All posts by Michael S. Davies, CFA, CMVP

Rising inventory levels of photovoltaic (PV) panels and new production capacity coming online is driving solar PV prices lower and thereby, bringing solar energy closer to grid price parity. With the release of the latest earnings of solar energy companies, Wall Street’s keen attention to revenue guidance, inventory levels and pricing are paramount in diagnosing the health of the solar energy industry. Expectations call consolidation of the solar industry with some key players gaining market share and for others it becomes more challenging. However, despite the turbulence in the industry, consumers will benefit in the near-term as solar PV prices fall and government incentive fuel growth in solar PV deployment.

To get a better perspective on the solar PV industry, let’s examine inventory levels for some of the leading solar PV suppliers. The following chart, Figure 1, compares inventory levels in relationship to sales volume. While inventory levels have increased, the level of inventories to sales is not egregious

Figure 1 Sales and Inventory levels

While it is important to control inventory levels in relationship to sales, revenue growth is predicated upon price, performance, and return on investment for prospective customers. Thin-film PV has emerged as the low-cost solar solution even with its lower efficiency levels in comparison to mono-and poly-crystalline PV panels. Thin-film still offers a lower cost/watt than crystalline PV, see Solar Shootout in the San Joaquin Valley , but prices for crystalline PV are falling as a result of rising production capacity and inventory levels.

Figure 2 Market Value

In Figure 2 Green Econometrics is comparing the market value of some of the leading PV suppliers as measured by their respective stock prices. In the valuation of solar PV suppliers, the stock market appears to be betting heavily on thin-film PV, as First Solar (FSLR), the leading thin-film PV supplier, enjoys a market value that accounts for over half the value of the entire solar industry. FSLR is positioned as the low-cost supplier in the solar industry with its announcement of $1 per Watt reducing its production cost for solar modules to 98 cents per watt, thereby braking the $1 per watt price barrier. However, new panel suppliers, mainly from China are pushing prices lower for poly-and mono-crystalline panels suppliers. ReneSolar (SOL) is seeing average selling prices for wafers at $0.93 per watt and bring PV panels prices to under $2.00 per watt.

There appears to be a lot riding on the success of thin-film PV and as prices fall for crystalline PV, the closer we get to grid parity. In the following chart, Figure 3, price for crystalline PV have declined quite dramatically in the last 30 years. According to the Energy Information Administration, in 1956 solar PV panels were $300 per watt, and in 1980, the average cost per solar modules was $27/watt and has fallen precipitously to approximately $2/watt in October 2009. As the installed cost of solar PV falls closer to $4/watt, pricing per kilowatt-hour (KWH) (depending on your climate and geography), equates to approximately $0.16/KWH that would be inline with utility rates after rates caps are removed.

Figure 3 Solar PV Prices

The bottom line is that despite the lower PV panel costs; we are still not at parity with hydrocarbon fuels such as coal and oil. Carbon based taxes or renewable energy incentives as well as more investment into alternative energy should improve the economics of solar and wind and bring us to grid parity.

A combined heat and power system (CHP) is the cogeneration or simultaneous generation of multiple forms of energy in an integrated system. CHP systems consume less fuel than separate heat and power generating systems. According to the Environmental Protection Agency in their Combined Heat and Power Partnership report, (EPA), CHP systems typically consume only three-quarters the amount of energy separate heat and power systems require. By combining both heat and power into the same energy systems, efficiency gains for the total system. Heuristically, high temperature and high pressure fuel ratios results in higher efficiency systems. In addition, the thermal energy produced from the CHP system could be used to drive motor applications or to produce heat, steam, and hot water.

As an initial step to reducing greenhouse gas (GHG) emissions, natural gas turbines could improve overhaul efficiency of 65-80%. In addition, the CHP offers lower greenhouse gas (GHG) emissions in comparison to conventional standalone systems. Gas turbines CHP systems operate under a homodynamic principle called the Brayton cycle. The design characteristics of a CHP gas turbine provide: 1) high electric and total system efficiency; 2) high temperature/quality thermal output for heating or for heat recovery steam power electric generation; 3) offer options for flexible fuels such as propane, natural gas, and landfill gas; 4) high reliability with 3-to-5 years before overhaul running 24/7; and 5) significantly lower GHG emissions.

Figure 1 Gas Turbine CHP System

Figure 1 demonstrates the mechanics and variables of a CHP system. In summary, the CHP technology enables the supply of efficient heat and power while minimizing GHG emissions. Total CHP efficiency is defined as the sum of net power produced plus the thermal output used for heating divided by total fuel input.

The use of methane (natural gas) as the main fuel for the CHP system offers advantages because methane offers the highest hydrogen-to-carbon ratio among fossil fuels, thereby, combusting with the lowest GHG emissions. According to EPA data, the emissions NOx particulates from gas turbines ranges between 0.17-to-0.25 lbs/MWH with no post-combustion emissions control versus 1.0-to-4.2 lbs/MWH for coal fed boilers. The carbon content of natural gas is 34 lbs carbon/MMBtu in comparison to coal at 66 lbs of carbon/MMBtu.

There are two valuable metrics used to measure efficiency for CHP systems. One is the total system efficiency which measures the overall efficiency of the CHP system including heat and electric and the other is the effective electric efficiency which is useful in comparing the CHP electric production versus grid supplied power. These two metrics, the total system and effective electric efficiencies are important for evaluating CHP system. The following provides a guideline foe measuring these two efficiency metrics and can be found at EPA – Efficiency Metrics for CHP Systems

Figure 2 CHP Efficiency

The economics of the CHP system depends on effective use of thermal energy n the exhaust gases. Exhaust gases are primarily applied for heating the facility and could also be applied to heat recovery steam generators (HRSG) to produce additional electric power. The total efficiency of the CHP system is directly proportional to the amount of energy recovered from the thermal exhaust. Another important concept related to CHP efficiency is the power-to-heat ratio. The power-to-heat ratio indicates the proportion of power (electrical or mechanical energy) to heat energy (steam or hot water) produced in the CHP system. The following provides an overview of the economics of a CHP system.

Figure 3 CHP Economics

Figure 3 illustrates the economics of a CHP system in comparison to competing energy sources. While the CHP does not have the low cost of coal in producing electric, the economic value of reducing GHG emissions is quite significant and beyond the scope of this article. However, natural gas prices remain below that of oil and better ways of capturing heat exhaust will further improve CHP efficiency. The bottom line is that natural gas produces less GHG emissions than coal or oil therefore; businesses should consider the benefits of CHP as a source of heat and power.

The development of an energy efficiency strategy incorporates analysis of energy expenditures and energy consumption. The energy strategy must incorporate dynamics between costs, budgets and the consumption of energy including the monitoring of kilowatt-hours (KWH) of electricity and liquid hydrocarbon fuels consumed. By analyzing both the financial and the energy consumption components we are better positioned to frame the scope of the energy efficiency projects.

We start with a comprehensive energy audit analyzing energy consumption and expenditures. After determining which activities offer the fastest, cheapest, and greatest economic impact we are then able to define the scope of energy efficiency projects. The next step in the energy strategy process is to assess, rank and specify energy saving opportunities. At this phase, we have a broad understanding of the scope of energy efficiency projects within the appropriate budgetary considerations.

Conduct Energy Audit and Analyze Energy Spending

Upon analysis of the energy expenditures and the appropriate budgetary considerations, we commence with an energy audit to examine the dimensions of energy consumption. The energy audit establishes an energy efficiency baseline for buildings and vehicles. In the energy audit, energy consumption is measured by source and activity using monitors attached to branch circuits, gas pipes, and fuel lines. In this manner, energy consumption is evaluated from a financial and physical perspective and baseline usage patterns are established for electricity and other fuels.

During the energy audit, an analysis of energy intensity is measured. For buildings, energy consumption is measured in kilowatt-hours per square-foot to identify which activities consume the most energy. The energy intensity measurements are then ranked by consumption activity and compared to actual energy expenditures.

The purpose of the energy audit is to establish a baseline of energy consumption and the energy intensity associated with each building, department, vehicles, and/or activity usage category. By constructing an effective energy efficiency strategy that identifies and measures energy demand by activity, a better understanding of economic- and financial-impact is established. The critical component to the energy audit is measurement and verification were wireless Internet-based energy monitoring provide data before and after energy efficiency projects commence. The energy audit and energy monitoring systems together with financial analysis of energy consumption serve as the framework to rank and assess energy efficiency projects.

Heuristically, energy consumption in buildings is tied to lighting; and heating, cooling, and ventilation systems see Energy Intensity . The following chart, Figure 1 serves to illustrate which activities contribute most to energy consumption in buildings.

Figure 1 Kilowatt-hours (KWH) per Square Foot

According to information provided by the DOE, lighting, cooling and ventilation alone account for nearly two-thirds of all energy consumption in a building. For perspective, electric energy demand is increasing at an annualized rate of 1.6%. According to the Energy Information Administration (EIA), demand for electricity grew 21% between 1995 and 2006.

The energy consumption audit provides a means to assess which activities should be further analyzed for energy efficiency projects. The baseline energy usage measured in KWH per square foot serves as the framework to evaluate that locations and activities could benefit from lighting retrofits, equipment upgrades, structural improvements, and energy monitoring systems.

As a consequence of increasing energy consumption in buildings, electric generation relies extensively on hydrocarbon fuels that carry adverse environmental effects. Figure 2 illustrates the proportion of coal and other hydrocarbon fuels that are used to generate electricity in comparison to renewable energy sources. Coal still accounts for nearly half of all electric generation while contributing the most in terms of harmful emissions such as carbon dioxide, nitrous oxide, and sulfur dioxide.

FIGURE 2: Electric Generation Method

As part of the energy audit process for buildings, an energy consumption analysis of lighting and HVAC systems is evaluated along with the building’s insulation R-Value (resistance to heat flow where the higher the R-value, the greater the insulating effectiveness). In addition to lighting and HVAC systems, specialized equipment may also account for large energy demand. During our energy audit, we plan to identify and measure energy usage of special equipment in order to construct energy efficiency initiatives with clearly defined and measurable energy reduction targets.

Energy efficiency for transportation vehicles is one of the most significant factors to manage. The fact that there are no real substitutes for oil in the transportation industry illustrates two important points: 1) structural changes to driving patterns are required to see appreciable changes to oil consumption and 2) government authorities are vulnerable, with no readily available substitutes for oil, supply disruption could negatively impact transportation systems. Therefore, we emphasize fuel management systems for fleets and vehicles that monitor fuel consumption and efficiencies. DOE studies have indicated that changing driving habits could improve fuel efficiency by up to 30%.

Vehicle mounted devices that integrated fuel consumption feedback as the vehicle is driven promotes higher fuel efficiency. These off the shelf products are cost-effective, offering payback in months that dramatically improves fuel efficiencies. Aside from routine tune-ups, limiting weight, and checking tire pressure, augmenting driving patterns through gauges that provide feedback on fuel efficiency make the difference in saving energy.

In most situations, fuel management systems can be installed without significant mechanical aptitude. The ScanGaugeII from Linear-Logic is useable on most vehicles manufactured after 1996 including Gas, Diesel, Propane and Hybrid Vehicles and are designed to be installed by the consumer with plug-and-play instructions.

Identify and Measure Energy Demand by Activity

From the Energy Audit, the energy intensity of targeted buildings and fuel efficiencies of official vehicles are established. In buildings, it’s the lighting and heating, ventilation, and cooling that comprise the bulk of energy consumption.

Heating, ventilation, and cooling represent a significant portion of energy consumption in buildings and are a priority target for energy analysis. The Seasonal Energy Efficiency Ratio (SEER) is employed as an assessment of the equipment and analyzed in conjunction with building insulation. The efficiency of air conditioners is often rated in SEER ratio, which is defined by the Air Conditioning, Heating, and Refrigeration Institute and provides a standard unit measure of performance. The higher the SEER rating of a cooling system the more energy efficient the system is. The SEER rating is the amount of BTU (British Thermal Units) of cooling output divided by the total electric energy input in watt-hours.

For heating systems in a building, Annual Fuel Utilization Efficiency (AFUE) is used to measure and compare the performance of different systems. DOE studies have indicated that even with known AFUE efficiency ratings, heat losses defined as idle losses contribute to degradation in heating system efficiency,

To analyze energy consumption of heating and air conditioning systems (HVAC), we evaluate the building’s R-Value in comparison to the energy efficiency of the current heating and air conditioning systems. The energy demand evaluation includes a cost-benefit analysis comparing options in either HVAC system upgrade and/or improvements to the building’s insulation R-Value. By comparing the buildings R-Value in conjunction with HVAC efficiency performance, projects offering the greatest cost effectiveness are identified. The building’s R-Values can be measured using FLIR Systems infrared camera and software system. In this manner, the replacement cost of an HVAC system and costs to improve the building’s R-Value are analyzed to measure economic benefits. This information will allow the building owner to make an informed decision on whether any energy efficiency investment into HVAC upgrade or improvement to R-Value demonstrate economic benefit, i.e. positive financial return.

Consideration for heating and cooling systems upgrades are assessed by equipment SEER and AFUE ratings, installation costs, and efficiency payback. After equipment assessment is complete, proposals will be provided along with estimates for upgrade costs and payback analysis.

Benchmark and Analyze Energy Intensity

After conducting the energy audit, and compiling data on energy usage by activity category, we benchmark and analyze energy projects offering the greatest opportunities. As illustrated in Figure 3, energy efficiency for lighting systems can be substantially improved by retrofitting legacy light fixtures with higher efficiency fixtures and bulbs.

The energy audit and analysis provide the framework to evaluate energy efficiency projects. By analyzing energy consumption and the economic benefits associated with the energy savings projects, the most efficient and economically beneficial initiatives are identified and ranked.

FIGURE 3: Energy Savings in KWH per Square Foot Figure 1 Kilowatt-hours (KWH) per Square Foot

Establish Measurable Goals and Objectives

To establish relevant goals and objectives we are evaluating projects that are adhering to the SMART goal approach: specific, measurable, attainable, realistic and timely. Energy efficiency gains are most pronounced with lighting retrofits and energy monitoring in buildings in buildings and energy monitoring in vehicles.

After conducting an energy audit, analyzing energy consumption activities and the economics of energy efficiency projects, realistic and achievable energy savings goals are defined. Key performance metrics for energy savings are defined for buildings and vehicles. Key performance indicators are established for each project. For example, KWHs saved are defined for lighting retrofit projects, efficiency improvements for HVAC system upgrades, R-Value improvements for building insulation, and MPG gains for vehicles.

For each energy savings project, timelines are established with clearly defined milestones. Energy projects are presented with costs; expected energy savings measured in energy and dollar units, cost benefit analysis, and timelines.

Architect the Deployment of Energy Monitoring Systems

One of the first energy initiatives to consider in any energy savings project is the installation of an energy monitoring system for vehicles and buildings. Energy monitoring systems demonstrate the fastest and most economical pathways to achieving energy savings.

Energy monitoring systems for motor vehicles also demonstrate positive economic returns and real energy savings. The $180 energy-monitoring device with 10% fuel efficiency gain achieves breakeven at 14,500 miles with gasoline costing $2.50 a gallon.

Evaluate Feasibility of Renewable Energy Projects

Renewable energy projects such as solar and wind energy systems are often costly with long payback periods. Without tax incentives and grants, renewable energy projects are unable to demonstrate positive financial returns. However, utility rates for electric are expected to increase, improving the case for renewable energy projects. To improve the viability of alternative energy projects, energy efficiency projects such as lighting retrofit serve to lower energy consumption and therefore enhance the feasibility of solar and wind energy projects.

The fall in oil consumption was most dramatic following the escalating price of crude oil to $145.16 per barrel on July 14, 2008 then at any other point over the last several years. Price elasticity, a key concept in Economics 101, which measures the impact of price change to changes in unit volume sold, is helpful in determining which products have readily available substitutes or which, like oil are inelastic with no real substitutes.

As illustrated by Benjamin Graham and David Dodd in their book Security Analysis, 1940 edition, during the 1930’s the economy had a dramatic impact on spending and consumption particularly on discretionary items such as travel. In one illustration, the change in demand was most pronounced in railroad revenues where tickets purchased for railroad travel, declined 51% from 1929 to 1993 as measured by gross receipts for the railroad industry. Over this same period, spending on the consumer staples (inelastic demand), such as electricity encountered a decline of only 9%.

While almost everyone would agree that the current economic climate is one of the most challenging since the 1930’s, a quick review of oil consumption over the last several years illustrates that demand has not significantly contracted, suggesting driving habits only changed when prices escalated to over $100 per barrel. Oil consumption dropped only 4.9% from January 2008 through January 2009.

Figure 1 Oil Consumption

As seen from Figure 1, the sharp drop in oil consumption in September 2008 of 8.3% appears as an aberration when measured over the whole year. The fact there are no real substitutes for oil in the transportation industry illustrates two important points: 1) structural changes to driving patterns are required to see appreciable changes to oil consumption and 2) how vulnerable we are as a nation with no readily available substitutes for oil in the transportation systems.

Figure 2 Oil Demand in China and India

With China and India undergoing significant structural changes as they rapidly migrate towards motor vehicles for transportation suggests the demand for oil should continue to grow relatively unabated. Until the price of oil climbs back over $100 per barrel, we will not see the structural changes necessary to develop alternatives to oil in the transportation market.

The bottom line: energy and in particular, oil has not experienced a dramatic drop in demand during 2008 suggesting driving patterns were influenced more by the price of oil then the struggling economy. We must begin to shift emphasis to alternative energies such as solar as well as hybrids and electric vehicles.

Last month First Solar (FSLR) achieved a milestone in the solar industry with its announcement of $1 per Watt reducing its production cost for solar modules to 98 cents per watt, thereby braking the $1 per watt price barrier.. While the achievement is great news for the solar industry some studies suggest more work is needed. An article in Popular Mechanics $1 per Watt talks of university studies questioning the scalability of solar given the immense global needs for energy. Last year our post included an article Solar Energy Limits – Possible Constraints in Tellurium Production? discussing possible limits on tellurium production on thin film solar photovoltaic (PV) suppliers.

In addition, Barron’s published an article (March 30, 2009)_ Nightfall Comes to Solar Land providing unique insight into the economics of solar PV suppliers. High oil prices and soaring stock prices on solar PV companies fueled silicon suppliers to ramp production capacity that has now transitioned, according to the Barron’s article, into an over supply of polysilicon used in the production of PV panels and subsequently, eroding the cost advantage established by thin film PV companies such as First Solar and Energy Conversion Devices (ENER) over polysilicon PV firms such as SunPower (SPWRA).

However, the PV panels typically represent approximately half the cost of a solar energy system. The following figure, Solar Installation Costs compares the total cost of installing a solar energy system which includes labor and supporting matertials.

Figure 1 Solar Installation Costs

As illustrated in Figure 1, the panels represent a significant cost of installation, but the labor and support brackets for the PV panels are significant as well. While thin film PV enjoys significantly lower panel costs and is easier to install, the supporting brackets are sometimes more expensive. As prices for silicon fall, the cost disparity between thin film and silicon PV will narrow.

Figure 2 Solar Energy Economics

In Figure 2 Green Econometrics is comparing PV efficiency as measured by watts per square meter versus cost per watt. The selected companies represent a small portion of the global PV suppliers, but do illustrate the position of the leading US suppliers. The ideal model is to lower cost per watt while improving PV efficiency. But be cognizant that PV module cost per watt may not be indicative of the total system costs.

A comparison of wind and solar energy costs is demonstrated by Detronics and offers a useful framework to compare wind and solar costs by kilowatt-hour (KWH). As a caveat, wind and solar resources will vary dramatically by location. In the Detronics example, the costs per KWH represent the production over one year and both wind and solar have 20-year life spans. Over twenty years the 1,000-watt wind systems cost per KWH of $7.35 would average approximately $0.36 per KWH and the 750-watt solar systems cost of $10.68 would amount about $0.53 per KWH over the investment period.

Figure 3 Alternative Energy Pricing

The Alternative Energy Pricing chart was base on research from Solarbuzz which is one of the leading research firms in solar energy. The cost per KWH that Solarbuzz provides is a global average. Even with cost per watt falling below $1.00, the system costs after installation are closer to $5.00 according to Abound Solar (formerly known as AVA Solar) and is still higher than parity with grid with a cost of $0.21 per KWH.

The bottom line is that despite the lower PV panel costs; we are still not at parity with hydrocarbon fuels such as coal and oil. Carbon based taxing or alternative energy stimulus and more investment into alternative energy is required to improve the economics of solar and wind.

America’s appetite for oil declined sharply as the economy weakened over 2008. According to the latest reported information from the Energy Information Administration (EIA), Monthly Oil Consumption oil consumption declined 13% y/y from September 2007 through September 2008.

Historically, the US has seen this type of demand erosion before. From 1979 to 1983, oil demand in the US declined 28% with annualized rate of a 10% decline per year. Over this same period, oil prices actual rose despite the fall in demand. Oil prices by barrel (42 US gallons) rose from $3.60 in 1972 to $25.10 in 1979. In 1983, oil prices increased to $29.08 a barrel, representing an increase of nearly 16% from 1979.

Economics would normally dictate that as demand declines so should prices. However, the geopolitical events and oil supply disruption maintained higher oil prices despite the subsequent decline in oil demand. It was not until structural changes in energy conservation and driving patterns were felt before leading to a fall in oil prices during the 1980’s.

Figure 1 Monthly Oil Consumption

As illustrated in Figure 1, the precipitous fall in oil demand over the last half of 2008 is quite dramatic in comparison to historical price data. The large fluctuations in monthly oil consumption during the 70’s and 80’s, were primarily due to supply disruptions. The higher oil prices resulting from supply disruptions over this period led to structural changes in the energy market that later resulted in falling oil prices.

Figure 2 Oil Prices

While falling demand and rising oil prices during the 70’s and 80’s is an anomaly, we see from Figure 2, that currently there is significant correlation between falling oil demand and a subsequent decline in the price of oil. Excluding the peak oil price in July 2008, oil declined 33% from the average price per barrel of $64 in 2007.

Perhaps the precipitous fall in oil prices can explain why demand for oil on a global basis has not declined as dramatically as in the US. As we can see from Figure 3, the drop in US oil consumption is matched with a slight increase in demand in Europe and only a moderate decline in Japan.

Figure 3 Global Oil Demand

The bottom line is the financial shock that hit global markets is dramatically impacting consumption. As a recovery inevitably ensues, demand for oil will increase and so will oil prices. Let’s not be complacent with hydrocarbon fuels. Falling energy prices act as a disincentive for investment into alternative energies.

As President Obama takes office, energy efficiency takes center stage. One of he fastest roads to energy efficiency is to reduce consumption and the simplest approach to energy conservation is to change a light bulb.

Compact Fluorescent Light bulbs (CFL) recommended by the U.S. Department of Energy (DOE) offer substantial savings to homeowners. In the commercial market, lighting fixtures consume the greatest amount of electric energy; three times the energy consumption of air conditioning. According to research report from the Energy Information Administration (EIA), Commercial Buildings Energy Consumption Survey lighting consumes the largest amount of electricity in commercial buildings as measured by Kilowatt-hours (KWH) per Square Foot

To calculate KWH, multiply the wattage of your lighting fixture x the yearly hours of operation for your facility divided by 1,000. KWH per square foot provides a useful means of measuring the energy intensity of a building. Just divide KWH by the total square footage of the building.

In an energy audit one can determine the energy intensity of your building as measured by KWH/Sq Ft. Figure 1 illustrates the energy intensity by end use according to the EIA’s report in 2008 Electricity Consumption (kWh) Intensities by End Use.

Figure 1 Lighting Consumes Most Energy

Furthermore, as part of the same research from the EIA, most commercial buildings are not using energy efficient lighting. The study finds that most commercial buildings, even those built after 1980, still rely on legacy incandescent and standard fluorescent light fixtures.

Figure 2 Most Commercial Buildings Lack Energy Efficient Lighting

After your energy audit is complete and one knows their energy intensity the next step is to understand the efficiency of lighting systems. Lighting efficiency is measured in Lumens per Watt and is calculated by dividing the lumen output of the light by the Watts consumed. A lumen is one foot-candle foot-candle falling on one square foot of area.

While lumen output is important in measuring brightness, color temperature, measured in degrees Kelvin, indicates the hue color temperature of the light and is also important in evaluating lighting systems because lighting systems operating near 5500 degrees Kelvin simulate sunlight at noon. Energy efficient lighting fixtures provide twice the lumens per watt of electricity than legacy metal halide fixtures while offering higher color temperature enabling near daylight rendering.

Figure 3 Energy Efficient Lighting

The bottom line is small steps sometimes produce big results. Retrofitting your building with energy efficient lighting systems saves energy, reduces operating expenses, and improves employee productivity and safety, while saving the environment. A 1.3 KWH reduction in power consumption reduces carbon dioxide (CO2) emissions by 1 pound. Coal generates about half the electric power in the U.S. and produces roughly ¾ of a pound of CO2 for every KWH of electric. In addition, the feasibility of alternative energy such as solar and wind are more viable by reducing energy consumption in buildings.

To understand current energy prices it may serve us to examine historical energy prices. Our theme is energy economics and specifically that energy prices follow the laws of supply and demand to set pricing.

There are some interesting perspectives on historical energy prices from several books including Security Analysis, 1940 edition by Benjamin Graham and David Dodd, The Great Wave, by David Hackett Fischer; and The Industrial Revolution in World History, by Peter Stearns. These books provide extensive data on pricing, industry revenues, and the framework that energy and technology serve in the economics of the industrial world.

Figure 1 Historical Energy Prices

With the risk of oversimplification, our first figure shows there have been four distinct energy prices waves that have rippled through history. The scarcity of wood that was used for building homes, heating, and tools became increasing scarce as deforestation spread through Europe in the 1300s and followed again in the 1600’s. Coal prices rose rapidly with the War of 1812 and the Napoleonic Wars. Oil prices peaked in 1982 and to an all time high of $145.16 on July 14, 2008.

Figure 2 Medieval Wood Prices

During the Medieval period in world history wood prices increased nearly threefold according to David Fischer in the The Great Wave. Wood prices rose with scarcity and peaked in 1320 as impact of the Bubonic Plague began to kill a quarter of Europe’s’ population. Twenty years from its peak in 1320, wood prices declined by 48% as the Bubonic Plague reduces the population and in turn, lowering the demand for wood.

Figure 3 Wood Prices

Figure 3. Illustrates the rapid rise in the demand for wood as the growing world populations benefited advances in science and agriculture from the Renaissance period. Wood is used for just about everything and prices climb as more land is used for agriculture leading to deforestation exacerbating the wood shortage. As demand for wood increases, prices subsequently follow. By the end of the 1600’s, coal begins to substitute for wood as an energy alternative.

With advances in technology came improvements in coal mining and transportation that allowed coal to substitute for wood as an energy source. With the invention such as Thomas Newcomen’s steam, powered pump in 1712 that facilitated coal mining and James Watt’s steam engine in 1765 that lead to advances in transportation including railroads and machinery, coal grew in importance as an energy source. These advances in technology enabled greater supplies of coal to enter the market which lead to declines in energy prices.

Figure 4 Coal Prices

We can gleam from Figure 4 that coal prices peaked in 1810-to-1815 coinciding with the War of 1812 and the Napoleonic Wars. The technological advances in mining and transportations fostered the development of an infrastructure to support the coal industry. The price of coal rose as wars ragging in Europe and the US, increased the demand for materials and supplies such as coal. However, as the wars came to an end, the abundant supplies of coal allowed prices to fall keeping energy prices low.

Oil entered the picture with the drilling of the first oil well in northwestern Pennsylvania in 1859 and the Internal Combustion Engine in 1860 that facilitated the development of the oil industry.

As oil emerged to become the dominant fuel of the 20th Century, it’s only recently that we face supply shortages. To better understand the dynamics of energy pricing in the face of changing demand, a review of spending on railroads and electricity may serve as a surrogate for discretionary and consumer stable spending patterns.

Figure 5 Industry Segment Revenues

Figure 5 illustrates changes in the aggregate revenues of railroads in comparison to electric utilizes during the Great Depression. Copious notes taken by Graham and Dodd for their book Security Analysis help to demonstrate the economic laws of supply and demand.

The change in demand was most pronounced in railroad revenues. Expenditures on railroads, the more discretionary of the two industries, declined 51% from 1929 to 1993 as measured by gross receipts for the railroad industry. Over this same period, spending on the consumer stable, electricity only encountered a decline of 9%. In economic terms, railroads demonstrate greater demand elasticity meaning there is greater change in demand at prices change or this period, disposable income. While there is some discretionary portion of our spending associated with oil, a large portion of spending on oil is out of necessity. Therefore, even during times of great economic distress, the propensity for energy consumption is not eradicated entirely.

The bottom line: Energy pricing will continue to be dictated by supply and demand. Hydrocarbon fuels such as oil are finite in nature and therefore, without definitive strategies to cultivate alternative energy resources we will remain hostage to the vagaries in energy prices..

The precipitous drop in oil prices may not hold for long. Speculators and fears of oil flow disruptions drove oil prices to an all time high of $145.16 on July 14, 2008 and is now down to $49.50 in November 20, 2008. Now the fear has shifted to the economy where deteriorating fundamentals suggest demand for oil will abate, at least in the near term. However, if history is any guide, demand for oil should be influenced by both structural changes such as consumers driving more fuel-efficient motor vehicles and cyclical factors such as the state of the economy.

Figure 1 US Historic Oil Imports

To get an understanding of the impact that both structural and economic factors had in reducing the demand for oil is to look at oil import from 1978 to 1988. Figure 1 illustrates the US demand for oil during the last major economic recession. The Oil Shock of the 1970’s severely impacted the US economy and the term stagflation captured our attention while interest rates reached exorbitant levels. From 1979 to 1982, US oil imports decline by 46% as the oil embargo of 1973 led to structural changes in oil consumption. US oil imports, as measured by the Energy Information Administration in U.S. Crude Oil Field Production (Thousand Barrels per Day) demonstrated a significant decline as a result of changing driving habits as fuel efficient import vehicles encroached on the domestic auto makers. The US consumers opted for foreign vehicles demonstrating higher fuel efficiencies and MPG entered our lexicon. These economic and structural changes dramatically reduced the demand for oil and subsequently, oil prices fell. It was not until 1985 before oil imports began to increase.

What’s missing from this analysis is the fact that during this period the US accounted for 27% of total world oil demand. . According to the Energy Information Administration (EIA), in 1980, China and India accounted for 2.8% and 1.0%, respectively, of the global demand for oil. In 1986, China and India increased their oil demand to account for 3.2% and 1.5% of the world market, respectively, an increase in oil demand of 57% for China and 44% for India.

In 2005, China and India account for 8.0% and 2.9% of global oil demand while US dropped to 24.9% of global oil demand. While even China and India are not immune to the current blissful economic environment, when the global economy does improve, their demand for oil will more than negate any structural changes the US consumers make in their driving habits. The demand for oil should continue to grow as an economic recovery ensues thereby leading to an increase in oil prices.

Figure 2 China and India Oil Consumption

Figure 2. illustrates the rapid rise in the demand of oil from China and India. From 1980 to 2005, demand for oil increased 280% in China and 125% in India. Despite the improving fuel consumption in the US, the global oil market is more apt to be impacting from the growth in developing countries than conservation in the US.

The bottom line: don’t remain complacent, strive for energy efficiency and invest into alternative energies.

For further reading on oil prices please refer to
oil price analysis .

Access to energy was instrumental fueling the Industrial Revolution. Over the last 200 years, industrial nations have migrated from wood to coal and now to oil as a source of energy. During the 1700’s, wood was used for just about everything from fuel to constructing houses and building wagons and even tools. As demand for wood increased, the cost of wood rose as deforestation led to the scarcity. The scarcity of wood resulted in deteriorating economics.

It was the availability and access to coal that enabled the growth of Industrial Revolution by providing accessible energy. The Industrial Revolution was predicated upon the availability of Labor, Technology, Capital, and Energy. Scarcity of any of these inputs could undermine economic growth, as was the case with capital during the Great Depression of the 1930’s and the Energy Shock of the 1970’s.

Oil, driven by rapid growth in automobile usage in the U.S, has replaced coal as the main energy fuel. According to the Energy Information Administration (EIA), the 70% of oil consumption in the U.S. is for transportation .

Figure 1 US Oil Imports

Figure 1 illustrates US historical oil imports, as measured by the Energy Information Administration in U.S. Crude Oil Field Production (Thousand Barrels per Day) that dates back to 1970. The EIA provides oil import data dating back to 1910. To estimate the amount of money the US spends on oil imports every year, we can use the data from the State of Alaska Department of Revenue, which provides historical data on the price of oil an derive an average yearly figure.

Figure 2 US Oil Import Spending

Figure 2. appears quite staggering given the amount of money we send to oil producing countries. The US is spending hundreds of billions to import oil. According to the EIA, the US imported an average of 10,031,000 barrels per day equating to $263 billion in imported oil during 2007 when the State of Alaska measured the yearly average spot price for a barrel of oil at $72.

According to Solarbuzz, Germany leads the world in solar photovoltaic (PV) installations with 47% of the market while China increased its market share of PV production from 20% to 35%. The US accounts for 8% of the world solar PV installations. Solarbuzz indicates the global solar PV industry was $17 billion in 2007 and the average cost of solar electricity is $0.2141 per KWH. If a portion of our $260 billion sent to oil producing countries were to be invested into solar energy, perhaps the US would not lag the world in alternative energy.

The bottom line is that the money spent on importing oil has a deleterious impact on our economy and continues our dependence on hydrocarbon fuels producing carbon and other harmful byproducts that negatively impact our climate and health of our children. The longer we are dependent on oil, the longer our economy and environment suffer. Use your vote for alternative energy and not drill baby drill.

Using the latest data from the Energy Information Administration (EIA) , oil production remains significantly below historical levels achieved in ‘70’s and ‘80’s. The peak production in 1970 has not been replicated despite significant expansion of drilling activity during the 1980’s.

Oil Drilling and Production

Figure 1 Oil Drilling and Production

Figure 1 illustrates US historical oil production, as measured by the Energy Information Administration in U.S. Crude Oil Field Production (Thousand Barrels per Day) that dates back to 1920 juxtaposed against U.S. rig count, as measured by Bakers Hughes. The chart suggests that during the first energy shock to hit the US and the world, drilling activity expanded dramatically. By 1981, weekly North American oil rig count reached a high of 4,530 oil rigs in 1981.

U.S. Crude Oil Field Production reached a peak of 9.6 million barrels per day in 1970. In 1981, the height of US oil drilling, oil production was 8.57 million barrels per day. By 2002, U.S. Crude Oil Field Production was 5.74 million barrels per day. Over the last six years oil production declined 10.7% while over this same period, drilling activity as measured by Baker Hughes’ North American Rigs Running weekly rig count, increased 125%.

The decline in U.S. oil production is quite disturbing. During the last decade, a host of new technologies were introduced to help facilitate oil production. Companies such as Dawson Geophysical Co. (DWSN) that enhanced the market for energy exploration by providing seismic data acquisition services. Dawson Geophysical acquires and processes data using 2-D and 3-D seismic imaging technology to assess the potential of hydrocarbon sources below the earth’s surface.

Companies such as W-H Energy Services Inc. that was recently acquired by Smith International, Inc (SII) , offer an array of drilling services such as horizontal and directional drilling for onshore and offshore oil drilling, and 3-demensional rotary steering drilling systems. Smith Int’l is growing revenues at over 19% annually and Dawson’s revenues are growing 53%. With these oil drilling and energy exploration technologies growing at double rates, and drilling activity expanding at 14%, why is oil production falling?

With the rancor of “drill baby drill’ heard as call to solve the energy crisis, energy technologies such as solar and wind energy solutions deserve greater emphasis. Oil will eventually run out. There is a finite amount of oil in the ground. The Tar Sands will not solve the problem. According to Alberta Energy, sand oil production was 966,000 barrels per day (bbl/d) in 2005 and is expected to reach 3 million bbl/d by 2020. Tar sands would only contribute 3.5% towards our current oil consumption of 84.5 million barrels per day.

The bottom line is that our dependence on oil leaves our economy vulnerable. Energy is the catalyst that enables economic development. The longer we are dependent on importing oil from countries hostile to civilized existence, the more tenuous grows the environment. We need to conserve existing energy use and invest into energy technologies that foster the development of alternative energies, thereby, limiting our dependence on oil period.

Energy storage enables the electric generated though solar photovoltaic devices or wind turbines to be used when it’s dark, cloudy, or calm. As Nathan Lewis, Professor of Chemistry, Division of Chemistry and Chemical Engineering Lewis Group at California Institute of Technology, framed it, energy storage is integral in facilitating the development of alternative energy programs.

While hydrogen fuel cells offer future promise to our energy storage needs, battery technologies could provide some immediate results. As with all technologies there are tradeoffs.

There are several competing approaches to battery development. Among these approaches include the lead acid, nickel metal hydride, and lithium-ion cells.
Lead acid: batteries are the oldest approach and are typically found under the hood of your car or truck. Nickel metal hydride batteries have been around for more than 25 years and are used in hybrid electric vehicles such as the Toyota Prius. Lithium-ion cells have been on the market since 1991 and are used extensively in cellular phones, laptop computers, and digital cameras.

There are several issues in dealing with batteries such as environmental, economic, power, safety, and useful life. Lithium-ion cells possess many advantages, but incidences such as laptop computers erupting into flames, leaves many concerns for applicability in motor vehicles. Despite the setbacks, lithium-ion technology could provide solutions to the electric vehicle.

Why is this battery technology important? Solving the energy needs of the motor vehicle has profound implications in solving our energy needs. Nearly 70% of our oil consumption is direct towards transportation essentially motor vehicles. Without a dedicated strategy to address the transportation market and specifically the automobile, our progress towards energy independence is an illusion.

There are several issues with the nickel metal hydride batteries currently used in hybrid electric vehicles. Nickel metal hydride batteries are heavy, bulky, require large storage space in the vehicle, and don’t offer great acceleration. Lithium-ion offer power, size, and weight advantages over nickel metal hydride batteries, and numerous companies are working to improve performance and ameliorate the negative connotations associated with flaming laptops.

One of the basic concepts in dealing with batteries is the measure of battery energy versus battery power. The amount of battery energy refers to endurance, how long will the battery last and is often measured in ampere-hours or watt-hours per kilogram of battery weight. The amount of power refers to the energy draw and is akin to delivering acceleration in an electric vehicle.

The following figure illustrates the measurement of battery power and energy. Lithium-ion batteries are differentiated in their ability to bridge the power and energy tradeoff.

Figure 1 Battery Power vs Energy

For home renewable energy projects such as solar or wind energy deployment, it is often recommended that a deep-cycle battery be used. Deep cycle batteries are able to draw down 70%-80% of their full power, offering longer energy life than a typical lead acid battery. In addition, newer materials such as Gel batteries and absorbed glass mat (AGM) that are sealed, maintenance free, and can’t spill, and therefore, are less hazardous. For a tutorial on home use batteries visit
BatteryStuff.com

An interesting perspective on battery design is presented Energy vs. Power by Jim McDowall. For a primer on how batteries work visit presented Battery Power The premise is that there are tradeoffs between designing a battery for high power versus high energy.

Research conducted at Stanford University suggest the battery life of lithium-ion batteries could be extended through the use of Nano-technology. The bottom line: energy storage is paramount to sustaining the development of alternative energies and battery technologies play a critical role in energy storage and further expanding the role of alternative energies.

Rising energy prices and our diminishing supply of oil threaten our national security. Without access to energy our economy and national defense are vulnerable to collapse. As a solution to our energy needs, we hear political rhetoric to expand oil drilling, but our energy strategy requires a long term solution that means embracing alternative/renewable energy technologies such as solar and wind. It only takes a quick review of oil production statistics to realize how formidable the challenge is that we face.

According to the Energy Information Administration (EIA) in 2007, the US consumed 20.6 million barrels of oil per day (bpd) but we were only able to produce 8.5 million bpd, leaving a deficit of approximately 12.2 million bpd. This means the US needs to import 60% of its oil and at a cost of $130 per barrel, the US will spend approximately $600 billion a year on imported oil.

Oil prices have increased dramatically with an increase of 420% since 2001. The combined impact of rising prices and diminishing oil production leaves the US in a precarious position. Yet, drilling for more oil may not rectify this tenuous situation.

As an example, back in the 1980’s, drilling activity in Alaska helped to ameliorate the oil crisis of the 1970’s. Today, oil production in Alaska has declined significantly. From its peak in 1988, oil production in Alaska has decline 64%. In Figure 1, oil production in Alaska in contrasted to the price of oil per barrel from 1980 to June 2008.

Figure 1 Alaska Oil Production

When we measure the supply and demand for oil, we find in the US, it is really a supply problem. According to the EIA , US demand for oil is growing at an annual rate of one percent over the last ten years, but oil production is down 20% since 1987.

Figure 2 US Oil Production

The energy problem however, is global. The demand for oil in the US may slow, yet supply constraints driven by growing consumption in developing countries could exacerbate this already bleak picture. On a per capita basis, the US consumes approximately 25 barrels of oil per person annually or a little over 600 gallons a year. That figure greatly exceeds other countries and particularly those in developing nations such as China.

In China, oil consumption per person is only 2 barrels or 84 gallons a year. However, oil consumption in China on a per capita basis has increased 88% from 1996 to 2006 according to data from the EIA. Despite China’s one percent population growth, at its current oil consumption growth rate, China is expected to double its current oil consumption by 2015 to over 14 million bpd and exceed the US in oil consumption by 2020. China’s current oil appetite suggests that in 14 years China will require an additional 14.6 million barrels per day. Even if oil producing countries are able to produce the additional oil, those countries that are unable to meet their own needs such as the US and China, will continue to be held hostage to oil producing states.

Figure 3 China Oil Consumption per Capita

The bottom line: the energy model based on hydrocarbon fuels is broken. Neither drilling for more oil will not satisfy our energy needs nor will corn-based ethanol. We need to rapidly embrace electric vehicles using solar, wind, and fuel cell technologies to provide alternative energy solutions. It time to put energy as the most critical component of our national security. Energy should be front and center for the US election. It’s time to invest into clean and renewable energy solutions.

As energy and food prices set new world records, what can we do at home to avert the crisis? Food prices are rising because corn is diverted from food production to producing ethanol for use as fuel in motor vehicles and is exacerbated by the recent flooding in the Mid West. Oil prices continue to escalate as demand for oil in developing countries increases and supply constraints, rising production costs, and limited refining capacity constrain the supply of oil. These factors continue to weigh against homeowners that will face escalating fuel bills to heat or cool their homes. There are some viable alternative energy solutions including wind and solar as well as home insulation that should offset the rising cost of energy. As far as food for fuel, we need to break our dependence on hydrocarbons which continues to impact our climate and weather and transfer our wealth to oil producing nations

Corn Prices have increased 264% since 2005. The rising price of corn used for ethanol is causing farmers to plant more corn and less production of other grains such as wheat or soy. Lower supply of grains is driving up food prices. Rising food prices is most debilitating to the poor, especially those in developing countries.

Figure 1 Corn Prices

Growing demand for oil and questions over Peak Oil suggesting even with oil prices rising to such an elevated level, production is rather anemic. According to the Energy Information Administration (EIA) , while oil prices increased 344% since 2001, oil production from OPEC is up only 1.2% over this same period.

Figure 2 Oil Prices

According to the EIA The demand for oil in China is growing at an 8.1% CAGR over the last five years. With demand for oil growing significantly in developing countries and despite production developments in Saudi Arabia and the 5-to-8 billion deepwater Tupi oil discovery in over Brazil The Tupi announcement in January 2008 is the world’s biggest oil find since a 12-billion-barrel field discovered in 2000 in Kazakhstan according the International Herald Tribune. These new oil discoveries are often in inhospitable areas or deep ocean environments, which makes extraction costly and difficult.

Figure 3 Rig Count and OPEC Oil Production

What can we do? . Forget drilling for more oil, electric vehicles and investment into alternative energy is the only way to avert this crisis. OPEC area drilling activity is up 48% since 1998 and yet, despite dramatically higher oil prices, up 5 fold since 1998, OPEC oil production increased only 11% over 1998.

Homeowners could begin to deploy energy saving and alternative energy systems. Wind and solar energy could help reduce some of the pain. As consumer embrace hybrids, electric, and fuel cell vehicles, wind and solar should begin to offer a stronger value proposition. Energy saving tips such as compact fluorescent bulbs, on-demand hot water heaters, and thicker home insulation products should help reduce heating and cooling costs.

According to the American Wind Energy Association AWEA a turbine owner should have at least a 10 mph average wind speed and be paying at least 10 cents per Kilowatt-hour (KWH) for electricity. There are electric utility and tax credits available in some areas. There are also questions regarding zoning restrictions, and whether to connect to batteries for energy storage, or directly to your electric utility. Consult the Wind Energy Resource Atlas of the United States Wind Resource Maps to get a better understanding of wind speeds in your area.

Cost wind systems will vary depending on model and installation costs will vary by your location. The Whisper 500 from Southwest Windpower offers electric production of 538 KWK/month at 12 mph (5.4 m/s). The system weighs 155 lb (70 kg) and has blade span of 15 feet (4.5 m) and must be mounted on a tower in cement. At 538 KWH per month, that is enough energy to cover the needs a modest house with conservative electric usage. Small wind systems can range from under $1,000 to over $20,000 with a payback period of approximately five years depending on wind resources and utility rates.

Solar photovoltaic (PV) panels cost an average of $4.80 per watt according to Solarbuzz which is about $0.24 per KWH over a 20 year life of the PV system. With an average output of approximately 10.6-watts/square foot (114 w/m^2), a five KW PV systems would cover 515 square feet (47.8 sq. meters) costing approximately $36,000 before credits and tax benefits and produce about 490 KWH per month. Of course installations costs are extra, but with PV production ramping and new PV suppliers entering the market we can expect costs to decline. Federal and local tax credits as well as selling unused electric to your local utility offers economic value on the margin.

The economic value is expected to increase as costs decline and electric rates increase and we can expect significantly higher utility rates in the near future. The economics of zero carbon emissions is not even measured as a benefit to the consumer. We are just beginning to see the cost impact of extreme weather and climate change.

Consumers should try to ameliorate the rising cost of energy by investing into solar and wind. There are several companies offering complete installation services. Among these include: Akeena Solar (AKNS) in California and The Solar Center in New Jersey.

The bottom line: energy and food prices are creating a crisis for consumers globally and there are several initiatives that could help minimize the pain. In addition, the erratic weather patterns around the world may be just a prelude to climate changes due to the impact of carbon dioxide on climate, which may cost us much more in the long run. Let’s stop the drain of wealth cause by oil and invest into clean and renewable energy solutions.

The question of Peak Oil, first proposed by Dr. M. King Hubbert can best be illustrated by analyzing the supply and demand for oil. With use of statistics complied by Energy Information Administration (EIA) , the tenuous position our energy needs becomes more apparent. Let’s examine the latest data from the EIA to provide a picture of the global demand and supply of oil.

Oil Demand

Figure 1 Oil Demand U.S. and China

From Figure 1 we can see that while the demand for oil in the U.S. has grown at a rather moderate rate in comparison to China. The demand for oil in the U.S. declined at an average annual rate of 0.4% during the 1980’s. U.S. oil demand has averaged at a 1.5% compounded annual growth rate (CAGR) during the 1990’s and 1.0% in the last five years since 2001.

In China, demand for oil is grew at 2.7% CAGR during the 1980’s and increased to 7.6% in the 1990’s. Since 2001, the demand for oil in China is growing at an 8.1% CAGR over the last five years. The strong demand for oil from China is remains unabated and is driven by growing motor vehicle usage. In nine years, at its current growth rate, China’s oil consumption will exceed the level of oil consumption the U.S. had in 1991 and in twelve years exceed our current level.

Figure 2 Oil Demand in China

Figure 2 illustrates that the demand for oil in China is quite substantial. With the rate of growth in oil consumption in China exceeding 8% it won’t take very long to exacerbate our tenuous current energy position. Perhaps a review of oil production will shed some light on the topic.

Oil Supply

The following graphs provide a review of oil supply from the Middle East, Saudi Arabia, OPEC, Russia and surrounding Eurasia countries including the former Soviet Union.

Figure 3 Oil Production Middle East and Saudi Arabia

While oil production contracted somewhat during the 1980’s, oil production in the Middle East and Saudi Arabia has grown since 1980, but recent oil production appears constrained. Oil production in the Middle East is up 3.1% on a CAGR during the 1990’s, and has remained at that level since 2001. Saudi oil production grew 3.0% during the 1990’s, but has dropped slightly to 2.1% since 2001.

Meanwhile, among the countries of the former Soviet Union, we see oil production gaining strength. In the countries comprising the former Soviet Union (Eurasia), oil production is up 6.7% on a CAGR since 2001.

Figure 4 Oil Production Eurasia, Middle East and Saudi Arabia

Currently OPEC accounts for approximately 37% and Saudi Arabia 11% of the world’s oil production. Saudi Arabia is recognized as having the largest oil reserves in the world and its Ghawar oil field is the single most productive oil field in the world, according to a recent article in the Wall Street Journal . “Saudis Face Hurdle in New Oil Drilling” The Saudis are developing new fields such its Khurais field, but are finding production efforts challenging as they employ deep horizontal drilling and water injection to achieve production. Given what we glean from the EIA production statistics, achieving moderate oil production growth maybe more of a challenge then we think.

Figure 5 Monthly Oil Production

The bottom line is that our dependence on oil leaves us vulnerable not only to supply disruptions but also in trying to protect supply in countries that gravitate towards violence and terrorism. If more global efforts were employed to develop alternative energies, we could limit our dependence on oil, improve global economics by offering affordable energy to the world, and save our environment and climate – a small step for our planet.

Solar energy is gaining considerable attention from Wall Street and countries looking to achieve energy independence. Solar energy represents one of the most significant energy solutions to help eradicate our addiction to oil. Despite the tremendous success offered with solar photovoltaic (PV), more research is required to sustain further deployment and achieve energy independence. Some semiconductor materials used to develop photovoltaic devices are scarce and may limit PV from achieving mass penetration. Let’s review the current solar PV market to better understand the dynamics of this market.

Figure 1 PV Production by Year

Figure 1 demonstrates the rapid market growth of solar PV and Solarbuzz is astute to point out some critical data points: cumulative PV deployment is still less than 1% of global electric usage, PV industry faces capacity constraints, and Germany and Spain account for 47% and 23% of total PV deployment in 2007. With the significant growth in both the production and deployment of solar PV devices, the stock price of some of the leading PV suppliers have appreciated dramatically even despite a recent pull back in the beginning of the year.

Figure 2 PV Production of Leading Suppliers

Despite the turbulence on Wall Street in 2008 with the NASDAQ down 14% year-to-date, and Dow Jones Industrial Average down 7.3% YTD, investor appetite for clean technology stocks remains robust. First Solar (FSLR), a leading supplier of thin film solar PV remains in positive territory and is up nearly ten-fold from its IPO in November 2006. Thin film PV offers a cost advantage over traditional crystalline PV cells. PV devices employ various elements with different band gap properties to achieve improving solar efficiencies. (See our post on semiconductor band gaps: What’s Pushing Solar Energy Efficiency?, October 1st, 2007)

Figure 3 Market Capitalization Solar PV Suppliers

There are several elements used in thin film PV production. Among the elements used include cadmium and tellurium (CdTe), copper, indium, and selenium, (CuInSe), and copper, indium, gallium, and selenium (CIGS). These various elements are used to improve operating efficiencies and lower production costs of PV devices. In general, crystalline PV devices have higher solar efficiencies, but cost more due to their material thickness of 200-to-300 microns. Whereas, thin film PV are usually about 3 microns deep offering significantly lower production costs. However, SunPower (SPWR) the leading polycrystalline silicon PV supplier offers the highest solar efficiency a rating of 22.7% that started shipping in 2007.

Figure 4 FSLR and SPWR Solar PV Production

FSLR and SPWR are the two leading PV players as measured by Wall Street in terms of market valuation. The cost-efficiency tradeoff between these two PV suppliers offers an interesting framework to evaluate the solar PV market.

Figure 5 PV Cost-Efficiency

The stock market appears to be betting on FSLR given its market capitalization of $22 billion and trading at 43 times 2007 revenues of $504 million. FSLR employs CdTe in its solar modules. In several postings on Seeking Alpha starting back in November 2007, Anthony and Garcia de Alba have provided valuable insight into material constraints in the production of PV devices.

Tellurium is a rare metalloid element that is used in producing semiconductor materials because it does not conduct electricity. Tellurium is recovered as a by-product in refining and processing of gold and copper as well as other ores. Tellurium was primarily used to create metal alloys that enable easier machining of end products.

Because of its unique properties, Tellurium and cadmium (CdTe) have been used in thin film PV production since the 1980’s. According to a comprehensive study by Fthenakis and earlier work by Moskowitz “The Life Cycle Impact Analysis of Cadmium in CdTe PV Production”, CdTe is deposited on a thin film substrate using electrodeposition, chemical surface deposition, and vapor transport deposition. FSLR reports in their 10K that they employ a proprietary vapor transport deposition process for CdTe PV production.

A thin film of CdTe is deposited on a substrate at a thickness of 3 microns. According to the Fthenakis and Moskowitz, back in the 1980’s, a 10 megawatt (MW) PV facility employing vapor transport deposition of CdTe uses 3,720 kilograms (kg) of CdTe to achieve a10% efficiency at 3 microns. A one-one bond of CdTe with an atomic weight of Cd at 112.41 and Te at 127.60 suggests Te comprises 53% of the weigh of CdTe. With 3,720 kg of CdTe used at 10MW, the amount of Tellurium used is estimated at 1,978 kg or 197.8 kg/MW.

The electrodeposition CdTe process using a mixture of cadmium sulfate and tellurium dioxide used 880 kg of tellurium dioxide, which amounts to approximately 696.8 kg of Te for 10 MW PV productions. The electrodeposition CdTe process would equate to about 69.7 kg of Te per MW. For a 100 MW PV production approximately 7 tons of Te are consumed.

One would assume the PV production process would improve significantly from the 1980’s and the amount of Te consume would decline with improving efficiencies. This would suggest that FLSR at 200 MW PV capacity in 2007 would consume somewhere between 14 and 38 metric tons of tellurium. This figure is significantly higher than the estimates derived from the FSLR tellurium posts on Seeking Alpha that are closer to10 tons per 100 MW (100 kg/MW).

Figure 6 Te Production

Let’s proceed with the conservative figure of 100 kg/MW (10 tons at 100 MW) to assess the tellurium constraints. Tellurium production is a by-product of gold, copper and other ores. We have found Te production estimates ranging from 132 metric tons (MT) to 300 MT per annum. In a National Renewable Energy Laboratory (NREL) report Assessment of Critical Thin Film Resources in 1999 estimated Te production between 200 and 300 metric tons per year in 1997 and indicated under utilization of capacity for the production of tellurium.

Let’s compare our conservative estimate of 100kg/MW Te usage for FSLR to the optimistic production forecast of 300 MT to evaluate capacity constraints for FSLR. With 300 MT (300,000 kg) global Te production and FSLR using 80% of the Te production, capacity of PV tops out at 2,400 MW (2.4 GW).

The U.S. electric energy usage in 2006 was 4,059.91 billion kilowatt hours (KWH) which translates into 463,460 MW (divide 4060 by 365 days x 24 hours). So without significant investment into research and development for PV FSLR could be constrained at 2,400 MW representing only 0.5% of the U.S. electric usage in 2004. Further more, if FSLR were to be constrained at 2.4 GW annual production, revenues ($2.60 per watt Q4/07) would peak at approximately $6.24 billion, a price-to-sales multiple of 3.4x with its market capitalization of $22 billion.

However, in comparison to leading companies in energy, pharmaceuticals, technology and finance, FSLR’s market capitalization is relatively small. Perhaps with improving production processes, FSLR could reduce the amount of Te per panel and improving mining and metal refinement process could increase Te production to expand the market for CdTe thin film PV devices.

Figure 7 Market Capitalization of Leading Companies

The bottom line is that more research and investment into alternative energies is required to ameliorate the world from being held hostage to oil and hydrocarbon fuels that are directly linked to rising CO2 levels and climate change.

With the infinite wisdom of the White House and U.S. Congress, food prices are now directly tied to the price oil. The price of corn-based ethanol is now determined by the price of gasoline that it substitutes in motor vehicles and that price is established by supply and demand for oil. The price of gasoline at your local gas station or convenience store is based on the price of oil. And now that the price of corn is rising because it is tied directly to oil, the price of other grains and subsequently, prices along the entire food chain are rising.

Corn Prices have increased 166% since 2005. The rising price of corn that is used to produce corn ethanol is causing farmers to direct their limited resources to grow more corn, which means other grains such as wheat or soy become scarce and their prices rise. The growing scarcity of grains for food products is raising price across the food chain. Developing a renewable energy solutions based on diverting food as a substitute for expensive gasoline forces food supplies to become scare and expensive.

It is the supply and demand for gasoline and diesel fuels that establishes the price at the pump. When corn ethanol is substituted for gasoline, prices tend to gravitate towards a mean price that continues to rise to keep pace with the escalating price of crude oil now over $110 per barrel. Corn prices are inextricably linked to oil prices and in turn; corn prices impact other grain prices that means it cost more to feed your family or to feed livestock and forces those prices higher.

The rise in corn prices is illustrated in Figure 1.

Figure 1 Corn Prices

Irrespective of the timing of Peak Oil, a long-term energy strategy is required. The days of cheap oil are over. Remember how oil production in Alaska helped ease the U.S demand for foreign oil a couple of decades ago. Oil production in Alaska declined by nearly 75 percent from its peak in 1987 according a Washington Post article back in 2005. In November 2007, the Petroleum News indicated production in Alaska is expected to decline further in the future. The U.S. depends on oil production in the Gulf of Mexico for about 25% of our supply, according to the Department of Energy which is why the impact from Hurricane Katrina was so devastating.

Diminishing supply and rising demand suggests oil prices should continue to remain elevated. The rising motor vehicle usage in China (China Motor Vehicle Registration)
and India continues to influence the demand for oil.

Figure 2 Vehicle Registrations in China

Figure 2 and Figure 3 illustrate the rising use of motor vehicles in developing countries. This trends should continue and in turn, increase the demand for oil.

Figure 3 Automobile Sales in India

Maybe we should look to some leading countries in the development of alternative energy strategies. Perhaps we can learn from Norway’s HyNor Project. Solar photovoltaic projects being lead by Germany
and Spain.

So the next time you fill your tank or when you’re at your local food store and find that your wages don’t quite cover your food bill, ask your local Congressional representative for better planning on alternative energy strategies and solutions. Investment and research into solar, wind, electric vehicles, and hydrogen energy could provide real solutions by addressing energy needs, climate concerns, the environment, and food prices.