, a factor of 15,000 cost reduction.
One consequence of the tremendous progress in module costs, is that “soft” costs now dominate the total cost of PV. These soft components involve activities with installing: roofers and electricians; marketing a novel technology; sales, often on a one-roof-at-a-time rate; financing; new business models; refreshing electric utility regulation; policy innovation; and crucially, integration into the surrounding technological system.
Despite the incredible progress in PV, this is no time for solar triumphalism. PV is still only 1–2% of global electricity supply and less than 1% of total final energy.
National innovation systems theory became prominent in the 1990s as a way to explain innovation in an increasingly globalized economy.
The central insight is that, despite the steady increases in international trade, communication, and transportation, we miss important aspects of innovation by looking at it globally as emerging from a single global system. Rather, the country level is a more useful container for geographically bounding analysis of activities. The networks of relationships among firms and individuals are central to how innovation occurs; those relationships are often much stronger within a country rather than between countries. Further, the national container is useful because innovation is conditioned by distinct institutions within them: education systems, industrial relations with the state, science and technology institutions, government policies, cultural traditions, and other national institutions.
Drawing on the theoretical concepts of “National Innovation Systems” and the “Energy Technology Innovation System,” the first question this book asks is: How did solar get cheap? In short: inexpensive solar power is the result of a sequence of disparate activities over the past 70 years that involved strong global links, important local activities, and the participation of multiple governments, firms, and influential individuals. It included both technology-push and demand-pull policy instruments. Diverse national systems of innovation complemented each other, sometimes concurrently but mostly sequentially. Progress was not linear, but rather occurred in fits and starts. Like many other technologies before it, solar’s importance has been over-estimated in the near term and under-estimated in the longer term.
In short, PV improved as the result of:
1. Scientific contributions in the 1800s and early 1900s, in Europe and the US, that provided a fundamental understanding of the ways that light interacts with molecular structures (Chapter 3);
2. A breakthrough at a corporate laboratory in the US in 1954 that made a commercially available PV device (Chapter 3);
3. A major government R&D and public procurement effort in the 1970s in the US (Chapter 4);
4. Japanese electronic conglomerates serving niche markets in the 1980s and in 1994 launching the world’s first major rooftop subsidy program, with a declining rebate schedule (Chapter 5);
5. Germany passing a feed-in tariff in 2000 that quadrupled the market for PV and developing production equipment that automated and scaled PV manufacturing (Chapter 6);
6. Chinese entrepreneurs, trained in Australia, building factories of gigawatt scale in the 2000s and creating the world’s largest market for PV from 2013 onward (Chapter 7); and
7. A cohort of adopters with high willingness to pay, accessing information from neighbors, and installer firms that learned from their installation experience, as well as that of their competitors to lower soft costs (Chapter 8).
No one country did it. There was no dominant strategy. Major players—the US, Japan, and Germany—each relinquished their commanding dominance of the industry at some point, meaning that no country applied persistence for the whole lifecycle of PV development. Expectations about future conditions were crucial to the investments that catalyzed PV’s improvements. But those expectations were unstable due to the boom and bust cycles of enthusiasm that have characterized PV’s evolution. Despite multiple crashes in interest, the emerging PV supply chain never quite died because a progression of niche markets sustained the industry when policy support was lacking. Satellites, offshore oil rigs, telecommunications, consumer electronics, offgrid homes, and green consumers all created demand that was robust to the vagaries of energy policymaking and the volatility of energy markets. PV’s ability to function at a variety of scales—less than a Watt in a calculator to a billion times that size in a utility scale plant—made it suitable in a wide variety of applications. Still niche markets alone were insufficient.
The primary motivation for this book is establishing how PV can serve as a model for other technologies.
The first explanation in tracking the progress in solar is that no single country led its development. Leadership in PV was like a relay race, with each leader passing the torch to another, sometimes involuntarily.
Up until the post-2010 period, PV was always a bit too far away from commercial feasibility to take off. As a result, it is somewhat surprising that PV has not gone extinct, like other technologies that don’t find a market.
The flexibility of solar to function in a wide array of conditions, many that had little to do with the market for bulk electricity, benefited the development of the industry and of the technology. The list of applications for which solar supplied power is lengthy: navigation aids on offshore oil rigs, buoys, lighthouses, telecom repeater stations, satellites, calculators, radios, toys, and off grid houses.
However, these niche markets were important because they created a path. They occurred in succession and generally increased in size and decreased in willingness to pay. One could portray these markets as a demand curve.
Solar was able to serve these niche market opportunities in large part because of its flexible scale: it could be deployed at large scale (100s of MWs), small scale (a wristwatch cell is less than a Watt), and anything in between. Utility scale solar is a billion times bigger than a wristwatch cell. Solar is unique in that.
The disruptive manufacturing hypothesis illustrates the point that much improvement in solar happened outside of R&D funding. R&D was crucial for technical improvements, but it was far from sufficient to take solar from the initial Bell Labs’ device to the massive industry we have today. That, more than anything, is a lesson for other technologies. Perhaps the most compelling depiction of PV’s progress has been the “learning curve.”
One of PV’s most intriguing characteristics is its intrinsic connection to once cutting edge scientific concepts—such as the structure of atoms, the characteristics of light, and their interactions with each other. That connection to advanced science makes it similar to nuclear power. The early activity in solar PV was closely tied to basic science and fundamental understanding, with barely any consideration about its potential applications. Progress in this early period was extremely slow. It took 115 years from Becquerel’s discovery of the photoelectric effect in 1839 until Bell Labs’ demonstration of the first efficient solar cell in 1954. For the first half of that period the early tinkerers were trying to observe what they were seeing and then to replicate and enhance it. While the observations themselves were important, none made any serious progress in trying to understand these observations until Philip Lenard in the 1890s. But it was the giant of 20th-century science, Albert Einstein, who provided a full explanation of the photoelectric effect in 1905, for which he won the Nobel Prize in 1921. Einstein’s work explained the phenomenon which had been observed for more than sixty years. He described light as packets of waves, or photons, which release electrons in a photosensitive material when those photons exceed a threshold energy corresponding to a material’s band-gap. That understanding opened a vein of research for other scientists, like Millikan, and led to systematic development of the technology in the 1930s, first by Siemens and later by Bell Labs. Bell Labs’ breakthrough in 1954 launched the PV industry and Sputnik in 1957 spurred US entry into the space race. The most enthusiastic early adopter was the US Defense department for its space program in the 1950s and 60s. The other significant early adopters were international oil companies that used PV to light offshore oil rigs. An array of niche markets emerged, albeit all of modest size. By the early 1970s solar had been established as a reliable technology and was positioned for a more significant role when the first oil crisis hit in 1973.
The 1970s transformed PV technology and the solar industry by making energy issues a top social priority for nearly a decade. Cell efficiencies tripled, costs fell by a factor of five, innovative policies were adopted, and thousands of people entered the field. This burst of activity was concentrated in the US, which continued its role as the global leader in PV from the 1940s until the mid-1980s when the US federal government purposively dropped PV as a priority technology and leadership shifted to other countries.
Key US institutions were established during this period including the Department of Energy (DOE) and the Solar Energy Research Institute (SERI), which was later renamed the National Renewable Energy Laboratory (NREL).
The Block Buy was a public procurement program, in which ERDA agreed to purchase pre-specified amounts of PV from private firms… Over the ten years of the program, ERDA bought a little over 400 kW of PV modules from a dozen or so manufacturers. The program accounted for 17% of global PV purchasers from 1976 to 1981… The buys were staged in a series of five “blocks,” with increasingly demanding specifications for the manufacturers.
Japan became a global leader in PV by putting in place all the key innovation components needed to develop a promising technology, commercialize it, create a market for it, and eventually dominate world production of it.
MITI created a rooftop subsidy program with a variety of innovative features: up-front rebates, a declining rebate schedule over ten years, and complementary policies such as net metering. During that program from 1994 to 2005 over 200,000 households installed PV systems and Japanese PV producers scaled up to meet that demand. The leading Japanese firm Sharp increased its production scale by a factor of 200 and by the mid-2000s attained the highest market share any company has had since the early days of the industry. Soon after that, Sharp’s growth stalled. German and later Chinese producers were able to produce at much higher volumes. Japan’s relinquishing its leadership on solar is surprising given its long history, the level of public commitment, and the deep engagement by firms. But it is not unique; the US and Germany also gave up what seemed like insurmountable leadership positions. Japan lost its lead due to its inability to anticipate the emergence of the German market, its focus on high quality rather than low cost production, a reluctance to enter into long-term contracts for silicon feedstock, the reallocation of production investment to thin film PV, and relinquishing technology development leadership to equipment suppliers.
Japan’s national innovation system is distinct in the large role for the state (Johnson, 1982). Government activities were more important for Japan than for any other PV country, even compared to China. The Japanese government not only funded R&D but determined much of the direction of private sector R&D. Japanese R&D rose just as US R&D was severely cut under Reagan… At the center of the Japanese developmental state (Johnson, 1982) was the Ministry of International Trade and Industry (MITI). MITI’s distinct approach was to get involved in an emerging technology area from its beginning (Freeman, 1987). This early entry was different from the Chinese central government approach, which is to provide support once companies become internationally competitive.
Japan’s national innovation system for PV is also distinct in that it involved large multinational conglomerates with a very minor role for start-up businesses.
Perhaps the biggest contribution that Japanese made in policy was by combining technology-push and demand-pull (Nemet, 2009). While technology-push in the form of R&D had been strong and consistent since the 1974 Sunshine Project, in the 1990s Japan got serious on the demand side by subsidizing installations and supporting that by allowing net metering. They initiated a virtuous cycle of technology- push and demand-pull (Watanabe et al., 2000), which Germany subsequently imitated. This stimulated the world’s first large-scale manufacturing of PV.
Japan industrialized PV production with a sequence of R&D, niche markets, creation of markets, and by enabling scale up. Japanese solar firms became the largest in the world.. But Japan, and its top firm Sharp, lost its lead after 2005. Several explanations played a role: Japan did not anticipate that Germany’s market would grow so quickly; the labor costs in Japan made it uncompetitive; they excessively emphasized quality; they had a slow response to the silicon price spike; and they over-invested in thin film.
MITI launched the rooftop subsidy program in 1994. While the central aspect of the program was a rebate for a portion of the cost of installations, it included a set of complementary policies. It simplified permitting procedures for installations, it provided technical guidelines for connecting systems to the grid, and supported the net metering scheme that the utilities had voluntarily adopted. The rebate scheme itself originally provided adopters of residential PV with a cash grant of 50% of the full cost of installing a system, including hardware, installation, wiring, etc. Consistent with the notion that the learning curve would lower costs, the scheme also specified that the rebates would decline over time and eventually end after ten years. This notion of declining rebates was perhaps Japan’s biggest policy innovation and would be replicated around the world.
By 2000, Japan was the largest PV market in the world. It became obvious, perhaps for the first time, that firms could make money in solar in the near term. Installations grew from 539 in 1994 to 15,879 in 2000 to 54,475 in 2004.
Over 200,000 systems and 0.8 GW of capacity were installed over the 11 years of the program, drawing on a total budget of $1.1 billion. The program provided real evidence for the existence of a PV learning curve. Prices of installed systems declined by more than a factor of three over the course of the program.
Thus, the most dramatic outcome was the emergence of a serious PV industry in Japan. As Figure 5.3 shows, the global PV market went from one led by niche applications before the rooftop program to one where rooftop applications dominated. With the Japanese rooftop program, the most important market for PV was no longer niche applications but consumer electricity; it was now competing directly with grid electricity.
From 2004 onwards, almost all of the demand was in Europe as Japan ended its subsidy program in 2005. Germany contributed to the development of inexpensive PV by creating a far bigger market opportunity than had ever existed.. , a policy window opened when the Green Party became a ruling partner in 1998 leading the German Parliament to pass the Renewable Energy Law (Erneuerbare- Energien-Gesetz, or EEG in German) in March of 2000.
From 2004 to 2012, the EEG supported the adoption of over 30 gigawatts of PV in Germany with a subsidy program that totaled over 200 billion euros. The EEG transformed the world PV market, accounting for half of global PV installations in the peak period of the program, 2004 to 2010, during which the world market grew by a factor of thirty.
The EEG catalyzed a global process of learning by doing and created opportunities for massive economies of scale. For the first time, equipment providers could design machines specifically for PV applications rather than repurposing them from the semi-conductor industry. This allowed PV producers to automate their production processes. The size of the new market opportunity interested Wall Street investors and venture capitalists. It enabled PV startups to hold initial public offerings, raise hundreds of millions of dollars, and invest in scaling up production to levels that were orders of magnitude larger than had been seen before. All of this reduced the costs of PV, which in turn expanded demand as lower prices attracted new adopters, which enabled further scale. From the EEG’s inception in 2000 to its decline in 2012, prices of PV modules dropped to 16% of their pre-EEG level.
German PV producers surpassed Japanese producers and became the largest in the world.
More broadly, the EEG showed the world that PV was a serious technology that could be scaled up, developed as an industrial production process, and integrated into electric grids in large amounts.
Eventually though, the EEG faced backlash. A victim of its success, the EEG became a high-profile target and its ramp down began soon after the 2004 revision.
By 2013, those who opposed PV in Germany could declare victory. The German PV market after growing by more than 50% per year from 2004, stalled in 2011, growing at only 1% and then 2% in 2012. This sudden end to rapid growth shocked PV producers but particularly German ones because they were more exposed to their domestic market. Q-Cells, Sunways, Schott Solar, all folded within a year. Starting in 2013, the German PV market got smaller each year and continued to shrink until 2017.
Albert Einstein, Bell Labs, the US Block Buy, Japanese niche markets, and the German feed-in tariff (FiT) all played key roles in developing PV. But activities in China between 2000 and 2016 contributed most directly to cheap PV. During that period, Chinese solar companies scaled up production by a factor of 500. By 2007, China produced more PV than any other country and by 2013 it was installing more PV than any other country. By 2017, China produced 70% of the world’s PV.
To understand the distinct path that China pursued in this period, I focus on one pioneering company, Suntech, founded largely by former members of Green’s team. Almost all of those founders were Australian citizens, some by birth and others who in becoming naturalized Australian citizens had had to renounce their Chinese citizenship. Suntech was the seed from which the Chinese PV industry grew, flourished, and eventually dominated. It established a successful model that others followed. It catalyzed cities’ interest in PV. It created a domestic Chinese supply chain. It trained a local skilled labor force. It partnered with foreign firms to export to foreign markets. It accessed finance from US capital markets. It established a profitable business model. Suntech demonstrates the role of entrepreneurship, which is a driving force behind innovation in China today.
The Chinese are better at building quickly than anyone. The US, Japan, and Germany were simply not fast enough to recognize the market opportunity, much less meet it. One of the distinct characteristics of firms in China is their “organizational capability”— their competence in hiring quickly, producing quickly, and improving quickly. These qualities were exactly what the German PV market required.
Low labor costs gave China an international comparative advantage in the key scale up period of 2000–07. However, this advantage was short-lived due to the swift proliferation of automation. The labor share became too small to provide much advantage. To remain competitive, China relied on other advantages such as speed, flexibility, and rapid exchange of information among supply chain partners. At the same time that automation was increasing, costs were plummeting. As a result, experience outside of the semi-conductor industry became increasingly relevant. Producing textiles, shoes, and handbags provided know-how about producing at gigantic scale in a commodity market where margins were thin due to fierce competition. China had more experience with those activities than any other PV producer.
As the Chinese industry grew, it became extremely competitive. The global market share of the largest company declined and never exceeded 10% .
Another aspect of China’s national innovation system is its openness to knowledge flows from abroad, a distinct contrast to the national innovation system of Japan, which was much more closed. Expertise from individuals trained in Australia was central to the establishment of the early PV industry in China. One firm brought both of these attributes—organizational capacity and openness to knowledge— together. The seeds of the China PV industry we have today were almost completely attributable to the founding and growth of Suntech.
Speed” has been one of the key factors in China’s success. There are so many entrepreneurs who are quick to spot an opportunity and take advantage of it. Doing a quick and dirty low-cost version has been a hallmark of the beginnings of many firms in China that later grew enormously.
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- “Natural Gas: Fuel for the 21st Century” by Vaclav Smil