Canadian Solar Industry: 16 Billion Addressable Market ?

Photovoltaic Energy: Is the Tipping Point Approaching?

Introduction

The renewable energy industry is not new, nor is most of the processes used to convert renewables into useable energy new. What is new however is the adoption by consumers at an impressive pace, driven by compelling forces such as climate change, ecosystem destruction, or other tragedies pertaining to exploration, development and transportation of non-renewable energies.

Solar technology was invented in the middle of the 19th century during the industrial revolution to heat water that fuelled steam engines. Edmond Becquerel discovered the photovoltaic effects in 1839 while Russell Ohl was awarded a solar cell patent in 1939 and is credited for discovering P-N junction, which is used as a diode to control the electrical current flow in one direction. (PBS, 1999)

 

How Solar Panels Work

 Photons are emitted from the sun in waves that travel towards earth eventually striking glass, conductive material and metal compounds known as solar panels. Silicone is a common chemical used as a conductive layer and when the photon strikes the tin dioxide and silicone the photon becomes excited, emitting an electron into the positive layer. The electron then travels from the positive layer into the negative layer and into the wired current creating what we call electricity. During the process the photon travels through a catalyst that allows the process to be reset and accept new electrons.

 

We will be focusing most of our research attention towards the solar industry specifically but due to the “lumped” reporting of renewable energy and the energy industry as a whole, some guess work will unfortunately be made. The renewable energy industry is classified as wind, geothermal, solar, tidal, and biomass or other sources of energy that can be replenished naturally within a human’s ordinary lifetime.

Global

 The year over year growth of the OECD renewable energy consumption from 2011 to 2012 was 13.2% while North America grew individually by 11.6%. OECD counties accounted for 71.3% of the global consumption, while the U.S alone made up 21.4% of global consumption. (BP Statistical Review, 2013) This bodes well for Canada who exported virtually all energy that was not domestically consumed to the United States.

 

Solar City the leading provider of solar panel installations in the United States expects 70% annual growth from 2013-2018, targeting one million customers. At the end of 2013 the United States overtook Germany as the leader in solar panel installation and new available capacity. (Solar City 10-K, 2013)

 

Tariffs and trade restrictions on solar PV between various countries produce short-term strengths for domestic manufactures but impose higher costs to consumers. It would be expected that boarders open up further and tax benefits are scaled back as the industry reaches a self-catalytic tipping point. We are seeing the process unfold as large integrated oil companies expand their renewable presence because of the threat of niche entrants. The International Energy Agency estimates that PV could supply 33% of the world’s electricity as soon as 2060 while it currently only supplies about 1%. (IEA, 2013)

 

 

Domestic

The Canadian market accounts for 1.8% of the global consumption of renewables and grew consumption 10.5% YOY. Canada’s energy sector employs over 280,000 people, contributing to roughly 9.5% (about 107 billion) of the 1.124 trillion GDP. (NRCAN, 2012)

 

  • 98.4% of Canadian energy exports are to the U.S (NRCAN, 2012)
  • 16.9% of primary energy supply is from renewables (NRCAN, 2010)
  • 8,200 people were directly employed by the solar industry in 2012 with expectations of 74,000 employed by 2018, an employment CAGR of 37% (CSA, 2011)
  • The average Canadian uses 800 Kwh a month at an average cost of 0.10-0.15/Kwh (Ontario Hydro, 2012)
  • In 2010 a total of 588.9 terawatt hours of electricity were generated while solar contributed roughly 3% or 17.667 billion Kwh. (NRCAN, 2010)
  • Ontario is a major player in the North American Solar industry, ranking top 5 (by state or province) for solar capacity installations since 2010.
  • Total solar PV capacity in Canada is expected to increase from 291 megawatts in 2010 to 12,000 megawatts in 2025 (CanSIA, 2011)Canada’s installed capacity for solar has seen average annual growth of 9.5% since 2000, reaching a capacity of 819 megawatts of thermal power in 2011. The 2008-2011 period however experienced catalytic and robust growth of installed capacity for solar power, reaching an annual average growth rate of 147.3%. (CSA, 2011)

 

Based on 17,640 GWH produced by PV and a sale price of 10-15 cents per Kwh when converted to electricity, we find a contribution of about 2-3 billion dollars towards GDP, roughly 0.18-0.27% of the total. Solar City estimates that the total current addressable market in North America is about 63 billion in U.S dollars, using a 14-cent per Kwh assumption. The Canadian electricity market under our assumptions is slightly smaller at 15.75 billion using the assumptions of 0.10/Kwh, 4500 Kwh consumed daily by all Canadians (35 million).

 

Investments

The solar industry has large upfront capital costs as well as on going maintenance. The capital costs are associated with financing inventory, customer leases, on-going operations, technological changes, and the skillful labor that is required for research, development and installation. Currently the Canadian government allows accelerated depreciation of 50% on solar panels, photovoltaic producing assets and costs incurred including feasibility, environmental and site approval studies. (CRA, 2012)

 

The solar industry is unique regarding the stakeholders as the capital suppliers are also primary customers of the product market and are partial owners of the organizations assets creating an opportunity for complete synergy or dysfunction. The government of Canada has also implemented strategic policy under the headline banners of REDI (Renewable Energy Development Initiative) and LTEP (Long Term Energy Plan) to spur investment, fueling supply and quicker consumer adoption rates as costs and margins are reduced. Because of the long term life of the useful asset an opportunity is created for residential consumers inclined to finance the debt over 20-30 years using the cost savings of their utility bill or cash flow from resale of electricity.

1

(Figure 1: CSA, 2011)

2

(Figure 2: CSA, 2011) 

The jobs created by investments in PV are more efficient in terms of jobs produced per GWh and the initial cost of that job shown in both figure one and figure two (above).

The renewable industry as a whole and the solar industry specifically cater to a relatively new trend, the triple bottom line. The triple bottom line is the product of p cubed, or people, planet and profit. Consumers are willing to pay more for the utility that is gained from sustainable purchasing methods, which is evident judging by today’s consumer trends. As consumers continue to adopt disruptive technologies the dynamics of the external market are changed and as Christensen notes in his renowned book Innovators Dilemma, markets that do not exist can’t be measured.

An industry’s profitability is a function of interactions between: 1) Suppliers 2) Buyers 3) Competition 4) Product Substitutes 5) Market Entrants. Studying the dynamics of game theory (prisoners dilemma) and the asymmetric payoffs of convexity are sure to lead to a more even playing field, quite possibly even a competitive edge.

Appendix (A) – Conversion Chart

 

W = Watt 1000 W = 1 KW
KW = Kilowatt 1000 KW = 1 MW
MW = Megawatt 1000 MW = 1 GW
GW = Gigawatt 1000 GW = 1 TW
TW = Terawatt
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