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The Los Angeles freeway system is in disarray. There is a lot of work that needs to be done. But there is so much traffic that there isn't a whole lot of time to get anything fixed. Even when roads are temporarily shut down, like the 405 was earlier this year, no discernible progress is made. And by the time any construction is finished it will be time to start all over again. The roadways resemble the handful of Frankenstein cars driving along them: Pieced together with spare parts and clinging to dear life, unrecognizable from what they once were.

Swap out a few words and you've got the United States' power grid. A jerry-built electrical network owned and operated by competing companies that is being stretched to its limit. Improvements have been proposed, but much like the highways in Los Angeles, by the time they are complete it will be time for the next round of emergency surgeries. Some have suggested that the grid's poor state leaves it vulnerable to a terrorist attack; others argue that it is so shoddy and unpredictable that such an attack might ultimately fail.

Los Angeles is so developed that replacing the highways is highly improbable, if not impossible. But it's at least conceivable that a new power grid could be built around the existing one, with the old system providing power up until the new system is complete. The benefits should outweigh the costs. The U.S. could have a state-of-the-art grid in place, securely and efficiently meeting increasing demand. This would also keep power companies in control of distribution. As much as some of them seem to want to believe it, the current setup will not be around forever.

With power production at such a crossroads, it would seem that now would be the time for alternative fuel sources to make a play for a bigger share of the market. In reality, the opposite is happening. Solar power technology is evolving rapidly, but still costs more than coal and natural gas. Coal production is slowing down, but natural gas production continues to rise and appears to be the preferred option in the short term. Subsidies help to reduce the cost of solar installations, but don't do enough to offset deterrents like tariffs and regulatory costs (such as obtaining permits). A good solar installation will save the owner money in the long run, but the upfront costs are proving too much to bear, especially for a residential customer.

Companies like SolarCity (SCTY) are making it more affordable for residential customers to install solar systems. The company offers free installation, as well as their own financing options for buying the electricity. Customers don't have to pay for the equipment; SolarCity gives the customer whatever panels and inverters it needs, and only charges them a rate for the electricity they use, usually at a monthly rate. Most other solar installers finance via a third party. SolarCity boasts that the useful life of their installations is 30+ years, but most manufacturers' warranties on panels last 25 years, while inverter warranties typically last 10 years.

The photovoltaic panels also degrade over time, so they will collect less energy as the years pass. Ironically, the stronger the sunlight is that hits the panels, the faster they will degrade. However, crystalline-silicon panels can withstand damage from the sun much better than their thin film counterparts. They also collect power more efficiently. The downside is they are more expensive and less durable than thin film panels.

SolarCity's stock price has risen 64.4% from $9.25 to $15.21 since its first day of trading on December 13. The company has seen lots of business in Long Island in the wake of Hurricane Sandy. Customers can pay as little as $39 a month (to start) for solar power. Governor Andrew Cuomo recently said he wants to quadruple New York's solar output in 2013 under the state's NY Sun Initiative.

EVEN THE SUN GOES DOWN

The surge the solar industry is experiencing isn't as promising in Europe, though. The subsidies in the United States aren't guaranteed to continue, and solar companies have already seen the effect that canceling these subsidies has had in Europe. Germany has significantly scaled back its feed-in-tariff program after years of leading the world in solar growth. The German government decided the high cost to the public just wasn't worth keeping the program going at its current rate. Germany installed 2% more solar capacity in 2012 than in 2011 (7,634 megawatts vs. 7,485), though sales in the fourth quarter fell 66% compared to the same period in 2011. According to German Environment Minister Peter Altmaier, installations will fall to between 4,000 MW and 4,500 MW in 2013, a 41.1%-47.6% decline.

Depending on whom you ask, Germany's solar program was either a failure or a success. The first piece, written by Bjørn Lomborg, argues that the subsidies cost German taxpayers too much compared to what they got out of it - through 2012 Germany has installed 32.8 gigawatts of capacity, but this accounts for only 4.5% of the country's consumption. According to Lomborg, though Germany's effort to reduce carbon dioxide emissions is noble, it's not having much of a real effect:

Even with unrealistically generous assumptions, the unimpressive net effect is that solar power reduces Germany's CO2 emissions by roughly 8 million metric tons-or about 1 percent - for the next 20 years. To put it another way: By the end of the century, Germany's $130 billion solar panel subsidies will have postponed temperature increases by 23 hours.

Using solar, Germany is paying about $1,000 per ton of CO2 reduced. The current CO2 price in Europe is $8. Germany could have cut 131 times as much CO2 for the same price. Instead, the Germans are wasting more than 99 cents of every euro that they plow into solar panels.

The price isn't the only problem. The net effect of German solar is zero CO2 reductions. The European Union Emissions Trading System only puts a limit on total emissions. So, while emissions in Germany have declined, other countries make up for it by using the cheaper fossil fuels. A more recent column by Lomborg shows he has softened his stance a bit in the past year, though he would prefer to see governments putting money into solar R&D rather than using the subsidies to install the current, high-cost technology.

The counter-argument from cleantechnica.com's Zachary Shahan makes some sound points, but the author comes off as quite the idealist. He claims the tariff cuts resulted from pressure from utility companies, whose profits suffered solar feed-ins drove down the price of peak electricity. This leads him to wonder if "… energy policy [should] be about making sure traditional, rich utility companies make a hefty profit, or should it be about what's best for the citizenry? (Tough one, I know if you're a politician.)" Heh, good one. Well, it turns out the policy didn't really help either party. German utilities are shifting back to coal plants to combat not only green energy, but also the country's reduced consumption of energy as a whole. There isn't enough demand for cleaner-burning natural gas plants to make profit in this environment. For the time being, solar is increasing reliance on coal, when the plan was to achieve the exact opposite.

WE'LL CALL IT MIXED EMOTIONS, FOR NOW

American companies are racing to get as many sales as possible now, in case a similar subsidy cut occurs in the States. There are several factors that should help in the near term. Solar prices continue to fall, making the technology more attractive to customers. But the plummeting prices are hurting U.S. panel makers. Cheaper, government-subsidized panels from China are oversaturating the market, and the tariffs the U.S. applied to these panels are being circumvented. Chinese companies quickly discovered and began exploiting a loophole in the tariffs. Since they only apply to panels made with solar cells produced in China, all the Chinese have to do is have a different country manufacture the cells to avoid the penalty. This only increases price by 10-15%, compared to the 24-36% more customers would pay because of the tariffs. Installers are benefiting from the cheaper panels, however. SolarCity margins rely almost entirely on buying cheap panels. These Chinese panels have a reputation for being of lesser quality than the American ones, but in this economy, the smaller price tag is winning out.

American companies still hold a sizeable market share within the U.S. on inverters. A solar project's price won't change too drastically when using a more expensive, but more reliable American inverter opposed to a Chinese one. Advanced Energy (AEIS) has seen its price improve 41.1% since November 15 ($11.27), and 44.0% from a year ago ($11.04). In 2011, the company made 66.2% of its sales to North America, where solar is still trending up. Contrast that to Power-One (PWER), which generated only 17.1% of its revenue in North America, and 65.4% to Europe in 2011. Its stock has fallen 41.5% since a high of $7.16 in July, and is down 13.3% from this time last year ($4.83). Its latest earnings call detailed that sales to Europe declined more than anticipated. The company is estimating that solar won't experience significant growth until at least 2014.

The outlook for Advanced Energy is brighter. Its 2012 numbers were basically on-par with last year's, which is pretty good compared to its competitors. Its achieved this because the market in North America where it does the bulk of their business stayed strong, and due to cost-cutting measures that dulled the effects of the downturn in Europe. The company's solar sales declined 2% in the fourth quarter, while Power One saw a 32% dip sequentially in its Q4 revenue.

Looking at North America more broadly, coal production is declining, though traditional utility prices are increasing. This could lead to a scenario like Germany where coal regains popularity because of its price. Also, the public concern about the environmental effects of coal burning is growing by the day. Nuclear power has fallen fast out of favor since the Fukushima meltdowns in 2011, and isn't much of a threat to solar expansion. Crude oil prices have fallen in the last five years, but it's too expensive to compete with natural gas and solar for residential use. Using oil to generate 1 kilowatt hour (kWh) will cost roughly five times as much as coal or gas would at their current prices. The cost of generating the same amount using solar depends on the equipment (and how long it remains operational), subsidies, and feed-in-tariffs. The sunlight, of course, is free. Customers who use programs like SolarCity's pay about one cent less per kWh than from what other utilities charge.

Natural gas is providing the stiffest competition right now, and looks like it will be formidable long term. Hydraulic fracturing ("fracking"), the process used to extract natural gas from within bedrock, is controversial among environmentalists, but that won't stop the gas companies from doing it. Prices per thousand cubic feet of natural gas have increased to $3.49 per million British thermal unit (MMBtu) from a low of $1.89 in April 2012, bringing the price to a point that is more economical for mining. Still, companies have said that gas needs to be $4 per MMBtu if they are going to turn a strong profit. Production might also slow in 2013 as gas reserve estimates are recalculated and fracking operations are postponed or halted. It's quite difficult to view this as a legitimate revision however; it seems like a fairly transparent ploy, given that last year's average price of $2.77/MMBtu was the lowest since it was $2.19/MMBtu in 1999. But that doesn't mean it won't work. Solar energy companies could find a little more room to maneuver if gas producers are serious about scaling back, though.

BUT THEN AGAIN, IT CAN BE FLEXIBLE

Let's face it: the Los Angeles freeways are doomed. But there are plenty of reasons to think that solar power (and energy in general) can avoid a similar fate. Sure, there are obstacles. But unlike the highways, there are genuine desires and efforts by governments, companies, and citizens to try and work this mess out. This year isn't shaping up to be the most profitable for solar energy companies, but 2014 looks promising. Solar technology keeps getting better, but it's still in its infancy. It took more than a hundred years for fossil fuel power to resemble what it does today.

The point solar technology is at is roughly analogous to the 18th century, when the Newcomen steam engine began to replace manual labor. Newcomen's engine was the best one available, but it cost a lot to operate. James Watt changed that. His engine, an improved version of Newcomen's, spurred the Industrial Revolution. At the pace solar is advancing, a similar progression probably isn't far off.

(Image by Eric Ramsley, original via thevsky.com)

Source: Under Construction: The State Of Solar Power