ALTERNATIVE ENERGY Fri 21/11/2008

Solar's chance to shine again

Colin Whitehead*, 11 August 2008

THERE is no shortage of energy in the world, indeed, the sun alone provides one kilowatt of energy for every square metre on which it shines. The issue therefore isn’t where to find energy, but how to capture it.

Capturing solar energy is not a new concept. Solar heaters were used in the US in the late 1800s, but they faded away as cheaper alternatives became available. Solar power did become briefly more popular during the 1970s oil crisis and the rising cost of oil is of course a factor motivating the use of alternative energy today.

Methods of harnessing the sun’s energy fall into two main categories, thermal solar power and solar photovoltaic (PV) power.

Solar PV, which refers to the use of solar panels that convert the sun’s rays into electricity directly, is one of the world’s fastest growing energy technologies with installed capacity expanding by 50% in both 2006 and 2007. Total global capacity is currently around 7.7gw (gigawatts), with a further 2.7gw of off-grid systems.

The largest market for rooftop solar PV systems is Germany, which accounts for more than half of global capacity. Japan is also a significant market, although the fastest growth is currently occurring in Spain. Spain is also a growth area for wind power and the country is clearly embracing alternative energy. The capacity of most solar PV installations is just a few kilowatts (kw). However, the growth of large-scale solar PV systems has begun to accelerate in recent years. Google’s head office in California has a 1.6mw (mega watt) installation on its roof and Nevada’s Nellis Air Force base hosts one of the largest solar PV systems at 14mw. Although Google and the US Air Force are clearly very different, what they do have in common is deep pockets.

This is no coincidence given that solar panels are expensive and solar PV costs anywhere from US20c to US80c per kwh (kilowatt hour). As a result, solar PV is an unlikely contender for utility level power generation given that nuclear and fossil fuel power stations operate at around US5c/kwh. However, thermal solar is gaining traction as a viable alternative to fossil fuels for utility level power.

Rather than generate electricity directly, thermal solar transfers the sun’s heat to liquids. At the household level, thermal solar can provide hot water for pools, showers and heating systems. China is a leading force in the domestic use of thermal solar, accounting for almost two thirds of the world’s 105gw of thermal capacity in 2006. Europe accounted for 12.8% while the US and Australia were both surprisingly low at 1.7% and 1.2%, respectively.

At the utility level, thermal solar creates steam to power turbines through a process known as concentrating solar power (CSP). CSP systems generate steam by concentrating sunlight on liquid contained in pipes or tanks. CSP Plants can deliver hundreds of mega watts of capacity and are cheaper than solar PV at around US12-18c/kwh.

Although this is still too expensive to be independently competitive, technology advancements will improve CSP’s cost profile. The National Renewable Energy Laboratory forecasts that CSP costs will fall to US4-5.4c/kwh by 2012.

Certainly, following more than a decade of slumber, CSP development has increased dramatically in recent years. The design of CSP plants falls into three main categories; troughs, dish and tower systems. The trough design has been around for quite some time, with a system constructed in Egypt as early as 1914. The design is so-called because the mirrors are set in a trough formation, with a pipe running down the centre at the mirrors’ focul point. Oil contained in the pipes is heated to several hundred degrees centigrade, which in turn heats water to produce steam and drive turbines. The first large-scale solar power generation projects were a number of trough systems built by Luz Industries in California’s Mojave Desert. The projects were completed in the 1980s and ownership has since transferred to FPL Energy. With 354mw of power, the Mojave Desert plants accounted for the majority of the world’s solar power for many years.

Dish systems focus the sun’s rays on a single focal point above the dish. The advantage of a dish system is that the focal point achieves higher temperatures because there is a greater concentration of light. Dish systems do not use traditional steam powered turbines. Rather, the sun’s rays heat gas stored at the focal point, which fuels an engine to generate electricity. A leading manufacturer of the engines is US-based Stirling Energy Systems.

Tower systems are effectively an enlarged version of the dish design. Rather than mount the mirrors on a dish, they are set on the ground over a large distance. The focal point for the mirrors is a tower at the centre of the array. The tower contains a tank of liquid that is heated to generate steam and spin turbines.

The table below shows the major solar power projects that have either been recently completed or are in development around the world today.

As the table shows, many of the world’s projects are located in south-west America. This is not surprising given that the area’s reliable sunshine makes it one of the foremost regions for solar power. Other suitable regions, stretching broadly across the equatorial belt, are Southern Europe, North Africa, India and China. At any rate, the US and Spain are leading the world in the development of solar thermal power. The countries together account for around 90% of forecast capacity through to 2012, of 5600mw. If solar power continues to grow at this pace, global capacity would reach 200gw by 2020, which could replace 135 coal fired power plants.

Solar power has two main drawbacks that have restricted the pace of development in the past. The most obvious issue, like wind power, is that plant operators cannot influence how many hours the sun will shine in any given day. And of course, there’s a distinct lack of sunlight at night!

Solutions to this problem include thermal storage systems such as molten salts that can store and deliver heat at suitable temperatures when sunlight is not available. An alternative to storing heat is to use excess energy to pump water, which can then run through a hydroelectric power generator when required. However, heat storage methods are preferable given that they do not require additional infrastructure on the scale of a hydro system.

In Australia, the country’s significant coal resources have limited the motivation for developing alternative energy. However, Australian design is at the forefront of the global industry.

Dr David Mills founded Solar Heat and Power in 2002, after working on solar technology at Sydney University in the early 1990s. The company built a 1mw pilot project at New South Wales’ Liddell coal-fired power plant in 2004. Solar Heat and Power subsequently moved to the US and became Ausra. However, the Liddell project continued to develop in the years since the pilot project and a 4.4mw solar thermal plant is currently in the commissioning stage. The project is a trough CSP system, which heats water directly and is currently Australia’s largest thermal solar project.

Ausra’s other major projects include a 180mw power plant in the United States and a 6.5mw plant in Portugal. Critically, Ausra believe their CSP systems are directly competitive with fossil fuel power stations. Ausra is, however, a private company and therefore not an option for Australian investors. Nevertheless, there are a number of other Australian Stock Exchange listed companies with exposure to solar energy and related products. They include:

Dyesol (DYE; market cap $A107 million). Dyesol was formed in 2004, listed on the Australian stock exchange in 2005 and holds a ‘pioneer’ licence from the inventor of the Dye Solar Cell (DSC). DCS is an advanced form of solar panel that is more flexible than previous technology. For example, it is possible to integrate DCS panels with windows. Rather than market solar panels to end users, the company supplies manufacturing solutions, equipment and materials to industrial customers based on the DCS technology. Although Dyesol is a potential industry leader, it is yet to deliver a profit and remain reliant on capital injections.

Quantum Energy (QTM, $A76m). Quantum Energy manufactures and distributes solar hot water systems and swimming pool heaters. The company’s systems produce hot water day and night, without the requirement for direct sunlight or solar panels. However, the company is very highly geared, with net debt to equity of more than 700% at the end of last year. The company recently breached a debt covenant and is not presently generating positive operating cash flows.

Solco (SOO, $A10m). Solco manufactures and markets solar power water pumping equipment and provides solar power solutions in Australia. The company delivered a loss of $240,000 for the six months to 31 December 2007, compared to a loss of $631,000 in 2006. Solco’s balance sheet is in reasonable health though, with net cash of $1.48 million and management expect to deliver a maiden operating profit of $100,000 for the full year to 30 June 2008.

Enviro Mission (EVM, $A7.4m). EnviroMission may be a micro cap, but its ambitions are anything but micro. The company plans to develop a solar tower system that, if built, would probably become one of the modern wonders of the world. EnviroMission’s tower system differs from the traditional design discussed above. Rather than using mirrors to generate heat and steam, the base area acts like a huge greenhouse to heat the air. The hot air then rushes upwards through the tower, spinning wind turbines in the process. The company believes a plant based on this design could have a generation capacity of 200mw.

Oh, and regarding the wonders of the world – the central tower will be 1km high! That’s more than three times the height of Sydney’s AMP tower.

In summary, there are no serious investment options in solar for the Australian investor. However, as a growing industry, we will continue to monitor the performance of some of the smaller players mentioned and provide updates from time to time.

*Colin Whitehead is an energy analyst with Fat Prophets.

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