SMUD PV PROGRAM REVIEW
SMUD’S PV PROGRAM:
Past, Present, and Future
FINAL REPORT
December 30, 2000
A Report to the
Sacramento Municipal Utility District
Prepared by:
Donald W. Aitken, Ph.D.
Donald Aitken Associates
Warren Schirtzinger
High Tech Strategies, Inc.
Steven Strong
Solar Design Associates
Sponsored by the
Sacramento Municipal Utility District
SMUD Consulting Services Contract No. I-143
SMUD Project Manager
Donald E. Osborn
EXECUTIVE SUMMARY
This SMUD PV Program Review looks at elements of SMUD’s PV Program
success to date, assesses what elements may continue to work in the future, and suggests
ways in which SMUD’s program might be progressively reoriented to place it in a
position of long term sustainability while also becoming internally self-supporting. This
study was initiated by the Solar Program within SMUD, under the direction of Donald
Osborn.
Section 1:
Overview of SMUD’s PV Program Technology Decisions and
Experience
From the beginning SMUD elected not to choose a single type of PV application,
but rather to gain both technical and economic experience from multiple applications.
Early on, however, they made a decision to go for applications that would allow them to
purchase PV modules by bid in substantial quantities, to progressively reduce the cost of
their PV along a “Sustained Orderly Development and Commercialization” (SODC) path.
In this regard, SMUD did not place much emphasis on the “high value”, but small and
labor-intensive, “niche” markets, preferring to reduce market costs for the majority of its
customers, rather than simply to exploit applications that are already cost-effective within
present market costs.
Distribution of SMUD's PV System - 1992 - 1999
Neighbor &
Solarports
28%
Substation PV
27%
Partnerships
Comm Solar
5%
PV Pioneers
40%
Figure ES-1
i
SMUD put more effort into their residential solar applications than into any other
single program area. During the first years of the “PV Pioneer Program” the homeowner
simply lent his roof—and paid a small surcharge to SMUD for that favor—with the PV
connected into the utility side of the meter, to give SMUD experience in the application
of distributed PV resources within its system, and to gain the confidence of SMUD’s
customers for having PV on their homes. This then evolved into their “PV Pioneer II”
program, in which the homeowners pay a subsidized amount for their systems, but claim
complete ownership of them and gain the benefit of the power into their side of the meter,
in a “net metered” configuration with the grid. The residual subsidized cost to the
customer is low enough to justify the purchase of the PV system on a 30-mortgage with
normal bank financing.
SMUD managed to support their PV Program with a combination of fees from
Pioneer I customers, fees charged for their services, and a portion of the “Public Goods
Surcharge” that they imposed upon themselves, with total residual PV program costs
equaling about 0.6% of gross revenues. The Solar Program was not helped internally in
this matter by the failure of other operations within SMUD to ascribe real value to peakload reduction and system operation benefits from the PV installed in the district, making
the SMUD PV program actually appear to be more costly for SMUD than it is.
Table ES-1: Utility Benefits Summarized
Benefits
Description
Service Revenues
(Economic Development)
Net service revenues from a new local PV manufacturing plant
(result of economic development efforts)
Externalities
Value of reduced fossil emissions
Fuel Price Risk Mitigation
Value of reducing risk from uncertain gas price projections
Green Pricing
Voluntary monthly contributions from PV Pioneers
Losses
Electric loss reduction (accounted for in each benefit)
Distribution
Distribution capacity investment deferral
Sub-Transmission
Sub-Transmission capacity investment deferral
Bulk-Transmission
Transmission capacity investment deferral
Capacity
Avoided marginal cost of systemwide generation capacity
Energy
Avoided marginal cost of systemwide energy production
Reduced Peak Time Purchases
Avoided peak pricing on energy purchases
ii
SMUD backed up their PV Program with strong technical support, quality control
and quality assurance, and warranty backing, resulting in excellent system performance
with high availability and reliability.
Section 1 Recommendations
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The authors of this Review believe that SMUD’s emphasis on residential
rooftop applications of PV should be continued, as this will be the largest,
most stable market within its District, and allows for cost-reducing
standardization.
It is important, as future phases of the program take form, that SMUD
continues to maintain contractual flexibility in terms of options, so that the
program’s success is not dependent on any single supplier.
SMUD should work with their chosen suppliers to identify ways to mitigate
the area-related penalty from low-efficiency PV at both the module and
system level.
SMUD should work with their chosen contractors and suppliers to identify
and/or develop cost-effective methods to retrofit residential rooftop systems
on non-composition roofs.
SMUD should work with their chosen suppliers to identify ways to expand the
options for PV roof-integration in new residential and light commercial
constructions, as well as for roof replacements.
SMUD should work with their chosen suppliers to develop PV-friendly design
and construction approaches that make future retrofits easier.
SMUD should work with their chosen suppliers to expand the range of costcompetitive hardware options for BIPV to commercial buildings.
SMUD should investigate the prospect of offering residential PV Pioneer II
customers a battery bank option capable of carrying some portion of the house
loads through a “typical” power outage, to tap into the market segment where
reliability of electrical service is an important feature.
SMUD needs to develop a closer integration of their energy efficiency and
solar programs to realize the benefits of both as part of an overall approach.
As solar domestic water heating (SDWH) can return three to four times the
energy savings per unit roof area as PV, the SDWH program should be
vigorously pursued and integrated with the efficiency and solar programs.
As the popularity of the PV Pioneer II systems continues to grow, SMUD
should begin to develop PV Pioneer II systems for commercial buildings.
SMUD should concentrate on their own service territory first and foremost, as
this provides the greatest opportunity for achieving their program goals.
SMUD absolutely must give internal recognition for actual value added to
SMUD operations and cost reductions for operations and infrastructure by the
PV systems installed in its District.
In the promotion of the PV Pioneer II options, SMUD should emphasize the
highly valued but intangible benefits of owning a PV system, and capitalize
on the security of having it backed by SMUD—a known and trusted partner in
the community which will be there for the long term.
iii
Section 2:
SMUD’s PV Market Development and its Relationship to Other
Utility Programs
The involvement of SMUD in photovoltaic applications began seriously with their
installation in 1984 of their first 1MW PV powerplant, and they have not looked back.
SMUD’s goal is to obtain half of its energy from energy efficiency, existing hydroelectric
plants, and renewable energy resources, but SMUD has also determined that the SMUD
Solar Program is a business development and commercialization activity.
Early on, SMUD decided to “force” the cost-reducing benefits of “Sustained
Orderly Development and Commercialization” (SODC) of PV by taking advantage of the
opportunity that contracts for significant amounts (megawatts) of PV would provide.
This has resulted in a systematic decrease of costs for SMUD and its customers.
Year
1993
1994
1995
1996
1997
1998
1999
2000*
2001*
2002*
2003*
Table ES-2: Cost Decreases for PV Pioneer Installations
System Cost
SMUD Program
Total Installed
(turn-key)
Cost
Cost
$7.70
$1.08
$8.78
$6.23
$0.90
$7.13
$5.98
$0.89
$6.87
$5.36
$0.85
$6.21
$4.75
$0.59
$5.34
$4.25
$0.82
$5.07
$3.75
$0.75
$4.50
$3.35
$0.65
$4.00
$2.80
$0.62
$3.42
$2.69
$0.49
$3.18
$2.59
$0.39
$2.98
Energy Cost
30 yr, ¢/kWh
25 - 26¢
20 - 21¢
19 - 20¢
17 - 18¢
15 - 16¢
14 - 15¢
13 - 14¢
11 - 12¢
10 - 11¢
9 - 10¢
8 - 9¢
It was also important for SMUD to contribute to the larger economic development
goals of the City of Sacramento. A long-term contract with EPV for the manufacture of
PV within the Sacramento City limits, as well as for Trace inverters to be assembled
within Sacramento, bring significant additional economic benefits to the City.
SMUD participates in the “Utility Photovoltaic Group” (UPVG), an organization of
over 100 utilities with some interest in the development and application of PV. While it
might then be expected that the success of SMUD’s large effort in PV applications would
lead to a number of replications, this has not turned out to be the case. Only two
municipal utilities have renewable programs with elements and goals that reflect portions
of SMUD’s, the Los Angeles Department of Water and Power (LADWP) and Austin
Energy. The LADWP program stands alone in its goals for the application of PV, but has
slipped in the last couple of years in getting its ambitious program launched full-scale.
Investor-owned utilities are still driven by short-term price motives, and are only engaged
in PV applications either as part of their “green” programs, financed by surcharges, or in
response to governmental mandates, such as renewable portfolio standards (required
iv
percentage increases over time for renewable energy applications). SMUD, therefore,
continues to pioneer its integrated, large-scale PV program and thereby to provide
valuable potential experience for other, later followers.
SMUD has the opportunity within its own District, provided it carefully targets its
evolving customer segments (see Section 3), to maintain a stable PV program for many
years to come. The ability of SMUD to remain organized as a “vertically integrated”
company, whereas the investor-owned utilities are being disaggregated into multiple
entities, gives SMUD a uniquely valuable framework for realizing the benefits of PV
within its various operations, all under one financial accounting system. As noted earlier
in this Executive Summary, however, SMUD fails to capitalize on quantifying and
ascribing these benefits at present.
Table ES-3: Future Potential MW of PV Pioneer Installations for SMUD
Distribution Planning
Area
Potential in
1996 (MW)
Potential in
2000 (MW)
Potential in
2005 (MW)
AFB
<1
<1
<2
Antelope
13
14
15
Carmichael / Citrus Hts
147
158
174
Downtown
6
6
7
Elk Grove / Laguna
37
40
44
Folsom
12
13
14
Galt
13
14
15
Industrial Area
6
6
7
N Natomas
4
4
5
Other Area
31
33
37
Pocket
15
16
18
Rancho Cordova
31
33
37
Rancho Murieta
3
3
4
S Natomas / Elverta
66
71
78
TOTAL
385
412
457
SMUD has developed base of “PV Partnerships” with entities outside of its
District, expanding its capabilities to aid other utilities and agencies. SMUD is also
planning to exploit the potential 22.5MW/year peak load reduction that could result from
marrying new residential construction built according to aggressive (but affordable)
efficiency standards with rooftop PV systems.
v
Section 2 Recommendations
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Section 3:
SMUD should continue to seek to make the PV program self-supporting
within SMUD—indeed, possibly an internal “profit” center—so that SMUD’s
public goods funds can be allocated to other socially important needs (e.g.
low-income, efficiency, or RD&D).
SMUD should nevertheless continue subsidies at a modest level for the PV
program, even as it becomes essentially self-supporting, to continue to
accelerate the accrual of benefits.
SMUD needs to continue to obtain PV systems at bulk, multi-year prices, and
to pass the savings on to their customers, to provide incentives to a long-term
market in their District.
SMUD should more vigorously identify and exploit other “niche” markets for
PV in its District, but not let this drain attention or resources from the primary
large-volume installation programs, e.g. BIPV.
SMUD should continue and expand their “PV Partnership Program”, with
“profits” going to defray some PV program and personnel costs, but not let
this drain attention or resources from the primary large-volume installation
programs within their District.
SMUD should continue to develop their PV-in-new-construction program, in
conjunction with their own architectural department, and to strive for the goal
of “zero net peak demand” new houses, as their District customer-base
expands.
SMUD should continue to collaborate actively with other utilities; local, state
and federal agencies; and other stakeholders, to continue to facilitate the
application of PV and the reduction of costs.
A Blueprint for Commercialization
SMUD demonstrates some, but certainly not all, of the elements of two widely
accepted models of market development, the Technology Adoption Lifecycle, and the
Principle of Disruptive Innovation. The first is a model that describes a market’s
acceptance of a new technology in terms of the types of consumers it attracts throughout
its useful life. The second model provides a framework for commercializing new
products whose performance is not as well developed as established products along some
dimension that mainstream customers have historically valued.
The strategies historically employed to spur expansion of the PV market are almost
always product oriented. They are typically based on the progressive lowering of prices
through economies of mass production, combined with subsidized “buy-down” programs
for residential and small business users. Lowering “cost per watt” is seen as the key to
unlocking a vast potential market for photovoltaics. It is clear that SMUD’s “Sustained
Orderly Development and Commercialization” (SODC) emphasis reflects SMUD’s early
vi
adoption of this strategy, but SMUD’s total PV purchases are still a small percentage of
national PV sales, suggesting that SMUD should continue to focus the benefits of
lowered costs on its own customers.
34%
34%
13.5%
16%
2.5%
Innovators
Early
Adopters
Early
Majority
Late
Majority
Laggards
Figure ES-2: The Technology Adoption Lifecycle indicates the sequence in which buyers enter the market
and adopt a new product or innovation. The percentage of each buyer type is also represented
Low price and ease of implementation, however, do not exclusively drive market
transformation. People must want to buy what is being offered. And motivating people
to want something—especially if it is technical in nature—requires the influence or
involvement of preceding groups of people in the marketplace. It is also important to
realize that there is no guarantee solar power will automatically become widely adopted
when it costs approximately the same, or even somewhat less that conventional sources
of electricity. Many other factors influence market adoption.
In particular, based on a sampling of telephone interviews, it appears that the value
of PV equipment to Pioneer Program participants is much different from the traditional
benefits associated with solar power, with people mentioning roof protection or interior
heat reduction (shade) rather than the more expected environmental or emissionreduction benefits. It is also clear that the expansion of the PV program in Sacramento is
not following the standard technology adoption sequence (innovators, early adopters,
early majority, and so on, as shown in Fig. ES-2 above). And nearly all respondent said
they would not participate in the PV Pioneer Program if it were not offered by the electric
utility.
Section 3 Recommendations
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SMUD needs to put more emphasis on understanding where SMUD’s PV
program is within the technology adoption lifecycle.
SMUD needs to rethink the target market as their PV Program develops, to
pay close attention to the differences in target groups, and to readjust the
description of the target market.
vii
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Each target market needs to be clearly identified and profiled, as well as
tracked as that profile changes over time.
SMUD needs to develop a testimonial program where early users discuss and
promote their experience with PV to the appropriate audience.
SMUD needs to promote more of the intangible benefits of PV using
communications techniques that are acceptable to the type of customer being
targeted.
SMUD needs to keep an eye out for unconventional applications that exploit
PV’s limitations.
SMUD needs to determine and clarify what makes the product “complete” in
the eyes of the target customer.
SMUD needs to continue to build a customer-oriented channel of distribution
so that customers are comfortable making the PV purchase.
If SMUD were to follow the relevant guidelines offered by the Technology
Adoption Lifecycle and the Principle of Disruptive Innovation, several
fundamental practices would emerge:
1. SMUD would focus on serving specific groups of customers in
sequence, one group at a time. This is often called target marketing.
2. A new emphasis would be placed on discovering the psychographic
and value profiles of potential customers.
3. SMUD would continue to build the organization needed to install and
service PV systems for customers. As a utility SMUD lowers risk for
conservative customers and therefore accelerates market
transformation.
4. SMUD would tailor their promotional activities to fit the preferences
of their target market.
viii
CONTENTS
INTRODUCTION………………………………………………………………..1
1. OVERVIEW OF SMUD’S PV PROGRAM TECHNOLOGY DECISIONS
AND EXPERIENCE………………………………………………………… 3
1.1 Introduction……………………………………………………………….. 3
1.2 PV Application Assessment………………………………………………. 3
1.2.1 Applications Selected……………………………………………...3
1.2.2 Niche Markets…………………………………………………….. 8
1.2.3 Process and Suitability of Selection………………………………. 8
1.3 Ascribing an Appropriate Market Value to PV Generation……………...10
1.4 Assessment of Program Implementation………………………………... 13
1.4.1 Contractor Selection and Management………………………….. 13
1.4.2 Technical Support and Warranties………………………………. 14
1.4.3 System Performance/Availability……………………………….. 15
1.4.4 Potential Technical Application Evolution of the
SMUD PV Program…………………………………………. 15
1.5 Summary of Technical Approach……………………………………….. 17
1.5.1 How is the program doing relative to its goals?………………… 17
1.5.2 Recommendations for the Future……………………………….. 17
2. SMUD’S PV MARKET DEVELOPMENT AND ITS RELATIONSHIP
TO OTHER UTILITY PROGRAMS…………………………………….. 19
2.1 Introduction……………………………………………………………… 19
2.2 Overview of SMUD’s Market Development Philosophy……………….. 19
2.3 Evidence for the Emulation of the SMUD Model by Other Utilities…… 23
2.3.1 Lessons Learned from Comparing the LADWP Program
To SMUD’s………………………………………………….. 24
2.3.2 Some Observations on Other Utility PV Programs……………... 26
2.3.2.1 Commonwealth Edison, the City of Chicago, and
the SPIRE Corporation……………………………… 26
2.3.2.2 Idaho Power………………………………………………27
2.3.2.3 Tucson Electric and Global Solar………………………...27
2.3.2.4 Austin Energy…………………………………………… 28
2.3.3 Conclusion from These Other Utility Experiences……………… 28
2.4 Marketing Challenges Facing SMUD…………………………………… 29
2.5 Trends in Emerging Utility Market Structures…………………………...31
2.6 Additional Market Potential for SMUD’s PV Program…………………. 33
2.7 Conclusions……………………………………………………………… 36
ix
3. A BLUEPRINT FOR COMMERCIALIZATION………………………. 38
3.1 Introduction……………………………………………………………… 38
3.2 Definitions and Assumptions……………………………………………. 38
3.3 New Business Fundamentals……………………………………………. 38
3.4 Overview of Commercial/Market Adoption Models……………………. 39
3.5 Historical Perspective: Sustained Orderly Development and
Commercialization (SODC)………………………………………….41
3.6 Comparing SMUD With Commercial Market Development…………… 42
3.7 The Delivered Value of PV………………………………………………43
3.8 Migrating Toward a Commercial Enterprise……………………………. 44
3.9 Summary………………………………………………………………… 46
Appendix: Psychographic Profiles of Each Buyer Type in the
Adoption process………………………………………...
48
FIGURES
Figure 1: The Distribution of SMUD’ PV System Applications……………….. 4
Figure 2: Utility Benefits of Tracking & Fixed PV in the SMUD System
At Distribution Voltages………………………………………… 10
Figure 3: System Load and PV Output Profiles on Peak Day, July 14, 1994…. 12
Figure 4: Cost of PV vs. Year, “Business as Usual” Compared to
“SMUD With SODC”………………………………………………..21
Figure 5: Direct and Indirect Effects of SMUD’s PV Purchase Commitment…22
Figure 6: Surveyed Market Potential for PV Pioneer II PV Installations……... 30
Figure 7: The Technology Adoption Lifecycle………………………………... 40
Figure 8: The Shift From Customer Tangibles to Intangibles…………………. 44
TABLES
Table 1:
Table 2:
Table 3:
Table 4:
Table 5:
Summary of SMUD PV Installations through 1999………………….. 5
Cost Decreases for PV Pioneer Installations……………… 13, and 21
Future Potential MW of PV Pioneer Installations for SMUD………. 31
PV Pioneer II: Estimated Unit Prices………………………………..32
SMUD PV Partnerships 1997 Through 1999………………………...34
x
INTRODUCTION
The testimonials that have come and continue to come to the Sacramento Municipal
Utility District (SMUD) regarding their program in the application of photovoltaic power
and their contribution to the national effort in promoting and accelerating PV markets are
now legion. We share just three of those here, to set the stage for our own work in this
Report.
First, from the Natural Resources Defense Council, in their “Review for NRDC of
Sacramento Municipal Utility District Public Benefits Programs”1:
Overall, SMUD is one of the most innovative, aggressive, and successful utilities
anywhere in promoting energy efficiency and renewable energy. SMUD has
developed an organizational culture that has integrated energy efficiency and
renewables as core values and keys to its future role, and has cultivated a customer
base that understands, supports, and responds to these values.”
Second, a testimonial from one of the authors of this report (DA) that is often
quoted in SMUD public presentations2:
It is critically important to note that SMUD’s rapidly reducing costs are the result
of the utility’s decision to be a substantial and consistent player in the PV market,
year after year. This has been shown to be the key to accomplishing the economic
benefits of “Sustained Orderly Development” of the solar electric utilities.
And third, a quote from a private memorandum to the authors of this report from a
very well known management consultant with special expertise in solar energy3:
SMUD was a true pioneer in proving that people will choose renewables if given he
opportunity, and that they will pay more for environmentally-superior power
generation…there is no doubt that SMUD’s program is one of the major programs
in the world, and it is worth caring about.
In those three testimonials lie our reasons for preparing this SMUD PV Program
Review, and selecting the topical areas included in it. SMUD is “worth caring about”, not
only because it has made pioneering contributions to utility applications of photovoltaics
to date, but also because it has the potential to continue to play a critically important and,
indeed, a leadership role for utilities in the future.
1
Gordon, F., Hewitt, D., and Pratt, J., Review for NRDC of Sacramento Municipal Utility District Public
Benefits Programs, Final Report, Prepared for Natural Resources Defense Council, Pacific Energy
Associates, Inc., Aug. 12, 1999.
2
Aitken, Donald W., then Senior Staff Scientist for the Union of Concerned Scientists, and developer of
the conceptual framework of “Sustained Orderly Development and Commercialization”, the market
dynamic selected early on by SMUD as the framework for their PV market-development efforts.
3
The author of this comment, and the memorandum, prefers to remain anonymous.
1
To realize this potential, however, requires looking at the elements of SMUD’s
success to date, assessing what elements may continue to work in the future, and
suggesting ways in which SMUD’s program might be progressively reoriented to place it
in a position of long term sustainability while also becoming internally self-supporting.
This is the task we have set before us.
The authors of this SMUD PV Program Review do not proclaim to be the last word
on these subjects, nor the ultimate experts in gazing into the crystal PV ball of the future.
But each of us has experience relevant to SMUD, and two of us (DA and SS) have long
contributed directly and indirectly to SMUD’s PV programs, giving us perspectives that
have developed over time, while the 3rd author (WS) has unique experience in
understanding the transition steps from the early stages of the introduction of a new
technology (PV) to full public and market acceptance.
Each of us has principally authored one of the three main sections of this Review:
Section 1, “Overview of SMUD’s PV Program Technology Decisions and Experience”
(SS); Section 2, “SMUD’s PV Market Development and its Relationship to Other Utility
Programs” (DA); and Section 3, “A Blueprint for Commercialization” (WS). We have
fully collaborated on the mutual editing of all three sections, and the agreement upon the
recommendations set forth.
It is in the spirit of our admiration for SMUD’s leadership to date, our faith in
SMUD’s commitment to its customers to continue to protect their interests in the
progressive energy resource transition that must and will take place this century, and our
acknowledgement that SMUD recognizes that adaptability and change are necessary for
continued success, that we offer the following review and recommendations.
2
1.
OVERVIEW OF SMUD’S PV PROGRAM TECHNOLOGY DECISIONS
AND EXPERIENCE
1.1
Introduction
In 1984 the Sacramento Municipal Utility District embarked on a program with no
precedent—an ambitious effort to bring PV power first to their system and later, more
directly, to hundreds of their customers while also using PV power for other useful
purposes within SMUD’s system. Without humility, their first step was simply to build
the world’s largest PV plant on the grounds of the decommissioned Rancho Seco Nuclear
Plant. Phase 1, consisting of 1MW of modules (which, because of tracking, operate as
effectively 1.23 MW), was constructed in 1984, and phase 2, also for 1 MW (or 1.23 MW
with tracking benefits) was constructed in 1986. That system has been working ever
since, day after day delivering power reliably to the SMUD grid, the value of which has
never depended on the availability or cost of fuel, and never will. Expansions since then
and planned for this coming year will bring the size of that system to over 3.5MW,
making it once again the world’s largest central station PV plant.
In 1993 SMUD continued to move forward, launching a program that would see a
total of over 8 Megawatts (MW) in place in over 650 different PV applications in
Sacramento within the next 7 years, and 8MW more planned by 2003. As with any new
venture, there was an element of risk, greater than the traditionally conservative utility
company criteria would normally accept. But with an unwavering consistency of vision,
SMUD soon became a model for other utilities to follow, also becoming known
worldwide for their courage and their mounting grid-connected PV experience, and
receiving national and international recognition and honors for the utility and for its
employees.
It is our task to look at the ingredients of this (obviously successful to date)
experience, and to extrapolate to conditions and circumstances that we see in our energy
crystal ball.
In this section of this SMUD PV Program Review, we look at the technical aspects
of SMUD’s PV Program choices, and draw conclusions and recommendations.
1.2
PV Application Assessment
1.2.1
Applications Selected
Right from the beginning, SMUD clearly elected not to choose a single type of PV
application, but rather to gain both technical and economic experience from multiple
applications. Early on, however, they made a decision to go for applications that would
allow them to purchase PV modules by bid in substantial quantities, to progressively
reduce the cost of their installed PV systems along a “Sustained Orderly Development
3
and Commercialization” (SODC) path. (The marketing philosophy of this is described
and evaluated in Section 2 of this Report.) The relevance here is that this approach led
SMUD to favor applications that required modest amounts of PV (from 1 to 400 KW),
and with the smaller units (1-4 kW) installed on residences in great numbers. On the
basis of their years of PV applications, SMUD has the benefit of actual real-world
performance and cost data to assess the pros and cons of all PV system options. SMUD
is well positioned to prioritize their program emphasis as their scale-up continues.
The distribution of SMUD’s PV system applications (for all but the Rancho Seco
central PV stations) is shown below in Figure 1.4 The reliance on systems that would
result in the fielding of substantial quantities of PV modules is evident, but within that
philosophy there appears to be a well-balanced choice of applications.
Distribution of SMUD's PV System - 1992 - 1999
Neighbor &
Solarports
28%
Substation PV
27%
Partnerships
Comm Solar
5%
PV Pioneers
40%
Figure 1: The distribution of SMUD's PV System Applications.
Table 1 on the next page lists the actual SMUD PV applications through the end of
1999.5
4
Osborn, D., Sustained Orderly Development and Commercialization of Grid-Connected Photovoltaics:
SMUD as a Case Example, Advances in Solar Energy, Vol. .., No. .. (2001)
5
Ibid. Table 1 does not include year 2000 applications. It is reported that there were about 90 Pioneer II
applications during 2000, in addition to other significant PV installations, such as the 450 kW “Solarport”
at the California Exposition Center parking lot.
4
Table 1: Summary of SMUD PV Installations Through 1999
SMUD PV Installations
1980’s
Rancho Seco PV1, Arco System, 1984
RS PV2, Arco/Solarex/Mobil, 1986
1992
PV Residential Demonstration Systems
PVEV Charging Station
1993
PV Pioneers 93, 3-4 kW, Siemens
Hedge PV1, UPG/Siemens
SMUD Warehouse PV, SEA
1994
PV Pioneers 94, 3-4 kW, Siemens
PV Pioneers 94, 3-4 kW, Solec
PV Commercial Pioneers, 10-30 kW, Solec
Hedge PV2, APS
WAPA BIPV Roof Demo, Powerlight
1995
PV Pioneers 95, 3-4 kW, Solec
PV Pioneers 95, 3-4 kW, RMI/Solarex
PV Pioneers 95, 3-4 kW, Placer/Solarex
PVEV Airport, SMUD/Arco
PV Solarport, UPG/Siemens
1996
PV Pioneers 96, 3-4 kW, Placer/Solarex
PV Pioneers 96, 3-4 kW, Solarex
PV Commercial Pioneers 96, Solec
Hedge PV3, RMI/Solarex
WAPA BIPV Roof, Powerlight
BIPV Demo Systems
1997
PV Pioneers 97, 3-4 kW, Placer/Solarex
Hedge PV4, UPG/Siemens
RS PV3, UPG/Siemens
1998
PV Pioneers 98, 3-4 kW, Solarex
PV Commercial Pioneers 98, Solec
PV Pioneer 98, 2 kW, Solarex Kits
PV Partnership
Community Solar, 4 kW, Sac Zoo, Effie Yaw
IBEW Training Center, 4 kW,
RS PV4, UPG/Siemens
1999
Neighborhood PV & Solarports
CalExpo Solarport (85% of 540 kW)
PV Pioneers: UPG/Shawnee/Siemens/Solarex/EPV
Community Solar
PV Partnerships
RS PV5a (35% of 750 kW) UPG/EPV
TOTAL TODATE
PV Pioneers
Neighborhood PV & Solarports
PV Partnerships
Community Solar
Substation PV (Hedge PV 1-4, RS PV 3-5a)
Substation PV (RS PV 1&2)
# of Systems
1
1
5
1
54
1
1
54
60
8
1
1
59
25
27
1
1
27
27
3
1
1
4
26
1
1
54
3
2
10
2
1
1
9
1
138
6
8
1
558
35
18
8
7
2
5
KW, AC, PTC,EPF
2460
1230
1230
21
10
11
495
200
258
37
675
200
220
144
108
3
554
200
87
100
9
158
461
129
100
80
102
40
10
495
100
132
263
490
200
70
4
44
8
4
160
1402
209
465
276
12
180
260
7053
1826
1275
224
20
1248
2460
It is evident from Table 1 and Figure 1 that SMUD put more effort into their
residential solar applications than into any other single program area. The authors
believe this emphasis was and is correctly placed as the potential for the residential
rooftop market is very large indeed. Further, these systems tend to be the most amenable
to standardization, which further reduces costs. While this emphasis continues today, the
nature of the residential PV program has evolved.
During the first years of the PV Pioneer program (1993-99), the PV was connected
into the utility side of the meter, giving the homeowner no direct value for lending his
rooftop to SMUD, and even asking him to pay $4 each month for the privilege!
This approach allowed SMUD to “test the market” for acceptance of residential roof-top
PV while also assessing the geographically disbursed benefits of “distributed PV”, a PV
version of a larger structural direction—distributed generation--that is today becoming
increasingly important for all utilities.
In particular, all distributed PV systems:





Provide grid support
Eliminate costs and losses in transmission and distribution
Create a diverse and resilient energy system
Typically require no special “impact assessment”, approvals or permits
Can be fielded very rapidly, in response to need
Mounting distributed PV on buildings such as on residential rooftops also provides
SMUD with these additional benefits:





The real estate comes “free” with the building
There are no site development costs—the PV is simply placed on the building
roof
Customer acceptance (e.g. willingness to make their roofs available to SMUD
and even to pay a little each month to subsidize it) arises in part as the rooftop
PV systems are a highly visible expression of the homeowner’s environmental
commitment.
The utility interconnection already exists to serve the building
There is no (additional) real estate tax on land to support the PV system or on
the PV itself
SMUD’s “Neighbors and Solarports”, the second largest slice of the Figure 1 pie,
represents larger distributed PV systems, but with much the same benefits for SMUD as
the residential applications. The third largest slice of that pie was for “Substation
PV”using even larger arrays integrated into their distribution facility support systems.
In 1999 SMUD began offering the PV Pioneer II Program as an alternative to its
customers. In this case, the residential customer purchases and owns the PV system,
enabled both by SMUD’s low costs and by SMUD’s attractive “buy down” incentives
and financing. (This is presented in more detail in Section 2 of this Report.) The PV
6
system output is therefore connected on the customer’s side of the meter. The meters run
in a “net metering” configuration, recording power flow both ways between the building
and the grid, thereby automatically providing a credit at full retail value for the customer
which can be used in evening hours to offset the evening purchases of electricity. (In
simple language, the meter runs both forwards and backwards.)
With the PV Pioneer II program, the customer gains considerable benefits from the
systems on their roofs. Most important, they receive the full use of the solar-generated
electricity either directly in their home or, via the ‘net metering’ policy that SMUD has
implemented system-wide, they realize measurable financial return from their
investment. SMUD also gains many of the benefits of distributed PV on their system
from these applications, while having the benefit that the customers now share a major
portion of the costs
Another innovation that SMUD now provides as part of their PV Pioneer II
program, as well as their PV programs for commercial establishments, is offering
distributed PV generation as “Building integrated PV” (BIPV). While this does not gain
SMUD further benefits from the installations, it brings further benefits and incentives to
building owners and occupants. Among these are:
 BIPV can displace conventional building material and labor, reducing the net
installed cost of the PV system on both residential and commercial applications
 The architecturally clean, well-integrated systems increase market acceptance for
PV
 For commercial buildings, BIPV can provide significant demand charge
reductions
With building-integrated PV systems, building owners are already paying for facade
and/or roofing materials and the labor to install them. The land is already paid for, the
support structure is already in place, the building is already wired, the utility is already
connected, and developers can finance the PV as part of their overall project. Another
benefit comes from distributing the BIPV installations over a very broad geographic area
and a large number of buildings, mitigating the effects of local weather conditions on the
aggregate, and producing a very resilient source of supply.
With reduced installation costs, improved aesthetics and all the benefits of
distributed generation, building-integrated PV systems are a prime candidate for early
widespread market adoption. These systems should be encouraged especially within the
architectural community, as the architects are the ones who make the decisions to
incorporate BIPV.
In closing this brief discussion about SMUD’s choice of applications, it is
interesting to note that, in 1992, while they were gaining the experience that enabled
them to launch the PV Pioneer I program, SMUD also built the first PV electric vehicle
charging station in California (and only the second one in the U.S.), to service their own
Evs at their headquarters building, showing their interest in having their solar program
support other important energy conserving programs within SMUD.
7
1.2.2
Niche Markets
SMUD elected not to invest much of their emphasis into “niche” or “high value”
applications early in their PV program. While the economics of these applications are
easier to justify on a case-by-case basis, they also tend to be applications for very small
quantities of PV, thereby not contributing to a sufficient market impact to reduce the
costs of the PV systems. Niche markets also often require custom configuration of PV
modules and balance-of-system (BOS) equipment, which requires design-intensive
support. If this support is provided directly by the SMUD program it could adversely
dilute SMUD’s technical resources that might be better used to pursue the greater overall
program goals. This is further discussed in Section 2 of this Report.
1.2.3
Process and Suitability of Selection
SMUD began their PV program with a broad cross section of applications from
individual residential and commercial rooftop systems to medium-scale PV at the
‘neighborhood’ and substation level to central-station PV. This was a wise starting point,
as it would provide SMUD program personnel with a broad base of both technical
operating experience and economic performance on all of the PV system applications.
The authors believe that all of the key PV systems applications that SMUD has
selected will achieve widespread commercial acceptance. We believe that the sequence
of commercialization will start with residential roof-top systems, followed by roof-top
and BIPV systems for commercial buildings with substation and ‘neighborhood’ systems
coming next and central station systems following last.
Our reasons for these conclusions are that residential and commercial PV systems
can and do displace utility power on the customers’ side of the meter at the retail rate,
while the substation and central station systems compete with the cost of avoided fuel or
bulk kilowatt-hours – both at the wholesale level.
The reason that residential systems are favored as the first application to reach
widespread commercial acceptance is that residential customers have access to home
mortgage financing for home improvements (such as PV systems). This provides 15 –
30-year financing terms at reasonable rates with tax deductible interest. Further,
residential electric rates have traditionally been the highest rate class so the PV power is
worth more to the residential customer who is also more likely to accept a longer-term
‘payback’ than a commercial customer.
We believe the commercial building market will follow because there are generous
federal incentives for commercial customers with a federal tax liability to field PV on
their facilities. Further, commercial electric rates are on the rise as are (or will be) the
demand charges associated with on-peak consumption.
8
The substation systems can and will be fielded to provide grid support and, when
the value of this grid support is recognized, this will put the substation systems ahead of
the central station deployment.
The retail value of the electricity is well known and the payment method (displaced
utility bills via net metering) is already defined and in place, while the value of the PVgenerated electricity to the utility is still, in our opinion, way undervalued – even at
SMUD. Until the real value of PV-generated electricity is recognized, the larger systems
at the substation and, especially at the central station scale, will lag behind the smaller
distributed systems for individual buildings when market forces, rather than government
policies, are the drivers for the applications.
It is important to note here that in other utility circumstances very different
decisions from SMUD's may also emerge. For example, Tucson Electric Power (TEP),
an investor-owned utility (and hence unlike SMUD) is now required to commit to
significant PV applications by the state government-mandated "Environmental Portfolio
Standard". (This is presented in more detail in Section 2 of this SMUD PV Program
Review.)
TEP is therefore seeking ways to install the maximum amount of PV at the
minimum cost to the utility, leading them to conclude from their analyses that central
station PV will be the least expensive starting point for them. They will just put up big
systems, rather than many smaller ones. (The legislated requirement does not permit the
utility to recoup costs from individual customers. Those are done in separate "green
power" programs, which do not qualify towards meeting the mandated installation
percentages.)
The conclusion of this is that PV program development priorities for utilities are
highly situational. Conclusions appropriate to one utility (e.g. in this case TEP) do not
extrapolate to other utilities (e.g. SMUD), nor are our recommendations to SMUD
necessarily appropriate to other utilities. We have seen criticisms of the SMUD program,
which have confused this point.
It is important that SMUD focus their PV Program’s near-term resources on those
applications that show the highest near-term promise for meeting the overall goals
established for the program and SODC. Although the application mix will vary and
special opportunities will come up (perhaps stimulated by compelling political
motivation), we recommend that SMUD prioritize the allocation of financial and
technical resources to distributed PV systems for individual buildings. If the number of
opportunities are limited by these applications, SMUD should take pro-active steps to
increase them.
9
1.3 Ascribing an Appropriate Market Value to PV Generation
A detailed analysis of “Photovoltaic Economics and Markets” that focused on
SMUD was prepared in 1996.6 Figure 2 below summarizes the benefits that the authors
of that report determined could be ascribed to the value of PV in SMUD grid-connected
applications.
Utility Benefits of Distributed PV ($/kW, 1996)
$3,500
Tracking PV
Fixed
Substation
PV
Pioneer
Service Revenues
(economic development)
$3,000
REPI
Externalities
$2,500
Fuel Price Risk
$2,000
Green Pricing
Distribution
$1,500
Sub-Transmission
$1,000
Bulk-Transmission
Generation Capacity
$500
Energy
$0
Primary
Voltage
Secondary
Voltage
Primary
Voltage
Secondary
Voltage
Figure 2. Utility benefits of tracking & fixed PV in the SMUD system at distribution voltages.
It is beyond the scope of this to SMUD PV Program Review to go into the
derivation of each of the shown valuations. (This is amply discussed in the
Wenger/Hoff/Pepper Report to SMUD.) For our purposes, we wish to note that the
energy output of the PV arrays is only a fraction of the total value of the PV to the
SMUD system. And we need to note that the SMUD Power Department ascribes a value
of the PV in their system of about $1,000/kW, no more, solely from valuing energy
produced and a portion of displaced generation capacity to the PV. All other economic
benefits of PV in the SMUD system go unvalued within SMUD operations.
6
Wenger, H., Hoff, H., and Pepper, J., Photovoltaic Economics and Markets: The Sacramento Municipal
Utility District as a Case Study, SMUD Contract G253
10
That means, as one inspects Fig. 2, that no value is recognized within SMUD
operations on PV’s contribution toward reduced load and maintenance on the grid
(transmission and distribution, or T and D), nor to PV’s value in reducing fuel price risk,
nor to the contribution of PV toward clean air (“externalities”). SMUD sets aside $20
million per year as a “hedge” against purchased energy costs in low hydropower years,
and yet gives no value to its renewable energy programs as a means to reduce
dependence on varying hydro capacity. And power providers certainly don’t care for the
economic benefits resulting from locating manufacturing plants in the District (shown in
Fig. 2 as the resultant “Service Revenues”). These value omissions all add up to an
unwarranted barrier within SMUD’s own accounting and operations systems.
We wish to examine just one of the omissions in valuing SMUD’s investment in
grid-connected PV, the time-of-day economic benefits of PV output, which has emerged
during the summer of 2000 as especially significant.
Renewable resources are often devalued because of their intermittency (depending
on variable sun or wind resources), with “capacity factors” around 20% to 25%, and
compared unfavorably to “baseload” resources which can run all night with consequent
high capacity factors (but why do the need to?). And renewable energy resources are also
frequently devalued by the inability to “dispatch” them on demand. But since the
greatest time of need for power is during the daytime, and especially during sunny days
when it is also hot, generating a considerable peak in demand for cooling in the
Sacramento climate, it is the “effective” capacity factor of the PV that is important—its
availability when the power it produces is actually needed. It has been shown by
Professor Richard Perez of the State University of New York in Albany that PV can in
favorable circumstances have an “effective capacity factor” for delivering valuable
energy to the grid exceeding 90%.
Fig. 3 on the next page shows the coincidence of the output of grid-connected PV in
the SMUD District in proportion to overall system load on the peak demand day in 1994.
The PV delivers energy during most of the time that the system needs it. In addition, the
fixed south-facing PV (e.g. on roofs) is delivering 50% of its rated load at the time of
peak demand. Shifting this to west-facing roof surfaces can raise that to the same as
shown here for tracking PV, or 80%. But that doesn’t displace 50%, or 80%, of the peak
demand on the utility, for it can be seen here that the PV output drops to zero while the
system load is still at 80% of its peak, so that during this later evening period the PV
contribution must be replaced by conventional resources.
11
Normalized Peak System Load & PV Output
100%
90%
80%
System Load
System Load
Tracking PV
Fixed PV
70%
60%
50%
40%
30%
20%
Peak Hour
10%
0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour Ending (PDT)
Figure 3. System load and PV output profiles on peak day, July 14, 1994.
The argument is therefore made that the “value” of the PV in displacing peaking
demand in the SMUD system would only be of the order of 20% of the rated output of
the array. But even this small additional valuation does not appear to be accepted by the
SMUD Power Department. However, SMUD, like all other California utilities,
purchases their additional power needs from the grid, in California through the Power
Exchange, with prices that vary during each hour. As a result, it is not like having to
suddenly bring a peaker on line and quickly up to 80% of its capacity in the late evening
hours. Instead, the PV has actually displaced the value of its output directly out of the
power purchase costs of the utility, truly saving SMUD that money.
What is this worth to SMUD? During the summer of 2000, SMUD’s actual costs
for purchased power were as follows:7
 Average “Off” Peak:
 Average “On” Peak:
 Average Super Peak:
 Maximum price:
9 cents/kWh
17 cents/kWh
20 cents/kWh
$1.10/kWh
This is to be contrasted with the costs to SMUD of the output of the PV Pioneer systems
as they have evolved over time. This is shown in Table 2 on the next page.
7
Osborn, Donald, from his talk at the UPEX 2000 Conference, “SMUD and the Solar Power Frontier”
12
Year
1993
1994
1995
1996
1997
1998
1999
2000*
2001*
2002*
2003*
Table 2: Cost Decreases for PV Pioneer Installations
System
SMUD Program
Total Installed
Cost
Cost
Cost
(turn-key)
$7.70
$1.08
$8.78
$6.23
$0.90
$7.13
$5.98
$0.89
$6.87
$5.36
$0.85
$6.21
$4.75
$0.59
$5.34
$4.25
$0.82
$5.07
$3.75
$0.75
$4.50
$3.35
$0.65
$4.00
$2.80
$0.62
$3.42
$2.69
$0.49
$3.18
$2.59
$0.39
$2.98
Energy Cost
30
yr,
¢/kWh
25 - 26¢
20 - 21¢
19 - 20¢
17 - 18¢
15 - 16¢
14 - 15¢
13 - 14¢
11 - 12¢
10 - 11¢
9 - 10¢
8 - 9¢
All costs in $ per kW (PTC; A/C) for “standard” roof. * Committed contract prices at contracted efficiencies.
Energy cost levelized ($real) over 30 years at District cost of money or 1 st mortgage rate (w/o tax benefits).
Clearly the SMUD PV program has already reached a point where purchasing
energy from the SMUD PV arrays is competitive at all times with SMUD’s costs for
purchased power, and a bargain during all peak times.8 And this still doesn’t take into
account the several other benefits quantified by Wenger, Hoff and Pepper but not
accepted by the SMUD Power Department. We certainly recommend that this and other
actual economic benefits of PV to the SMUD system be valued by SMUD, to offset some
more of the apparent costs to SMUD, or, better, to internalize some of the costs against
real benefits, so
1.4
1.4.1
Assessment of Program Implementation
Contractor Selection and management
From the very beginning of their Program, SMUD has used competitive
procurements to select the contractors for installation of their PV systems. Requests for
proposals (RFPs) were issued and multiple awards were made for multiple systems based
on qualifications and cost. Awarding volume contracts to multiple vendors helped to
build a foundation for a healthy market while also keeping unit costs down through
competition and volume purchases. (The first column in Table 1 reveals the multiplicity
of participating vendors.)
In 1997, SMUD changed their approach and, in an effort to gain maximum
purchasing leverage issued single five-year contracts for module and inverter supply.
Since these two contracts were issued under a competitive solicitation, the lowest cost
8
The authors of this report sought to make an actual valuation of this for the summer of 2000, but were not
given the requested cost information to enable the calculations. This is also a SMUD problem.
13
was assured. However, the five-year contracts meant that SMUD would be dependent on
this single supplier for the success of the program for the period of the contract.
To reduce this exposure, SMUD did structure these contracts so that if the given
supplier did not perform, SMUD was free to look elsewhere for sources of supply. The
result was that SMUD limited the downside exposure to the loss of time, which would
result from sub-par performance or total non-performance.
In retrospect, this strategy appears to be paying off. Although both the inverter and
module supplier were late in meeting their delivery schedules, there has been little
negative impact on the program. SMUD simply supplemented module delivery from its
contracted supplier with modules purchased ‘on the market’ to meet its program plan and
accepted substitute product and/or rescheduled installation sequences to accommodate
the lateness of the inverter delivery.
In general, management of the contractors has been quite good under the program.
The SMUD purchasing group issued contracts with performance terms favorable to
SMUD, and SMUD’s technical group kept a watchful eye on field installations. While
there was some schedule slippage, overall performance of the suppliers and installation
contractors has been very positive, especially when one considers that the entire PV
program was breaking new ground.
It is important, as future phases of the program take form, that SMUD continue to
maintain maximum contractual flexibility in terms of options so that the program’s
success is not dependent on the performance of any single supplier.
1.4.2
Technical Support and Warranties
One of the great strengths of the SMUD Solar program is the quality of their
technical support. This does not just mean service in the field, or replacement of faulty
product. SMUD has developed a careful quality assurance/quality control (QA/QC)
program to which all suppliers of PV and components must adhere. They actually sign
QA/QC assurance documents.
Furthermore, SMUD’s own constant testing has turned up potential problems that
they have then gone back to the manufacturer to solve—often using the suggestions of
SMUD’s technicians—as a means of avoiding problems before they can occur in the
field. This is a significant factor in the overall excellent and long-term performance that
SMUD is realizing in the field.
Warranty provisions were clearly established for key components during the RFP
process and reinforced as the contracts were put into place. SMUD has had little in the
way of field failures and has gotten the manufacturers to make good on their equipment
under the terms of the warranties.
14
1.4.3
System performance/availability
In the Introduction to this section we noted that SMUD’s 1984 and 1986 PV
installations at the Rancho Seco site have been working reliably ever since. The only
difficulties have been with the inverter for the Phase II array. Replacing that cleared up
those problems, but that was an indicator of the fact that, while the hundreds of PV arrays
that SMUD has installed show no signs of lifetime degradation or lack of reliability, the
weak point has been in the power conditioning electronics.
SMUD is in the unique utility position of having 16 years of experience with a
multi-megawatt grid-connected application, thus lending confidence to SMUD’s
expectations of future reliability. Quoting from Osborn (see footnote #1):
After 16 years, 7MW [now, in 2000, 8MW] and nearly 600 PV systems of PV
operational experience, SMUD has determined that PV can be simply installed and
operated with high reliability. Indeed, the performance and reliability improves
with volume. Installation of large numbers of like systems results in better
performance than that of demonstration projects of a few systems…
Scientists from the Sandia National Laboratory studied 100 of the first Pioneer I PV
systems, installed in 1993 and 1994. This analysis produced “availability factors” (PV
systems working) of 92% or higher for 88% of the systems, with the one lowest still at
44%. A second way of rating PV system performance is the “Performance Index”9,
which rates the actual performance of PV systems against their simulated performance,
taking into account realistic variables and losses. A PI of better than 90% is considered
excellent. Measurements on SMUD’s installed systems consistently show this kind of
performance.
1.4.4
Potential Technical Application Evolution of the SMUD PV Program
The leading candidate technologies to meet the goals for low-cost PV are thinfilm products. While they currently promise lower cost per watt, all the available thinfilm technologies are lower in efficiency than their crystalline counterparts – some
dramatically so. A thin-film array needs to be larger in size to deliver a given amount of
power when compared to an array of crystalline modules. Thus, the number of individual
modules that need to be mounted, fastened and wired is greater. This is an important
criterion as it can reduce or eliminate the cost advantage of the thin-film products.
SMUD should work with their chosen suppliers to identify ways to mitigate this
area-related cost penalty at both the module and system level. In this regard it is
noteworthy that the new Sacramento-based EPV plant is beginning to produce Copper
Indium diselenide (CIS) modules, a technology which has achieved the highest efficiency
9
Wenger, Hoff and Pepper, see footnote 6.
15
of all thin film products, potentially competitive with crystalline efficiencies. That
should be a good technical choice for SMUD.
As the number of residential rooftop retrofit systems increases within the SMUD
service territory, the availability of candidate sites with ‘ideal roofs’ will eventually
become a constraining factor to limit further program opportunity. One of the factors,
which currently make a residential roof attractive, is if it has composition (asphalt)
shingles. There are many homes within the District with tile or shake roofing, which,
save for the difference in roof materials, would be good candidates. SMUD should work
with their chosen contractors and suppliers to identify and/or develop cost effective
methods to retrofit residential roof-top systems on non-composition roofs. This will
expand the pool of desirable candidate roofs, allowing the program more room for growth
while satisfying a larger cross-section of customers.
New residential construction represents a major opportunity for the SMUD PV
program. SMUD’s present method of installing a PV array on a new residence during
the initial construction makes use of solar tiles called ‘Sunslates’ which displace
conventional roofing materials to become the finished roof. While this concept is very
appealing, the present product is too expensive to achieve the longer-term cost goals set
out for the rooftop program. SMUD should work with their chosen suppliers to identify
ways to expand the options for PV roof integration in new residential and light
commercial construction as well as roof replacements. One option might be to explore
the development of larger-area modules using lower-cost thin-film PV configured for
direct roof-integration.
Another aspect of new residential construction is the provision of the basic
infrastructure to make the future installation of a rooftop PV system easier in homes
where the systems cannot be installed during construction. SMUD should work with
their chosen suppliers to develop PV-friendly design and construction approaches, which
make future PV retrofits easier.
There is considerable potential promise for the SMUD program in the use of buildingintegrated PV in new commercial construction. The architects are the gatekeepers to this
market and must be inspired to incorporate BIPV at the very beginning of the design
process. SMUD has begun to successfully engage the architectural community and
interest in building. One way to help to increase the incorporation of BIPV systems is to
expand the range of options for available PV modules. Currently the thin-film PV
modules are only available in a two by four foot format. Architects constantly ask for
other sizes and options. SMUD should work with their chosen suppliers to identify ways
to expand the range of cost-competitive hardware options for BIPV in commercial
buildings.
16
1.5
1.5.1
Summary of Technical Approach
How is the program doing relative to its goals?
Any program working with the initial introduction of a wholly new technology on
such a scale represents considerable risk. The authors believe that SMUD has understood
and managed this risk well. In most respects, the SMUD PV program seems ‘on track’
with their overall goals and in some respects is actually ahead. Some could argue that the
cost reductions in the coming phase of the program may be more of a challenge to
achieve than those of prior phases. While this may be true, the PV industry has changed
dramatically during the first decade of the SMUD PV program and is now far more able
to reach the goals set out for the program than it has been previously. With continued
consistent support from upper management, the SMUD program appears well positioned
to achieve its overall goals for Sustained Orderly Development and Commercialization
during the next phase of the effort.
1.5.2
Recommendations for the future.
During the author of this Section’s (SS) work with PV for residences, the one thing
homeowners have most often inquired about is the availability of their utility-interactive
PV system in the event of a utility outage. It is suggested that SMUD investigate the
prospect of offering residential PV Pioneer II customers a battery bank option capable of
carrying some portion of the house loads (such as the critical ‘core’ loads) through a
‘typical’ power outage. While this would add cost and complexity to the residential
program offering, it is the function most often requested and could be offered only when
the customer wanted it.
One of the most important opportunities available to SMUD is to leverage the PV
program effort with the Energy-efficiency program. It is well known that it is easier to
save energy than it is to produce it. Further, if the energy needs of, for example, a new
house are reduced during the planning and construction, the contribution from a roof-top
PV system would contribute a far more meaningful percentage of the home’s power.
Energy-efficient demonstration homes have been designed and constructed in hot
climates where cooling requirements dominate, that combine advanced conservation
techniques with solar water heating and rooftop PV. The results are impressive, with no
net addition to the utility peak demand from the residence even during heavy cooling
periods.10
These results emphasize the benefits of an integrated approach where the energy
efficiency and the solar systems are incorporated together as part of an overall approach.
The results further would suggest that SMUD revisit the emphasis of their solar waterheating program. While solar water heating systems do compete for available roof area
“Field Evaluation of Efficient Building Technology With Photovoltaic Power Production in New Florida
Residential Housing”, FSEC-CR 1044-98, November, 1998. See also Parker, D., and Sheinkopf, K., “Cool
Home Features Bring Peak Energy Savings”, Home Energy, July/August 1999 (pp. 22-27).
10
17
with PV systems, the properly designed and installed solar water heating system will
displace 3 to 4 times the kWh per dollar when compared to the same investment in a PV
system. Just as PV hardware and systems have evolved in recent years, so have SDHW
systems. The authors believe these systems can and should play a more important role in
SMUD’s overall strategy.
As the popularity of the PV Pioneer II systems continues to grow, SMUD should
begin to develop PV Pioneer 2 systems for commercial buildings. While the authors
believe that the residential market will be the first to reach full commercial status, the
commercial buildings market will not be far behind. The SMUD program has fielded
many PV systems on commercial buildings. It will be a relatively simple task of defining
the optimum system package, with perhaps a few variations in size and configuration, to
offer to the commercial customer.
Other recommendations for SMUD’s PV Future:

SMUD should concentrate on their own service territory first and foremost as this
is the area that provides the greatest opportunity for achieving their program
goals. If organizations outside of SMUD request collaboration, SMUD should
help them as it can. But SMUD should not spend a significant amount of
resources cultivating such opportunities until later in the program

In the promotion of the PV Pioneer 2 options, SMUD should emphasize the
highly valued but intangible benefits of owning your own PV system, such as:
• It is environmentally responsible
• It has a clear and very visible ‘green appeal’
• It is backed by SMUD – a known and trusted partner in the community who will
be there in the long term.

SMUD should seek to understand in more detail the market development cycle as
described in Section 3 of this report and market first to the innovators and early
adopters as they are indeed the first customers. The use of detailed web site will
help to reach and convince these prospects.
18
2.
SMUD’s PV MARKET DEVELOPMENT AND ITS RELATIONSHIP TO
OTHER UTILITY PROGRAMS
2.1
Introduction
The involvement of SMUD in photovoltaic applications arises from the utility’s
goal of obtaining at least half of its energy from energy efficiency, existing hydroelectric
plants, and renewable energy resources, beginning in the year 2000 and extending
beyond. But the involvement of SMUD in the market development of PV goes beyond
these aims, for SMUD has also been convinced that their large and visible role in the PV
market should contribute in a significant way toward the lowering of costs for installed
PV systems in general, which would benefit all PV purchasers, and lower the costs for
SMUD’s own PV applications even further. And SMUD has clearly seen a business
opportunity growing out of this that transcends their own applications.
This latter aim is confirmed in written descriptions of SMUD’s commercialization
philosophy, such as “The SMUD Solar Program is a business development and
commercialization effort for the sustained orderly development and commercialization
(SODC) of grid-connected PV.”11 And “SMUD would rather…provide photovoltaics as
a business opportunity than concede that to someone else.”12
This being the case, it is important to look at the ingredients of SMUD’s “business
plan for photovoltaics” as shown by the history of their Solar Program since 1993, to look
for evidence that their business plan has also stimulated other utilities to follow their lead,
and to appraise elements of a future business plan for photovoltaics that might help
SMUD to achieve their long-range PV business goals. This and the next major Section of
this report seeks to present our views on this.
2.2
Overview of SMUD’s Market Development Philosophy
The underlying philosophy adopted for the SMUD Solar Program had first been
enunciated by one of the authors of this report (DA) in a report to the State of California
in 1991, and further refined in later publications13:
Simply stated, it [SODC] represents a condition in which the costs of a new
technology progressively decline through the action of a growing and stable market
that is stimulated by orders placed on a reliable and predictable schedule. The
orders increase in magnitude as previous deliveries and engineering and field
experience lead to further reductions in costs. And, with respect to the renewable
11
Osborn, Donald E., Sustained Orderly Development and Commercialization of Grid-Connected
Photovoltaics: SMUD as a Case Example, Advances in Solar Energy, Vol. , No. , pp.
12
Ibid.
13
See, for example, Aitken, D.W., Sustained Orderly Development of the Solar Electric Technologies,
SOLAR TODAY, Vol. 6, No. 3, p. 20 (May/June, 1992).
19
electric power resource, the reliability of these orders can be projected many years
into the future, on the basis of long term contracts, to minimize market risks and
investor exposure.14
Early on, SMUD decided to “force” the cost-reducing benefits of SODC by taking
advantage of the opportunity those contracts for significant amounts (megawatts) of PV
would provide. These were initially awarded on a year-by-year basis to the winning
bidders. But then SMUD added the advantage of a five-year guaranteed contract, again
for MWs of PV. PV manufacturers and installers willingly responded with bids
guaranteeing continuing year-by-year cost reductions, on the assumption that they could
reduce their own costs at a sufficiently rapid pace to provide at least minimal profit over
the term of the contract. The results, from the inception of the Solar Program to the end
of the present 5-year cycle, for systems applied to the PV “Pioneer” programs, were first
shown in Table 2, Section 1 of this SMUD PV Program Review. We reproduce that here
for convenience.
Year
1993
1994
1995
1996
1997
1998
1999
2000*
2001*
2002*
2003*
Table 2: Cost Decreases for PV Pioneer Installations
System Cost
SMUD Program
Total Installed
(turn-key)
Cost
Cost
$7.70
$1.08
$8.78
$6.23
$0.90
$7.13
$5.98
$0.89
$6.87
$5.36
$0.85
$6.21
$4.75
$0.59
$5.34
$4.25
$0.82
$5.07
$3.75
$0.75
$4.50
$3.35
$0.65
$4.00
$2.80
$0.62
$3.42
$2.69
$0.49
$3.18
$2.59
$0.39
$2.98
Energy Cost
30yr, ¢/kWh
25 - 26¢
20 - 21¢
19 - 20¢
17 - 18¢
15 - 16¢
14 - 15¢
13 - 14¢
11 - 12¢
10 - 11¢
9 - 10¢
8 - 9¢
All costs in $ per kW (PTC; A/C) for “standard” roof. * Committed contract prices at contracted efficiencies.
Energy cost levelized ($real) over 30 years at District cost of money or 1 st mortgage rate (w/o tax benefits).
The result of this, though, is that SMUD’s SOD experience and projections departed from
national expectations and experience elsewhere. This is illustrated in Fig. 4 on the next
page, with costs shown for PV modules only.
14
Aitken, Donald W., New Economic Thinking and Approaches to Utility Scale Application of Solar
Energy in the 90s, Advances in Solar Energy, Vol. 11 (1997). The “SOD” market dynamic was only
recently slightly retitled by SMUD to “SODC”, to take into explicit account the commercialization aim of
the philosophy.
20
Figure 4: Cost of PV vs. Year, “Business as Usual” Compared to “SMUD With SODC”
Comparing the “Business as Usual” scenario for actual and projected cost-reductions for photovoltaics
with the SMUD experience (1993-1996), SMUD guaranteed contract (1997-2002) and SMUD
projected after that. The three different levels of cost-effectiveness refer to PV costs delivering energy
and capacity at competitive rates (“Traditional”), or the inclusion of T&D system benefits (“NonTraditional”), or the inclusion also of the benefits to Sacramento from having the EPV plant within the
city (“With Service Revenues”).
It is clear that the SMUD market development philosophy has succeeded, certainly
in the first ten years of the program, in yielding costs to SMUD that are well below levels
outside of the SMUD district. This, in turn, benefits the SMUD customers, for it allows
SMUD to provide the attractively low PV Pioneer costs, thereby stimulating installations
(PV Pioneer I) and sales (PV Pioneer II) with relatively little contribution from the kitty
established by SMUD’s Public Goods charge, and with that contribution declining each
year and dropping to zero by 2002.
A second important part of SMUD’s market development philosophy is to leverage
the societal benefit of the funds that they spend for PV by developing PV and balance-ofsystem production and assembly within the SMUD District. In this way jobs and tax
revenues are produced locally, with consequent “multiplier” benefits of those
expenditures. The winning bidder in SMUD’s present five-year contractual period,
Energy Photovoltaics, Inc. (EPV) has indeed located a plant within Sacramento, and will
soon deliver Copper Indium diselenide modules (CIS) manufactured in that facility to
SMUD. Fig. 5 schematically illustrates two of the three multiple economic benefits
resulting from PV-related expenditures when such a PV manufacturing facility is located
21
in the District. [The three levels of benefits are 1) direct (sales of manufactured product),
2) indirect (acquisition of materials and supplies from within the District for the
manufacture of finished product), and 3) induced (tax revenues, job-production and
expenditure of PV plant employee income in the District)].15
Service Costs
SMUD
Purchase
Costs
PV
Manufacturer
Produc.
Costs
Other
Firms & New
Ratepayers
Service Revenues
Other
Purchases
Direct Effects
Indirect Effects
External Effects
Figure 5. Direct and indirect effects of SMUD’s PV purchase commitment.
Fig. 4 had already revealed how those benefits can effectively accelerate the time at
which PV becomes a cost-effective expenditure for a city-owned utility. (See the hashed
“With Service Revenues” range shown on that figure.) And those shown in Fig. 4 were
only the direct and indirect effects, as the authors of Ref. #15 did not conduct a full
input/output analysis of the impact. Nevertheless they recommended that a lower-bound
“placeholder” value to SMUD of the product produced at the EPV plant is worth
$708/kW to SMUD.
How much greater might this be worth to the City of Sacramento? A 1992 analysis
commissioned by the U.S. Department of Energy for a PV manufacturing plant in
Fairfield (close to Sacramento) revealed planned direct expenditures of $25 million per
year for 10 MW of PV module sales, leading to $40/million per year for indirect
expenditures, and a whopping $300 million in the county resulting from the sum total of
15
Wenger, H., Hoff, T., and Pepper, J.: Photovoltaic Economics and Markets: A Case Study of the
Sacramento Municipal Utility District, report sponsored by the California Energy Commission, Sacramento
Municipal Utility District and the U.S. Department of Energy (1996).
22
“induced” expenditures16. One might conclude, therefore, that the benefits to Sacramento
from locating the EPV plant within City limits could be from 8 to 12 times the direct
value, greatly enhancing the economic benefits of SMUD’s PV program for the City.
And it should also be pointed out that SMUD has succeed in attracting a major
components manufacturer, Trace Engineering, to locate the assembly of the inverters
within the SMUD District, further enhancing the economic benefits to Sacramento.
The questions to be posed now are whether this marketing philosophy is
sustainable, or in what ways might SMUD begin to position their evolving Solar Program
to keep it as a sustainable business element within SMUD that at least earns back its own
costs, while continuing to benefit their customers and their District in important and
practical ways.
2.3
Evidence for the Emulation of the SMUD Model by Other Utilities
One way to approach the question posed just above is to examine the extent to
which other utilities may have emulated SMUD’s program, or at least some elements of
it, perhaps revealing that they also believe that it is or will be good utility business to get
into the PV business early, and in a significant way. In his fine contribution to the
publication “Advances in Solar Energy”17, author Donald Osborn presented several case
examples, specifically for LADWP, the Spire/ComEd/City of Chicago SODC Solar
Program, GPU Solar, Idaho Power’s Applied Power Corporation, Tucson Electric
Company and Global Solar, Duke Solar, and the Arizona Environmental Portfolio
Standard. The author of this section of the present report (DA) visited the LADWP
offices to interview the founder of both that program and SMUD’s (David Freeman),
along with representatives from the LADWP PV program. He also conducted telephone
interviews with the solar program managers for all of the other programs, save for Duke
Solar, which is a solar thermal-electric program. In the interest of brevity of the present
report, we shall not repeat the descriptions of those other programs, preferring to refer the
reader to Osborn’s publication. Nevertheless, some comments on the results of these
interviews are presented in the following as they affect an interpretation of SMUD’s
marketing philosophy.
The overall conclusions from the telephoned interviews is that there is really only
one other utility program that is of a scope in both size and multi-year focus similar to
that of SMUD, and which also shares the same sort of utility-benefit-centered PV
marketing goals as SMUD, and that is the LADWP solar program. As noted above, both
programs were founded by the same person, David Freeman, who was SMUD’s
16
Demeter, Christian, Economic Impacts of a Photovoltaic Module Manufacturing Facility, United States
Department of Energy, Office of Conservation and Renewable Energy, Office of Solar Energy Conversion,
Photovoltaic Program, Washington, D.C. May 7, 1992.
17
See Footnote 11. Donald Osborn is SMUD’s Superintendent for Renewable Generation including
Photovoltaic and Distributed Technologies (PV/DT) group in the Power Generation Department.
23
Administrator during the conception of SMUD’s Solar Program, and who hired Donald
Osborn to direct it. So the LADWP program is not exactly an “emulation” so much as an
“evolution of concept”. It nevertheless demonstrates that elements of the SMUD model
work in other and even larger municipal utility frameworks, and therefore that the
extrapolation of the SMUD model rests more on utility leadership than on the particulars
of the model.
This is both an interesting and discouraging circumstance. It suggests that, while
considerable interest by other utilities has been shown toward the SMUD program [e.g.
leading to awards to SMUD by the national coalition of over 100 utilities with interests in
photovoltaic applications, the Utility Photovoltaic Group (UPVG)], the same leadership
that produced the SMUD program has produced the only other full-scale variation of it.
In most other cases, utilities engaged in relationships with manufacturers or suppliers of
PV who appear to be pursuing PV as a utility business are doing so either because they
have been required to develop solar programs in legal settlements (e.g. Commonwealth
Edison), or because they must meet legislatively mandated goals (Tucson Electric), or
because the utility’s holding company is interested in making money through a legal
subsidiary that is selling PV primarily out of the utility’s district, to high value, remote, or
international markets (Idaho Power).
In other words, SMUD’s accomplishments and internal benefits from their PV
program have not yet stimulated similar programs in areas other than Los Angeles18.
This is partly the result of short-term economic approaches by most utilities, which
continue to choose conventional resources as the presently favored low-cost option, and
partly due to the uncertainties related to actual or impending restructuring (deregulation).
The important point we wish to make of this, though, is that this failure to jump on the
SMUD-model bandwagon by other utilities does not portend a failure of the SMUD
model. Indeed, SMUD will probably continue to be able to position itself better in terms
of coping with the increasing volatility of fuel prices and electricity supply constraints, as
well as for potential emission-charges (e.g. carbon taxes) that may result from
international pressures, than other utilities (save perhaps for LADWP), by maintaining
and strengthening their aggressive efficiency and renewable energy programs. Still, a
comparison between SMUD and the LADWP can illuminate other features of potential
value to SMUD’s future PV program directions.
2.3.1 Lessons Learned from Comparing the LADWP PV Program with SMUD’s
The LADWP PV program matches SMUD’s in aggressiveness and exceeds it in
scale, proportionate to the much greater number of customers and resulting larger budget
for such activities (e.g. SMUD’s goal toward the U.S. Million Solar Roofs Initiative by
2010 is 25,000 roofs, while that for the LADWP is 100,000.) The LADWP plans to
18
This is not precisely true, for the City of Davis, directly adjacent to Sacramento, is pursuing a PV
program, but contracting with SMUD to provide the expertise and hardware, under SMUD’s PV
Partnership Program. And the City of Austin, Texas, Municipal Utility also shares some of the elements of
the SMUD program.
24
spend $65 million to accomplish the installation of 14 MW of PV over the next five years
(2000-2005). While an expected arrangement with British Petroleum (BP) to laminate
PV modules within Los Angeles City limits, and to provide 2-3MW of product each year
to the LADWP over a five-year period at progressively declining costs (and, hence, very
similar to the arrangement between SMUD and EPV) collapsed, setting the LADWP
program back, it is still the goal of the LADWP to enhance the economic benefits of their
PV program through a regional economic development opportunity. This is now being
negotiated with other potential PV suppliers.
The LADWP also shares a number of the SMUD programmatic aims. They
support their Green Power for L.A. program, for example, similar to SMUD’s Pioneer I
program, in which the homeowners do not pay for the PV installed on their roofs, nor do
they get any discounted power from the proximity of that PV. But the volunteers are
providing space for distributed PV resources, which are then paid for by the green power
surcharges.
In addition, Los Angeles homeowners can elect to purchase their own PV systems
with the benefit of a $3/watt buydown by the LADWP, paid for by the LADWP Public
Goods Charge. But here is a major difference between the SMUD and LADWP PV
programs. The bulk-purchases of PV modules by the LADWP are reserved for LADWP
installations. Homeowners purchasing their own systems will receive the buydown
incentive, but will contract with private installers, not with the LADWP, and for the
going rate for PV installations by private contractors in the region, not necessarily just in
Los Angeles. This does not produce as favorable a financial circumstance for the
homeowners as in Sacramento, but, according to LADWP Administrator David Freeman,
it keeps the LADWP as a participant with all other regional PV installation contractors,
rather than as a competitor.
Freeman reasons that it is the wish of the LADWP to have the PV installations in
their district (3 million utility customers) stimulate by example installations for the 20
million utility customers living nearby, but out of their district (e.g. Orange County), and
that this can best be accomplished if the costs are uniform across District boundaries.
The $3/watt LADWP buydown from within their District is matched by the $3/watt
buydown offered to customers of California’s investor owned utilities outside of the
LADWP district, while all other costs are the same. This removes a potential marketing
constraint for PV beyond the LADWP District that SMUD will have to face, namely, the
higher costs of PV installations as SMUD seeks to have influence in the nearby territory
of an investor-owned utility. This is discussed in part 2.5 of this Section.
A major tenant of the SMUD marketing philosophy is that SMUD’s program can
have an impact on nationwide PV and PV system costs, that is, that SMUD’s SODC
program will help propel the national SODC benefits to lower costs at earlier dates (see
Fig. 4). And yet SMUD’s actual PV purchases, as large as they are, represent only about
1.5% of PV sales by U.S. manufacturers, which could not directly have much of an
impact on national prices. The LADWP, with a larger PV program than SMUD’s over
the next five years, acknowledges up front that their PV program itself won’t drive down
25
the PV costs, but the ancillary benefits, resulting from publicity, educating architects, and
gaining public confidence in PV as a standard way of doing business, will bring benefits
to the entire PV community from increased sales, and hence lower prices indirectly.
Finally, we addressed in Section 1 of this report the apparent reluctance of
SMUD’s Power Generation Department to ascribe real value to benefits of gridconnected PV to the SMUD system, beyond energy and a portion of the rated PV
capacity. It is interesting to note in this regard that the rationale by the LADWP for
expending funds on PV comes in large part from a “non-traditional” benefit: earthquake
reliability and security (for end-users of electricity), which the LADWP sees as a rapidly
growing concern by their customers.
The LADWP engaged in a $1 million marketing effort to its customers. In
addition to offering PV for earthquake reliability and security, they appealed to their
customer’s “pride in living in a home for the 21st century”, “pride in using homegrown
electricity” and using PV as a “ hedge against energy price inflation.”19
2.3.2
Some Observations on Other Utility PV Programs
A few brief observations resulting from interviews with other utilities or suppliers
regarding their PV marketing programs are offered in the three examples that follow, but
only as they supplement or expand on the descriptions in the article by Osborn (see
footnote #1 on p. 1 of this Section). The purpose of this is to generalize to the
observation presented at the end of these examples.
2.3.2.1 Commonwealth Edison, the City of Chicago, and the SPIRE
Corporation
Commonwealth Edison and the City of Chicago have an agreement with the
SPIRE Corporation to build a PV factory on a 6-acre “Brownfield” in Chicago and to
construct an adjacent 2.5 MW PV generating station on the Brownfield land (producing
electricity at 0.4MW/acre), selling power to Commonwealth Edison, and for SPIRE to
provide a total of $12 million in PV products over a five-year period to Commonwealth.
The City of Chicago reaps the economic “multiplier” benefits of 50 new employees and a
new business, as well as a cleaner power mix. Commonwealth’s involvement, however,
resulted from a settlement with the City of Chicago following a power outage, and they
are reluctant participants. Commonwealth has apparently done no analyses at all on
“non-traditional” PV benefits, such as peak load shaving, reliability enhancement, or
T&D benefits. Indeed, it was the SPIRE Corporation that pointed out to Commonwealth
that turning the “Brownfield” into a “Brightfield” would save the utility $0.5 million per
acre of clean-up costs. Taking this one “non-traditional” benefit into account, SPIRE
calculated a 20-year resultant cost of energy from the PV applications to Commonwealth
of $0.23/kWh. This is still almost three times higher than SMUD’s 30-year estimate for
19
Administrator David Freeman expressed these views in a conversation on 11/19/99.
26
the 2003 end of its present program (see Table 2), leaving Commonwealth with little
interest in the PV ventures.
2.3.2.2 Idaho Power
The utility Idaho Power is involved in a multi-corporation ownership relationship
with the Applied Power Corporation, now billed as the largest domestic supplier of PV in
the U.S. Included in the APC “package” are Ascension Technologies (for on-grid
applications), Solar Electric Specialties (SEC), and Alternative Energy Engineering
(AEE). But Idaho Power and all of the other companies are also owned by their parent,
Idacorps Technology, which also has an interest in fuel cells (Idatech). These are all
business ventures for Idacorps, which are certainly laudable, but Idaho Power’s
participation in the PV applications is now almost negligible. Starting in 1991 Idaho
Power offered a pioneering program to new customers to substitute off-grid PV power for
line extensions when the PV was cheaper. About 250 of those were installed, but then
the program stalled out, and today Idaho Power basically just maintains them, although
they are looking at a few possible high-value applications, such as cathodic protection
and remote communications. But with 60% of Idaho Power’s energy from low-cost
hydroelectric, Idaho Power continues to have little interest in PV for itself.
2.3.2.3 Tucson Electric and Global Solar
Unisource Energy owns Tucson Electric Power (TEP) and has a 2/3 equity
position in the thin-film flexible-substrate PV company Global Solar, also located in
Tucson. This marriage has enabled TEP to install 260kW of PV systems in 5 projects,
using product provided by, but not yet manufactured by, Global Solar. This relationship
would seem to bode well for a SMUD-like future. Indeed, TEP’s responsibility under the
new pioneering Arizona Environmental Portfolio Standard (EPS) will be for 10MW of
PV by 2007. Since TEP is only 1/3 the size of SMUD, this would be equivalent to
30MW of new PV by SMUD in the next 7 years. Accordingly, TEP will continue with
an aggressive PV program, relying on multiple providers, yet only using a portion of the
product manufactured by Global Solar.
While this would seem to be fully similar to SMUD’s program and the potential
benefits for Tucson customers, TEP’s careful economic calculations continue to show
little financial benefit of PV to TEP. The “value” of the PV power, taking into account
the system load profile and the time-of-day PV output, is still lower than either the output
of their nuclear plant (Palo Verde) or a possible wind-electric plant. The late evening
peak power demand in that hot climate leaves PV with only a 20% coincidence at best
with the peak, and the remaining peak after sunset would still load down infrastructure,
giving PV no T and D value. As a result, TEP is building PV applications only in
response to the legislated EPS mandate, but not because they see any intrinsic value for
the utility. Still, they want to keep the PV costs down, so they recommend the economics
of large central PV plants as being better for this than building-integrated PV applications
27
(BIPV). The ground-mounted PV arrays at TEP switchyards are there only as cheaper
methods to meet the EPS, not because of any perceived value to the switchyard.
2.3.2.4 Austin Energy20
Austin Energy (formerly the City of Austin Electric Utility Department) currently
owns 2,450 megawatts of generation capacity, mostly from coal, natural gas, and nuclear
sources.
Customers in the Austin Energy service territory have shown a strong interest in
participating in and supporting efficiency and renewable energy programs. Austin Energy
and the City of Austin are already recognized for some of the most comprehensive and
successful energy conservation programs in the nation. Since 1982, more than 100,000
Austinites have used Austin Energy rebates or low-interest loans to make home energy
improvements. Austin Energy's Green Building program, which provides assistance to
builders in the design of energy and resource-efficient and environmentally friendly
homes, is the largest in the country in terms of the number of builders participating (58),
the number of architects and designers (59), and the number of homes built (681 in FY
1999) with Green Builder features. Now, Austin Energy is beginning to incorporate PV
and other renewables in its service territory as a test of clean, distributed generation.
In support of these clean energy alternatives, Austin Energy is committing to $7.8
million in spending in each of the next 10 years to build its green power program.
Austin Energy's GreenChoice is a program aimed at providing power generated
from wind, sun and biomass sufficient to meet 5% of the utility's energy sales by 2005.
Through March 2000, about 700 residential customers have signed up for GreenChoice
and another 500 have received brochures. The program costs subscribers an additional
$0.004 per kWh-the smallest premium of any green power program in the nation,
according to a Department of Energy survey. Subscriptions of five large companies
alone will absorb about 15 percent of the initial 40 MW of green power that began to
flow into the Austin Energy grid by the fall of 2000.
Solar Explorer is Austin's newest renewable energy program. For just $3.50 per
month, residents of Austin can share the cost of constructing PV systems, but these are
not mounted on residences, and the focus of the Austin program is not on a systematic
development of a PV market. Austin’s program is perhaps more closely allied with
Wisconsin’s “Solarwise Schools” program as far as the use of public funds for the
construction of PV is concerned. So while the Austin Energy model is laudable, it is not
really a replication of the main market-based ingredients of the SMUD PV program.
20
This description was taken from an earlier work by one of us (SS).
28
2.3.3
Conclusions from these other utility experiences
The perceived economic “value” to the utility and/or its customers is still the
short-term driving force behind most utility interest in PV. If the benefits are not there,
or cannot be demonstrated, the utilities remain uninterested, only moved into PV
programs by various forms of legislated or PUC or court-mandated coercion. This is
unfortunate. But this underscores the necessity for SMUD to continue to determine,
evaluate, and publicize the economic benefits of its PV applications to its customers as
well as internally to other SMUD departments. And this also underscores the need for
SMUD to demonstrate that the PV programs earn their own way. For the next 12 years
this is safe for SMUD, because of the extension of the California Public Goods Charge
program and SMUD’s adoption of its share of that. But these funds can be used broadly
for public goods, so the more that SMUD’s PV programs earn their own way, or have
costs covered by green surcharges or PV partner expense reimbursements, the more
Public Goods funds can be diverted to other programs within SMUD.
2.4
Marketing Challenges Facing SMUD
There are now at least three major marketing questions before SMUD, as they look
toward projecting their PV market development philosophy well into the future. The first
is whether their low costs are sustainable, in light of continuing experience outside of
their district that would suggest that higher prices are the norm and in face of criticism
from contractors outside of the SMUD District who argue that SMUD is “subsidizing”
their low costs in a competitively unfair manner. This becomes an apples and oranges
argument, however, for the higher prices quoted by others are not based upon multi-year,
multi-megawatt acquisitions, therefore requiring PV suppliers outside of the SMUD
District with the need to recoup costs of each sale from each sale, rather than over a
period of time during which hardware costs also decline.
SMUD can also reasonably argue that any other utility, or any other sales entity, for
that matter, could achieve the same cost reductions as SMUD, if it embarked on programs
of the same type and magnitude. Therefore, it is appropriate to examine the possibility of
SMUD’s continuing success based upon the SODC curve shown as “B” in Figure 4
(“SMUD with SOD”), for it does indeed pertain to the reality of SMUD’s
accomplishments and projections. That it diverges from the national SODC projection is
not really relevant to SMUD, except to underscore the earlier arrival by SMUD at full
economic justification for its PV Program.
The second marketing question before SMUD, though, is whether the market
demand within their District will be sufficient over a large number of years to provide for
a stable market at costs that keeps SMUD on their SODC path, or whether they can and
should supplement those activities and revenues with expansions beyond their District,
such as their “PV Partnership” program, in order to continue to provide a sufficient
market for multi-MW PV acquisitions at continuing favorable prices.
29
Two projections made for SMUD’s PV market potential in the Pioneer programs
are presented on the following 2 pages as Fig. 6 and Table 3.21 They are basically
consistent, both suggesting hundreds of MW of realistic customer potential just within
the SMUD District, certainly enough to provide SMUD with years of reliable sales for
its multi-year programs from within its own District, but clearly price-sensitive, requiring
SMUD to continue to obtain PV systems at bulk, multi-year prices, to pass the savings on
to their customers.
Market Potential for Customer-owned
PV SMUD - March '97
30%
25%
20%
15%
24%
>200
MW
14%
12%
10%
7%
8%
Discounted
4%
5%
>35
MW
0%
Willing to pay more
Willing to pay about
15% more
Willing to pay about
30% more
Figure 6: Surveyed market potential for PV Pioneer II PV installations
21
From Wenger and Hoff—see footnote 6.
30
Table 3. Future Potential MW of PV Pioneer Installations for SMUD
Distribution Planning
Area
Potential in
1996 (MW)
Potential in
2000 (MW)
Potential in
2005 (MW)
AFB
<1
<1
<2
Antelope
13
14
15
Carmichael / Citrus Hts
147
158
174
Downtown
6
6
7
Elk Grove / Laguna
37
40
44
Folsom
12
13
14
Galt
13
14
15
Industrial Area
6
6
7
N Natomas
4
4
5
Other Area
31
33
37
Pocket
15
16
18
Rancho Cordova
31
33
37
Rancho Murieta
3
3
4
S Natomas / Elverta
66
71
78
TOTAL
385
412
457
A third marketing challenge before SMUD is to manage to gain better evaluation of
PV’s true economic value within the other operations of SMUD. It does not make sense,
for example, as first argued in Section 1 of this report, for the peak-shaving benefit of
SMUD’s 8 MW of PV to be given no value. It does not make sense for the contribution
of PV located on buildings or at substations toward enhanced reliability of service to be
given no value. It does not make sense to give no value to the growing security of
customer costs from SMUD’s renewable energy supplies, or to the value of the nonhydro renewables as a “hedge” against low hydro potential years. It does not even make
sense not to appreciate the huge public relations benefits accruing to SMUD from giving
customers what they want and believe in. These are challenges, however, that can only
be met within SMUD, and so we can only recommend—as we do—that this policy
within SMUD be changed.
2.5
Trends in Emerging Utility Market Structures
People who live in Sacramento are privileged, for they participate in the very
favorable combined buy-downs and low system costs provided by SMUD. People who
live outside of Sacramento can only look at those costs with envy, as they receive higher
quotes from private contractors, and may be discouraged from PV applications by the
higher costs that they must pay. This in principle could severely limit the ability of
SMUD to extrapolate its program benefits to areas outside of its District.
31
But there are at least three ways out of this, which can in principle continue to
provide the low-cost PV installations that SMUD customers enjoy, but also enhancing the
value of the SMUD PV Program to outside of the District. The first has already been
mentioned, and that is that any other utility can elect to undertake the same multi-year
bulk PV purchases and, hence, offer the same attractively low prices to their own
customers. But electricity customers just outside of the SMUD territory are served by the
Pacific Gas and Electric Co. (PG&E), which is an investor-owned utility, and hence
which operates on very different financial assumptions, because of the deregulated nature
of California investor-owned power suppliers.
SMUD is still a “vertically integrated” company, managing all aspects of the
delivery of power to its customers, and hence able to realize PV benefits from one
internal operation as they benefit other operations, whereas PG&E is now a restructured
company selling the distribution of power that it buys from the California Power
Exchange, so the accrual of financial benefits from PV installations are no longer
centered within one company. This is a major potential stumbling block. Indeed, as
PG&E is paid by its customers today on the basis of the energy delivered over their T&D
system, reductions in energy use by end-users could have a negative effect on PG&E’s
earnings. And PG&E purchases its power from the California Power Exchange, and has
little intrinsic incentive to acquire more costly power.
The way out of this dilemma is the second “leveling the field” policy, in that
California legislation requires utilities to gather a surcharge from each customer and
apply this “Systems Benefits Charge” to “Public Goods” Programs, of which renewable
energy is one. There may have been some long-term uncertainty in this, in that the
present $54 million for PV is to be expended by March 2002. But the Public Goods
program, recently extended ten years by the California legislature, will produce well over
an additional billion dollars for renewables over that period, guaranteeing important PV
buydown potential through 2012.
The $3/watt present California Energy Commission buydown for PV is similar to
SMUD’s first-year buydown rate for its customer-owned rooftop systems (see Table 4
below). And as PV applications increase, the basic cost for installed systems by the
private sector will be lowered, while SMUD will reduce its own contribution to its
customers in proportion to a decrease in SMUD PV system costs. (Table 4 shows that
SMUD’s costs charged to its customers level at $2.50/watt starting in 2001.) This may
serve to bring the SMUD costs and the private sector costs for customers outside of the
SMUD territory considerably closer than they are now, reducing the apparent SMUD
District advantage.
SMUD Cost
“Buydown”
Customer Cost*
Table 4: PV Pioneer II: Estimated Unit Prices – ($/W)
1998
1999
2000
2001
$ 5.07
$ 4.50
$ 4.00
$ 3.42
$ 2.84
$ 2.13
$ 1.60
$ 0.92
$ 2.23
$ 2.37
$ 2.40
$ 2.50
* Available to SMUD distribution customers.
32
2002
$ 3.18
$ 0.68
$ 2.50
2003
$ 2.98
$ 0.48
$ 2.50
A third method by which SMUD can help to reduce the inequity of costs for its own
customers and those outside of its District is for SMUD to provide services that would
otherwise be more costly in the private sector, and to embrace aggregation of PV
purchases with other entities outside of its District. This begins to describe the “PV
Partnership Program”, which is discussed in the next part of this Section.
2.6
Additional Market Potential for SMUD’s PV Program
There appear to be at least four areas in which SMUD can (and, to a good extent,
already does) expand its PV Program influence and activities. Three involve
conventional PV applications. The fourth would be for SMUD to more aggressively seek
opportunities for “high-value” or “Niche” PV applications within its own District, such as
applications for streetlights, billboards, building security systems, and perhaps peakshaving for commercial buildings, to reduce the high end of their bills (see footnote #8.)
The authors of the NRDC Review of the SMUD Public Benefits Programs suggest that
this could also diversify SMUD’s financial risk in its own PV program22.
We have already expressed out opinion in Section 1, however, that this “safe”
haven for PV investments is not an adequate cornerstone on which to build a marketing
plan based on large future volume and to continue accomplishing program cost
reductions:
The advocacy of the Niche Market approach as the primary basis of a PV
commercialization policy today is much like building the Maginot Line; it is a policy that
responds to past conditions, not to the changed conditions of the present nor of the
future. Commercialization policy for this decade must reach beyond the Niche Market
approach if that policy is to make a significant impact towards commercializing PV for
the broader grid-connected markets and permitting PV to make a real impact towards
being part of the solution of our critical energy and environmental problems…The Niche
market does continue to be important as a precursor to these other, volume driven
strategies and as an excellent way for new players to gain useful experience and develop
confidence with PV.23
A published research report on “Expanding Markets for Photovoltaics: What to Do
Next”, recommended a number of market strategies24. One of those, and consistent with
the discussion above, was the author’s view that “…the secret to expanding markets for
PVs seems to include both the exploitation of high-value markets and subsequent
volume-driven cost reductions.” SMUD has reversed this process by using high-volume
22
Gordon, F., Hewitt, D., and Pratt, J., Pacific Energy Associates, Inc., Review for Sacramento Municipal
Utility District Public Benefits Programs, Final Report, prepared for The Natural Resources Defense
Council, August 12, 1999.
23
See footnote #11
24
Serchuk, A., and Singh, V., Expanding Markets for Photovoltaics: What to Do Next”, Renewable
Energy Policy Project, Special Report, December, 1998
33
PV programs to reduce their costs before investing in other applications. The result is
that their future investments in “high value” PV applications will now be even “higher
value” for SMUD.
The REPP research report also stressed the importance of “buy down” policies, net
metering, standardized interconnection requirements, and minimal additional fees. There
is no doubt that SMUD’s program is certainly consistent with this package of nationally
recommended marketing strategies.
SMUD has already developed its “PV Partnership Program”, in which it offers
procurement support (e.g. in the form of aggregated orders to reduce costs), technical
consultation and programmatic assistance (with SMUD paid for its professional time),
and joint development projects. Continuation and expansion of this could presumably
help to support staff personnel and SMUD overhead in SMUD’s PV program, while
meeting SMUD’s goal to extend its influence and benefits to a wider field. SMUD PV
partnerships from 1997 through 1999 are shown below in Table 5.
Partner
Table 5: SMUD PV Partnerships 1997 through 1999
Scope of activity with SMUD
Alameda Bureau of Electricity
TEAM-UP, 4kW system supplied
Citizens Utilities, AZ
TEAM-UP, 16 kW systems supply
Los Angeles Dept. Water & Power
TEAM-UP, 28 kW inverter supply, consulting
Main Power, New Zealand
4 kW system, program assistance
Western Area Power Administration
TEAM-UP, 51 kW systems supply, program assistance
Northern CA Power Agency
TEAM-UP
New York Power Authority
TEAM-UP
Salt River Project
TEAM-UP, Renewables & Distributed Generation Joint MOU
Tucson Solar Alliance
TEAM-UP
CA State Parks Department
4 kW Visitor Center PV system
City of Roseville Electric Department
TEAM-UP, 8.5 kW Bleacher/PV system
State of CA
20.5 kW Parking Garage Solarport
Jacksonville Electric, FL
MOU, 8 kW systems
National Park Service/NREL
PV energy supply system for Alcatraz, 85+ kW
Truckee-Donner Public Utility District, CA
TEAM-UP, 2 kW system, DAS
State of CA EPA
30 kW turnkey rooftop system on new high-rise
34
A third potential market expansion area is for SMUD to be the provider of
components and expertise to other utilities, partnering with them in bulk and multi-year
PV module and balance-of-system procurements, and being reimbursed for SMUD
expertise. SMUD has long offered this opportunity, but there have been few takers, and
only for selected projects (see Table 5), not for long-term multi-megawatt joint programs.
These would be mutually beneficial in reducing PV costs for SMUD as well as for its
procurement partner. But it will require a commitment by the partnering utility
equivalent to SMUD’s own, and, as we have presented, we are not aware that this has yet
emerged in places other than Los Angeles, and perhaps partly also in Austin, Texas.
A fourth market expansion area, which SMUD is also already seriously pursuing, is
in the field of new residential construction. One-half of the projected load growth for the
utility (and for the State) is expected to come from new residential construction. Toward
this end the SMUD Solar Program is actively teaming up with its own architectural
department to develop and complement substantially more efficient residential designs
(Energy Advantage Tier III) with modest-sized (2kW) rooftop PV systems. The aim of
this is to produce “zero net peak demand” houses, so that the new residential construction
in its district does not exacerbate the expensive power purchase needs by SMUD during
peak demand times. This was shown in a careful Florida experiment to be an effective
and realistic option25.
The aim of the partnership of the SMUD Solar and SMUD New Construction
Programs is to remove the new on-peak load while retaining the off-peak load. The
estimated maximum potential of this could be 22.5MW/year load reduction, at post-2003
costs of less than $3/W for installation and 8-9 cents/kWh for energy costs,26 well below
those for either standby peak load generation or power purchases to meet peak loads. As
argued several times by us, though, this also requires recognition inside SMUD of these
financial benefits accruing to SMUD from combined architectural and PV applications,
so that the economic savings enjoyed by SMUD’s power purchasing department can be
attributed to the PV and New Construction Programs, to offset the architectural and PV
program costs, possibly neutralizing those costs in view of internal bookkeeping. Under
the present system, the savings are absorbed by SMUD, while the costs are seen as
separate budget line items that “subsidize” the PV program.
An additional benefit of the new construction program, however, would be to
reduce costs for future SMUD PV applications, since it is easier and cheaper to install PV
in new construction than in retrofit applications.
Further market development aspects of the future SMUD Solar Program are
presented in Section 3 of this report.
25
26
Parker, D., and Sheinkopf, K., see Footnote #10.
Osborn, Donald, from his talk at the UPEX 2000 Conference, “SMUD and the Solar Power Frontier”
35
2.7 Conclusions
The purpose of this section has been to examine the economic basis and wisdom
of SMUD’s solar marketing program to date, and to see if weaknesses are showing up.
SMUD’s aim is for the solar program to become essentially self-supporting.
With regard to potential program or marketing weaknesses, no glaring ones have
appeared in our analysis. Indeed, we see emerging new strengths as the SMUD Solar
Program staff embarks on many of the directions that we suggest. It is good that this has
been accomplished to date with so little impact on SMUD’s finances. Quoting from
Osborn’s review paper (see footnote #8):
The multi-year, 10MW program is being funded by SMUD mainly through the
market value of the PV generated energy and just 0.6% of annual District
revenues being committed to PV under the Public Good Fund (PGF) program at
SMUD. Over the 5-year period, 7.5 MW of the full 10 MW is funded by the value
to SMUD of the PV generation as a wholesale, power market commodity (about 2
to 3 cents/kWh) and the 0.6% of revenues that is committed to the renewables
portion of SMUD’s Public Goods Funds (about $3.6 million per year). The
balance of the 10MW, about 2.5MW, is covered by leveraged funds that include
PV Pioneer II sales, PV Partnership sales, and grants or cost-shares such as
TEAM-UP funding.
We believe that it is not at all unreasonable to aim to have the SMUD Solar
Program become essentially fully self-supporting within this next five-year cycle of PV
procurements. But we also note that SMUD should plan to continue subsidies for the PV
program anyway, to accelerate the accrual of benefits.
We echo Osborn’s stress on collaboration among utilities; local, state and federal
agencies; and other stakeholders, as a necessary ingredient to accomplish the
commercialization of PV, and anticipate that SMUD’s future PV marketing strategy will
continue to include (and perhaps expand upon) the kind of collaborative efforts they have
already shown with, for example, the federal TEAM-UP program.
A federally sponsored “PV Technology Roadmap Workshop”, jointly conducted
by the U.S. Department of Energy (National Center for Photovoltaics) and the U.S.
Photovoltaics industry in June, 1999.27 Highlighted two recommendations for
“Commercialization”:
 Encourage consistent multiple-year funding
 Offer long-term low-interest financing for appropriate, easily integrated, reliable
PV systems.
27
See Report of the Photovoltaic (PV) Industry Roadmap Workshop, Energetics, Inc., Columbia, MD,
September 30, 1999
36
And in their “Summary Session” the participants at that Workshop noted several
strategies critical to the expansion of the PV market. Among them were:




Alternative subsidy opportunities to enhance the grid-tied PV market need to be
developed.
Installed system prices must be significantly reduced.
For grid-tied systems, customer expectations in terms of performance and
reliability need to be met.
Grid-tied PV applications must be accepted by the electric utility industry
.
SMUD’s strategies for developing their PV market since 1993 have certainly been
consistent with these recommendations. And SMUD is one of the “alternative subsidy
opportunities” recommended by the PV industry and federal government.
37
3.
A Blueprint for Commercialization
3.1
Introduction
This section of the SMUD program review addresses the question of how SMUD’s
market development activities compare to those of a new business or commercial
enterprise. Given SMUD’s goal of extending the PV Pioneer Program to new
geographical areas or markets, a comparison of the SMUD program to accepted
commercialization and market development models can be helpful in guiding
management’s future efforts.
Included with this comparison is an acknowledgement of “best practices,” or those
areas where SMUD is doing the right things from a commercialization point of view.
Areas for potential improvement and requirements for commercial success are also
discussed.
The material presented in this section forms a foundation from which SMUD’s
market development activities can be augmented or refined.
3.2
Definitions and Assumptions
Mainstream Market – the portion of a total market represented by conservative buyers,
who are referred to as the early and late majority. The mainstream market segment
contains 67% of a market’s total population.
Discontinuous Innovations - new products or services that require the end user to
significantly change their past behavior.
Disruptive Technology – a technology whose performance or potential is not fully
developed, but offers commercial value because it is cheaper, simpler, smaller or more
convenient to use than established products.
Market Transformation - a process whereby new products or technologies are introduced
into the marketplace and, over time, penetrate a large portion of the eligible market. Once
a new product (or other type of innovation) is introduced, its penetration begins to rise
through a sequence of buyer types. Penetration then "takes off" as awareness of the
technology and its advantages grows. Market transformation involves ongoing and
lasting change such that the market does not regress to lower levels of utilization at some
later time.
3.3
New Business Fundamentals
The task of any business is to deliver value to the market at a profit. There are at
least two views of how an organization goes about the task of delivering value. The
traditional view is that the firm makes something and then sells it. This view assumes
38
that the organization knows what to make and that the market will buy enough units to
produce profits for the organization.
Alternatively, there is a contemporary view that says organizations must design or
customize an offering for well-defined target markets. Instead of emphasizing making
and selling, this view describes the business process in terms of a sequence of value
creation and delivery. In this sequence, the company must segment the market, select the
appropriate market target, and develop an offering that has great value to people in the
target market.
The contemporary view of business is most relevant when the product offering is
complex. The traditional view is appropriate in economies marked by goods shortages,
where people buy whatever is available. If an organization chooses to embrace the
contemporary view of business, then an understanding of market segmentation and
market adoption is required.
3.4
Overview of Commercial/Market Adoption Models
There are a number of widely accepted models of market development or “market
transformation” that offer guidelines for accelerating the adoption of new technologies in
an emerging marketplace. Two of them provide useful background information for this
review of the SMUD PV Program.
To set the stage for an objective assessment of the SMUD program, two
models of market transformation are presented prior to making
comparisons with the SMUD program. Please note that not all aspects of
high-technology market development theory apply to SMUD’s situation,
and this introductory discussion of the market adoption process does not
specifically refer to photovoltaics or to SMUD.
The first model is the Technology Adoption Lifecycle which was originally
developed in 1957 based on social research about how communities respond to
discontinuous innovations--new products or services that require the end user to change
their past behavior. Everett Rogers broadened this model six years later in his book,
Diffusion of Innovations28.
The Technology Adoption Lifecycle is a model that describes a market’s acceptance
of a new technology in terms of the types of consumers it attracts throughout its useful
life. It is probably the most well established model in “new product marketing” because
it provides useful insight at all stages of market development.
The underlying thesis of the Technology Adoption Lifecycle is that innovations are
absorbed into any given user base in stages corresponding to psychological and social
profiles of segments within that user community. The process can be represented by a
28
Everett M. Rogers, Diffusion of Innovations, The Free Press, New York, 1962
39
bell curve with definable stages; each associated with a definable group, and each group
making up a predictable portion of the whole community (see Figure 7).
34%
34%
13.5%
16%
2.5%
Innovators
Early
Adopters
Early
Majority
Late
Majority
Laggards
Figure 7: The Technology Adoption Lifecycle indicates the sequence in which buyers enter the market
and adopt a new product or innovation. The percentage of each buyer type is also represented.
The prescription for success in introducing a new product or technology into any
community is to work the curve from left to right, focusing first on the innovators,
growing that market, then moving on to the early adopters, growing that market, and so
on. To do this effectively, it is necessary to know and understand the psychological
characteristics of each group of buyers. (The Appendix at the end of this section
provides psychographic profiles of each buyer type in the adoption process)
The psychographics of each group in the adoption process influences the
development and dynamics of the market. For example, each group places a different
value on product intangibles, and on endorsements or references from other groups. As
products move through the adoption process, intangibles and user references assume
more importance. Often, pioneering new products lose their initial prominence because a
new entrant is more successful in product positioning based on a more effective mix of
intangibles. This can be the case even if the second product is not technically superior.
Another useful, albeit less developed model of market adoption is the Principle of
Disruptive Innovation. This model provides a framework for commercializing new
products whose performance is not as well developed as established products along
some dimension that mainstream customers have historically valued. Developed by
Clayton Christensen, an associate professor at the Harvard Business School, the
fundamental principle is that new technologies usually fail when offered in direct
competition (or in direct comparison) to established offerings because they are not
initially able to deliver the value provided by mainstream products.
Although disruptive technologies often become competitive over time, the task of
an organization is to discover alternative applications or uses that have the greatest value
to early customers, and focus on those first. Historically, the attributes that make
disruptive technologies unattractive in established markets often are the very ones
that constitute their greatest value in emerging markets.
40
The Technology Adoption Lifecycle and the Principle of Disruptive Innovation
share at least two fundamental attributes. First, both models describe market
development in terms of the changing nature of the user rather than the product. Using
similar terminology, both suggest that products are initially used by early customers who
base their purchase decisions primarily on the product’s functionality. Then, once the
demand for functionality has been met, vendors must begin to address the need for
reliability that is demanded by an initial wave of mainstream buyers. A third phase of
growth occurs when market followers and conservatives require that vendors meet their
needs for convenience. The final group is mostly concerned with price.
Another shared attribute is, despite a track record of proven success, both models
are counterintuitive to most business managers. When struggling for survival, a new
organization will find it incongruous to focus on the peculiar or specialized needs of a
small group of potential buyers, before addressing the more common needs of larger
groups. Too often managers attempt to serve an entire market all at once, and
unintentionally delay the market transformation process.
The inescapable task of winning over a sequence of buyer types, combined with the
necessity of promoting intangible benefits tailored to the user’s point-of-view, form the
cornerstones of market transformation. These principles have repeatedly guided new
products and companies to the achievement of mainstream market acceptance and
commercial success. Much of the history and experience behind these models can be
translated into helpful guidance for SMUD.
3.5
Historical Perspective: Sustained Orderly Development and
Commercialization (SODC)
The strategies historically employed to spur expansion of the PV market are almost
always product oriented. They are typically based on the progressive lowering of prices
through economies of mass production, combined with subsidized “buy-down” programs
for residential and small business users. Lowering “cost per watt” is seen as the key to
unlocking a vast potential market for photovoltaics.
The cost-per-watt model requires coordinated, volume procurement of PV,
suppliers willing to offer low-profit pricing and long-term service contracts, and the
belief that PV installers need to prepare for the consumer market, which will soon
emerge. At the same time, steps are taken to make the product (PV) more “attractive” to
the consumer. These include: legislation that encourages deployment of PV systems,
sales tax exemptions, interconnection standards, net metering laws, and other programs
designed to ease or eliminate barriers to adoption.
A comprehensive description of SMUD’s SODC Program is provided in Section
Two of this report. The purpose of this section is to provide a comparison of the SMUD
program to the accepted commercialization and market development models discussed
above.
41
3.6
Comparing SMUD with Commercial Market Development
One of the important objectives of this report is to compare SMUD’s SODC
Program with the accepted principles of commercial market development. Although
municipal utilities are not subject to exactly the same competitive conditions found in a
free market environment, this comparison has the potential to help SMUD migrate their
PV efforts toward a more commercial orientation.
Numerous past studies and development efforts have promoted a “product path” to
PV market expansion, similar to SMUD’s SODC Program. PV products are subsidized
or supported with the primary goal of achieving economies of mass production and
eliminating barriers to use. Examples include:
 federal and state buy-down programs
 coordinated government procurement of PV
 elimination of barriers to capital formation
 legislative packages supporting distributed energy
 legislative and regulatory assistance to states
 prohibition of restrictive covenants and ordinances
As stated in a recent research report by the Renewable Energy Policy Project
(REPP):
The product path requires government involvement to increase the diffusion rate of
consumer [PV] products through setting market rules, making strategic purchases,
and other innovative support.29
This product-centric approach emphasizes pushing photovoltaics into various
applications or markets under the assumption that lower prices, attractive financing
options, and the absence of barriers to implementation, will automatically lead to
consumer demand.
In contrast, the underlying belief in a commercial enterprise is that people do things
for their own reasons. So low price and ease of implementation do not exclusively drive
market transformation. People must want to buy what is being offered. And motivating
people to want something—especially if it’s technical in nature—requires the influence
or involvement of preceding groups of people in the marketplace.
Most “for profit” organizations working to accelerate market transformation focus
on winning over groups of buyers in sequence according to their psychographic profiles.
This involves identifying a group of early buyers who initially value a product offering,
and then communicating or promoting a combination of tangible and intangible benefits
in ways that lead to the sale of product. After capturing the first group, the organization
refocuses its collective attention on the unique needs of the next group, and so on. In this
way a succession of customers act to pull the market forward as the product is adapted or
“positioned” to address their varying needs.
29
Serchuk, A., and Singh, V., see Footnote #24.
42
From the standpoint of pure capitalism, it is important to realize that there is no
guarantee solar power will automatically become widely adopted when it costs
approximately the same, or even somewhat less than conventional sources of electricity.
Many other factors influence market adoption.
3.7
The Delivered Value of PV
Qualitative interviews conducted with participants in SMUD’s PV Pioneer
programs reveal some interesting information regarding the end user’s perception of
value. Results from telephone interviews highlight the differences between the
customer’s value profile, and traditional beliefs about why people use PV. When asked
why they decided to participate in PV Pioneer I, the most common responses were:
1. roof protection
2. interior heat reduction (panel shade)
3. environmental benefits
Although this survey is not statistically valid, it appears that the value of PV
equipment to Pioneer Program participants is much different than the traditional benefits
associated with solar power: reduced pollution, lower energy-related emissions of
greenhouse gases, renewable source of energy, etc.
Furthermore, the Technology Adoption Lifecycle would lead us to expect that
initially, customers would participate in the PV Pioneer Program strictly due to their love
of technology. (Please refer to the psychographic profile for innovators at the end of this
section) But interview responses indicate that many PV Pioneers are conservative by
nature and therefore we know the expansion of the PV program in Sacramento is not
following the standard technology adoption sequence (innovators, early adopters, early
majority, and so on)
Also notable was the fact that nearly all respondents said they would not participate
in the PV Pioneer Program if it were not offered by their electric utility. This is
significant because the image or reputation of a supplier is one of the intangible benefits
that lead a conservative buyer to purchase. And clearly SMUD is able to off that specific
benefit whereas others may not.
The relationship between product tangibles and intangibles shifts dramatically as
different stages of the adoption process are achieved. This shift in customer emphasis
from tangibles to intangibles can be demonstrated schematically, as shown on the next
page in fig. 8.
43
Innovator
Early Adopter
Early Majority
Late Majority
Product Tangibles
Product Intangibles
Figure 8: The Shift From Customer Tangibles to Intangibles
As products move through the adoption process, intangibles assume more importance.
This confirms the need for utilities to be part of the value chain that ultimately expands
the residential use of PV.
3.8
Migrating Toward a Commercial Enterprise
One of SMUD’s stated goals is to develop a business and marketing strategy that
will lead to an unsubsidized commercial market in which solar power achieves
widespread acceptance. In support of that goal, SMUD can immediately begin to use
many of the techniques prescribed in market transformation models originally developed
for high technology.
For example SMUD can begin to accelerate the adoption of PV through use of the
following “commercial” practices and conventions:

Put more emphasis on understanding where SMUD’s PV Program is within the
technology adoption lifecycle. In order to apply the principles of commercial market
adoption, the first step is to determine where you are on the technology adoption life
cycle bell curve. Only then will you know what types of buyers are available to
address, and which programs are appropriate for that group.
You can roughly estimate the progression of the market by applying the
percentages underlying the Technology Adoption Lifecycle curve to the population
that is served by SMUD. So in the SMUD service area of approximately 508,000
customers there are:
1.
2.
3.
4.
5.
12,700 innovators (2.5%)
68,580 early adopters (13.5%)
172,720 early majority (34%)
172,720 late majority (34%)
81,280 laggards (16%)
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
Rethink the target market as you progress. Just as the characteristics of a PV system
changes over time, so too will the appropriate market. Readjust the description of
your target market and pay close attention to the differences in the groups. For
example, innovators and early adopters may be excited about a "new" product but the
early and late majority will want reassurances that risk is minimal and the product
will do what is promised.

Furthermore, target marketing is a critical practice for SMUD to embrace. History
shows that clearly targeted products diffuse more rapidly than non-targeted products.
Complicating this factor is overwhelming evidence that the customer base changes
for each stage of the product life cycle as different segments of the market become
interested in PV at different times. Consequently, it is important to recognize the need
to clearly identify and profile a target market as well as take into account that the
profile of the target market will change over time.

Develop a testimonial program where early users discuss and promote their
experience with PV to the appropriate audience. Because consumers see technology
purchases as fundamentally high risk, they look for signs of comfort before buying.
A positive reference from an existing PV customer can accelerate the purchase
decision provided the relationship between the two customers is correct. For
example, innovators can provide references for early adopters, but no one else.
Members of the late majority are the only credible reference for other members of the
late majority. A successful testimonial program must provide the appropriate
reference at the right time.

Begin to promote more of the intangible benefits of PV using communications
techniques that are acceptable to the type of customer you are targeting. Each group
in the Technology Adoption Lifecycle has strong preferences regarding how they like
to receive information. For example, innovators and early adopters hate magazine
articles about current users, because they like being “first.” And members of the
early and late majority despise technology conferences. So all promotional activities
must be in step with the target market.

Keep an eye out for unconventional applications that exploit PV’s limitations. The
Principle of Disruptive Innovation shows that historically, the very attributes that
make certain technology products uncompetitive in mainstream markets actually
count as positive attributes in new or emerging markets. This would indicate that
SMUD might discover a group of buyers who view the inherent limitations of PV-dependence on sunshine, limited generation capacity, generation restricted to certain
times of day, requires land or roof coverage, etc--as desirable characteristics that they
are willing to pay for.
This may seem counterintuitive but please consider the following. Electric cars offer
many desirable attributes to potential buyers—zero pollution, quiet, low operating
cost per mile, etc. But their limited range makes them unattractive in direct
comparison to gasoline-powered cars. Until battery technology progresses to allow
greater range, electric cars could be marketed to people who WANT limited range,
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such as the parents of teenage drivers. Odd as it sounds, the limitation of range is
what makes an electric vehicle most attractive to certain buyers. Unfortunately
automakers don’t understand the Principle of Disruptive Innovation and are missing
the opportunity to help accelerate the adoption of electric vehicles in the marketplace.
Instead they sell EVs through their existing dealer channel in direct competition with
gasoline-powered cars, where electric cars are seen as inadequate.
The Principle of Disruptive Innovation has some interesting implications for PV.
Buyers probably exist who are willing to purchase solar power specifically to get the
attributes that are considered to be weaknesses by mainstream consumers. In fact,
participants in SMUD’s PV Pioneer Program have indicated in interviews that they
value panel shade and roof protection above all else--attributes that are seen as
unfavorable by mainstream purchasers of electric power.

Determine what makes the product “complete” in the eyes of the target customer.
Although innovators and early adopters easily tolerate missing pieces, the
conservative buyers that make up the early and late majority will not accept an
incomplete product. Frequently, the product is not seen as complete unless it contains
several intangible attributes. Discovering what those intangibles are, and how to
incorporate them, takes a great deal of time and attention focused on the target buyer.

Continue to build a customer-oriented channel of distribution so that customers are
comfortable making the purchase. Please note that SMUD is doing an excellent job
of this already and continued strength in this area will be SMUD’s greatest long-term
competitive advantage should they ever face free market conditions. When PV
becomes a mainstream product, conservative customers will feel most comfortable
buying a system from their local utility.
3.9
Summary
Like all business or market development initiatives, the success of SMUD’s PV
Pioneer Program in a free market environment will depend on how well the organization
tailors its offering to deliver perceived value to a changing base of prospective users over
time.
When applied to SMUD, there is substantial value in the Technology Adoption Life
Cycle as a marketing model. By isolating the psychographics of customers based on
when they tend to enter the market, it gives clear guidance on how to develop a
marketing program for an innovative product, such as PV.
If SMUD were to follow the relevant guidelines offered by the Technology
Adoption Lifecycle and the Principle of Disruptive Innovation, several fundamental
practices would emerge:
1. SMUD would focus on serving specific groups of customers in sequence, one
group at a time. This is often called target marketing.
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2. A new emphasis would be placed on discovering the psychographic and value
profiles of potential customers.
3. SMUD would continue to build the organization needed to install and service PV
systems for customers. As a utility SMUD lowers risk for conservative customers
and therefore accelerates market transformation.
4. SMUD would tailor their promotional activities to fit the preferences of their
target market.
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Appendix
Psychographic Profiles of Each Buyer Type in the
Adoption process
Innovators
Innovators pursue new technology products aggressively. They sometimes seek
them out even before a formal marketing program has been launched. This is
because technology is a central interest in their life, regardless of what function it is
performing. At root they are intrigued with any fundamental advance and often
make a technology purchase simply for the pleasure of exploring the new device’s
properties. There are not very many innovators in any given market segment, but
winning them over at the outset of a marketing campaign is key nonetheless,
because their endorsement reassures the other players in the marketplace that the
product does in fact work.
Early Adopters
Early Adopters, like innovators, buy into new product concepts very early in their
life cycle, but unlike innovators, they are not technologists. Rather they are people
who find it easy to imagine, understand and appreciate the benefits of a new
technology, and to relate these potential benefits to their other concerns. Whenever
they find a strong match, early adopters are willing to base their buying decisions
upon it. Because early adopters do not rely on well-established references in
making these buying decisions, preferring instead to rely on their own intuition and
vision, they are key to opening up any high-tech market segment.
Early Majority
The early majority shares some of the early adopter’s ability to relate to technology,
but ultimately they are driven by a strong sense of practicality. They know that
many of these newfangled inventions end up as passing fads, so they are content to
wait and see how other people are making out before they buy in themselves. They
want to see well-established references before investing substantially. Because
there are so many people in this segment—roughly one-third of the whole adoption
life cycle—winning their business is key to any substantial profits and growth.
Late Majority
The late majority share all the concerns of the early majority, plus one major
additional one: Whereas people in the early majority are comfortable with their
ability to handle a technology product, should they finally decide to purchase it,
members of the late majority are not. As a result, they wait until something has
become an established standard, and even they want to see lots of support and tend
to buy, therefore, from large, well-established companies. Like the early majority,
this group comprises about one-third of the total buying population in any given
segment. Courting its favor is highly profitable indeed, for while profit margins
decrease as the products mature, so do selling costs, and virtually all the research
and development costs have been amortized.
Laggards
Finally there are the laggards. These people simply don’t want anything to do with
new technology, for any of a variety of reasons, some personal and some economic.
The only time they ever buy a technological product is when it is buried so deep
inside another product—for example a microprocessor that is designed into the
braking system of a new car—that they don’t even know it is there. Laggards are
generally regarded as not worth pursuing on any other basis.
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