Does the solar industry need a Salesforce.com?

Getting electricity from the sun has clear environmental benefits and can make sense economically. But to install solar panels, customers and installers face big up-front costs and a maze of government incentive programs.

Millions of dollars are being poured into making cells better at converting sunlight to electricity, but the industry's future isn't riding on some radical technical advance, Shah argues. Instead, what's needed is the right business model to make it work cost effectively and at scale.

Much like the way companies purchase software as a service from hosted application providers like Salesforce.com, SunEdison and other companies offer corporate customers the ability to buy electricity, rather than solar panels.

The panels sit on the roof of an office park building or retail outlet, but the panels belong to and are maintained by someone else.

Shah, who was on a solar power panel at the Massachusetts Institute of Technology's 're="" the="" reason="" why="" we="" made="" our="" numbers="" this="" quarter."="" <="" p="">

One of the things you said at the MIT conference is that innovation in financing is equally as important as technical innovation in the solar industry. What needs to be done there?
Shah: What Sun Edison has been able to do to date (is like) the mortgage industry, where people (don't have) to pay cash up front for a home (and instead) get a mortgage. That (mortgage industry) innovation occurred probably in the '30s or '40s. The next stage is to create what the mortgage industry has already done, which is to create a Fannie Mae to reduce interest rates for everybody and spread risk. Because right now SunEdison only works with the best, credit-grade customers. So we work with folks that have investment-grade credit, large companies, municipalities, state governments.

If you were going to apply this model to the residential level, would the risk and the paperwork would be overwhelming? Is that why you're sticking to the corporate customers?
Shah: Yeah, there are two reasons for us right now. Today the customers we can finance successfully are large, credit-grade companies. And in residential, you're right, for us to do a 10-megawatt portfolio with residential, it would be 3,000 applications to process, which is a lot of applications to process.

You started the company four years ago. It begs the question why you would need to start a new company rather than have an established manufacturer or installer offer financing services?
Shah: Solar is really complex, and what we're trying to do is simplify it. From a manufacturer's perspective, they are really focused on doing an amazing job of providing a reliable product, something that is going to last for 40 years. (We deal with) all the other pieces that make solar complex--navigating the local building codes, working with a utility to get permission to connect the system into the grid, working with the state of California and other places to get all the rebate forms filled out, doing three-way negotiations with our contracts. Our contracts not only had to be suitable for the customer but also for the investor that is going to be financing the project.

All that, I think, takes a dedicated focus to reduce the complexity of solar. And I think for better or for worse, solar panels are not wind turbines or railcars where it's just: put "A" into "B" and "B" into "C." It's a real chemical process, and the manufacturers just have their hands full trying to make sure that they get their product right.

So the analogy of the Salesforce.com of the solar industry, do you think it actually fits?
Shah: It's definitely very applicable in some ways. What Salesforce.com has done--we, by the way, use Salesforce.com ourselves--is make a technology accessible to small businesses.

But absolutely what we are trying to do is make solar accessible to customers like Staples and Whole Foods and others. You can imagine that a company like Staples, which continues to grow by probably hundreds of stores a year, spending millions of dollars on solar doesn't seem to be a great investment for their shareholders; whereas we have a lot of project finance people lining up to finance solar projects.

Do you think that utilities will get into solar power in a big way?
Shah: Today the utility industry cannot utilize the federal investment tax credit. So there is a built-in piece there where it really is more cost effective for the ratepayers for a utility to partner with the company like SunEdison financially. But we continue to work hard to partner with utilities today to try to show them that our services can really be used as a tool to service their customers. We have a large job with Xcel Energy to build a plant in Colorado. And that really came out of their desire, spurred by the ratepayers demanding it, to diversify their portfolio. For one of these utilities, they are seeing that natural gas and coal are experiencing price volatility. Wind and solar and a lot of other alternative energy technologies tend to be a lot less volatile.

At the MIT energy conference, there was this discussion of subsidies and when solar power will reach grid parity and be cost competitive with fossil fuel power generation. You seem to be saying that grid parity is something that the industry can do in a few years.
Shah: Yeah, my point at the conference, though, is that we will achieve creative parity in our lifetime. But the point I was really trying to make is, what do we really need to do to prepare for grid parity? Because there is this battle between the "feed-in" tariff-type subsidies in Europe and the rebate and incentive-type subsidies in the U.S. What the U.S. is focused on, which I think is the right thing to do, is on net metering, interconnection standards--which is the permission that we need to get from a utility--and standards more broadly. How do all the inverters work together? How to get panels to be more standardized so that we can interchange solar panels depending on the situation?

Because in a place like Germany, (a feed-in tariff means that) all the power the commercial customer has goes directly to the utility, where the utility pays an above-market cost for the power. But the commercial entity doesn't get any price predictability from solar. The commercial entity still buys the power based on what the retail tariff is in Germany. Whereas in the U.S., our customers are getting price predictability. And as the prices of systems come down, the subsidies that have to get paid by the local, state or even federal incentives would go down.

But in any case the customers are being introduced to a business model that will outlast solar subsidies when and if that happens. Our model will survive even after we don't need subsidies.

People keep talking about how a technology breakthrough would leapfrog the industry. But my impression is that that's not on the near-term horizon. Do you think that the technology is there or that there is a long way to go?
Shah: There will always be small technology breakthroughs in standards, improvements in manufacturing process, etc. Over the last 10 years the cost of manufacturing solar panels, minus the silicon cost, has come down about 5 percent a year. That cost has come really simply through the learning curve. The learning curve theory is that for every cumulative doubling of manufacturing experience, you get about an 18 percent cost reduction. So simply through the growth of the solar market over the last 10 years, we've achieved a lot of cost savings. My point at the MIT conference is that we are really not counting on a technology breakthrough. The growth of the market alone is causing cost reductions simply through economies of scale.

I see folks slip into sometimes (saying that) the solar industry needs a breakthrough to get to the next level. And my response is, no, the solar industry is already on the glide path to making it to the next level. We just need to continue the growth we've experienced of the last 5 to 10 years.

Are you concerned that the solar industry can maintain the level of rapid growth that it's going at now?
Shah: We've been able to sustain it over the last 5 to 10 years. And solar is a very small part of the energy mix today, so we're not going to turn the entire energy industry upside down tomorrow if we continue to grow at that pace. We produce a small percentage (of electricity) today--I think globally it's less than 3 gigawatts a year. But we definitely have a lot more room to grow before we upset the entire energy balance.