Reference no: EM131669788

Question: THE PUSH FOR GRID PARITY AT SUNTECH POWER

With energy costs trending upward and more people becoming attuned to the geopolitical complexities of petroleum-based energy and the environmental challenges of all major energy sources, interest in solar and other alternative energy sources continues to grow. Alternatives can't replace all the energy generated from conventional sources, but they can become increasingly important elements of the world's energy mix. As the world's largest manufacturer of photovoltaic solar modules for generating electricity, China's Suntech Power is ideally positioned to take advantage of the worldwide opportunities in solar power. Under the leadership of founder and CEO Zhengrong Shi, Suntech is lowering the cost and raising the energy-conversion efficiency of photovoltaic panels to achieve grid parity, meaning being cost-competitive with nonrenewable sources such as coal and natural gas. Grid parity is a simple enough concept, but it is no small challenge to achieve-or even to calculate so you can tell when you've achieved it.

Every form of energy has a unique mix of direct costs, from initial construction and installation costs to ongoing fuel, maintenance, and operations expenses. Every energy source also has a mix of indirect costs, including expenses that enable or mediate the effects of its use. Examples of such costs include health care expenses linked to air pollution caused by burning fossil fuels and the need to secure nuclear power plants from terrorist attacks. Also, every energy source, even "clean" energies such as solar and wind power, has an ecological footprint, the sum total of its impact on the environment throughout its entire life cycle. Furthermore, even with a single type of energy source, specific implementations can have different cost profiles for different customers. For instance, when photovoltaic panels are installed on the roof of a house, the individual homeowner has to bear the full cost of installation (unless financial incentives are involved-more on this shortly), but there are no transmission costs because the electricity is used right where it is generated.

Conversely, when a utility company builds a large-scale solar facility, the cost can be shared by all its customers-but large facilities require a lot of land and abundant sunshine, which means they are often built out in the desert and can require lengthy transmission lines and circuitry to connect to the electrical grid. Location also plays a major role in cost comparisons, even for identical methods. For example, solar has an advantage over coal in Hawaii, given that state's abundant sunshine and the high cost of shipping coal across the ocean. And as if this all weren't complicated enough, costs rarely stand still, as supplies and demands fluctuate and technologies mature. Energy costs can be particularly volatile, making comparisons across energy formats even trickier. Clearly, identifying all these costs accurately for each energy source is a complex task, and different assumptions in the calculations can lead to different conclusions. However, the numbers are starting to look appealing for solar. At least by some calculations and in some locations-such as Hawaii-photovoltaic energy has already reached parity with the grid. With prices for competing energies expected to keep rising, photovoltaic technology has another advantage in that it has become a big enough industry that it can start to put pressure on suppliers of silicon, a major component of solar modules, to lower their prices.

Now for those financial incentives mentioned a moment ago. In many locales, until the actual cost is driven down far enough by technical advances and production efficiencies, some governments are helping solar technology with tax credits and other incentives. One particularly interesting governmental boost is the feed-in tariff. Homeowners and businesses whose solar installations generate more electricity than they need can sell it back to utilities, and to spur the growth of solar energy, some governments pay these individual suppliers above-market rates for their power. Germany, for instance, one of the pioneers of feed-in tariffs, pays homeowners as much as four times the rate paid for electricity from a nuclear plant. Shi and Suntech are counting on a combination of market forces like these and continuing improvements in photovoltaic performance to make solar power a viable competitor in the energy marketplace-and a viable business model. After revenues dropped by almost 90 percent during the global recession in 2009, Suntech has recovered and resumed its global expansion plans. Shi remains confident that solar power will reach grid parity in the near future and that photovoltaic energy will eventually be even cheaper than coal or gas. With its low-cost production, technical innovations, and worldwide presence, Suntech is well on its ways to meeting this ambitious goal.

1. What effect are feed-in tariffs likely to have on electricity users who don't adopt solar power? Is this outcome fair? Why or why not?

2. If a particular government believes that solar is a more desirable energy source than nonrenewables such as coal and gas, why wouldn't it simply grant solar energy utilities monopoly rights?

3. Does it make sense for Suntech to acquire ailing competitors during a deep recession? Why or why not?