Center on Japanese Economy and Business

The Tenth Annual Mitsui USA Symposium

Japan’s Solar and Wind Ambitions:How Bright Is the U.S. Market?February 5, 2009

Speakers

Christopher StolarskiSenior Vice President, Mizuho Corporate Bank, Ltd.

David KaltsasExecutive Vice President, Distributed Power Group, SunWize Technologies, Inc.

Gen Hajime ItoPresident, Japan External Trade Organization (JETRO) New York

Commentator

Geoffrey HealPaul Garrett Professor of Public Policy and Business Responsibility, Columbia Business School; Director, Center for Globalization and SustainableDevelopment, The Earth Institute, Columbia University

Moderator

Hugh PatrickDirector, Center on Japanese Economy and Business; R.D. Calkins Professor ofInternational Business Emeritus, Columbia Business School

Cosponsored by Columbia Business School's Energy Club, Green Business Club, and Japan Business Association

Symposium Summary ReportJeffrey Lagomarsino, EditorSenior Research and Editorial OfficerCenter on Japanese Economy and Business Japanese translation inside

2 Japan’s Solar and Wind Ambitions: How Bright Is the U.S. Market?

Japan’s Solar and Wind Ambitions: How Bright Is the U.S. Market?February 5, 2009

The Center on Japanese Economy and Business, with the

support of the Mitsui USA Foundation, organized the sym-

posium “Japan’s Solar and Wind Ambitions: How Promising Is

the U.S. Market?” The event marked the 10th anniversary of

the Mitsui USA Foundation’s sponsored symposia at Columbia

Business School and was the first to include a remote audi-

ence of Columbia Business School’s alumni association in Tokyo

via interactive webcast. Columbia Business School’s Energy

Club, Green Business Club, and Japan Business Association

cosponsored the event.

One hundred forty people were present to hear the views

of David Kaltsas, executive vice president of the Distributed

Power Group at SunWize Technologies; Christopher Stolarski,

senior vice president of the Project Finance Department of

Mizuho Corporate Bank; and Gen Hajime Ito, president of

the Japan External Trade Organization (JETRO) New York.

Geoffrey Heal, Paul Garrett Professor of Public Policy and

Business Responsibility at Columbia Business School and direc-

tor of the Center for Globalization and Sustainable Development

at Columbia University’s Earth Institute, served as the com-

mentator, and Hugh Patrick, director of the Center on Japanese

Economy and Business and R.D. Calkins Professor of Inter-

national Business Emeritus, Columbia Business School, opened

the symposium with introductory remarks and moderated the

discussion.

Mr. Kaltsas began by describing SunWize Technologies’

segmentation of the photovoltaic (PV) solar market into four

types of projects: on-grid utility scale, on-grid commercial, on-

grid residential, and off-grid industrial. Mr. Kaltsas then described

the PV value chain, broken into the following categories: sili-

con feedstock, ingots and wafers, solar cells, modules, and

integrators/VARs. The equipment sold, installed, and integrated

by SunWize Technologies’ business includes all aspects of the

value chain, except balance systems and integrators/VARs,

thereby accounting for approximately 70 percent of the total

installed cost of a PV system.

Mr. Kaltsas noted that the U.S. market for on-grid solar

projects became significant only in 2001, when the Japanese

companies Sharp and Sanyo and the German company Q-Cells

brought PV technology to the U.S. market at a competitive

price point. At this early stage the PV industry’s growth was

fueled by cheap silicon. The next stage of the industry’s evo-

lution was characterized by silicon shortages and corresponding

price increases. The silicon shortages led to the injection of

venture capital into the PV industry, creating many new start-

up companies that have driven innovation, particularly of thin-film

technology. Mr. Kaltsas noted that Mitsui Group was at the

forefront of the recent industry trend toward consolidation. In

2006, Mitsui acquired SunWise Technologies, the largest dis-

tributer of PV equipment in the Unites States. Less than a year

later, SunWise Technologies acquired GenSelf Corporation,

a company known for its excellence in sales and installation.

According to Mr. Kaltsas, the industry is still facing some sil-

icon shortages and undergoing consolidation, but a new stage

of the PVindustry is emerging; it is one where silicon constraints

disappear, U.S. policy incentives become stable, and large,

mature companies dominate.

Next, Mr. Kaltsas discussed the evolution of the global PV

market. He noted that Japan was the leader in deployed PV

systems until 2005, when the European market experienced

tremendous growth and moved the whole industry forward. He

said that while the United States accounts for only slightly over

10 percent of the global PV market, now is a very exciting time

to be involved in that market. Today, the U.S. PV market is a

7-state market, and by 2015 he expects it to expand to a

49-state market. This market expansion, Mr. Kaltsas said, will

be driven to a large extent by the projected rising cost of

conventionally generated energy, as well as federal solar incen-

tives like the 30 percent investment tax credit (ITC), which was

extended for eight years in October 2008.

Despite his bullish stance on the future of the U.S. PV mar-

ket, Mr. Kaltsas said the financial crisis has made it much more

difficult to finance solar projects. In particular, the number of

tax-equity investors has shrunk dramatically, leading to increas-

ing competition among solar companies and poorer financing

terms for project developers. Mr. Kaltsas said that for a 1 per-

cent increase in the interest rate on debt, a developer’s

equipment costs must fall by 8 percent to achieve the same

internal rate of return on a project. As a consequence of finan-

cial conditions, many solar projects that were previously fast

tracked have now been delayed.

In conclusion, Mr. Kaltsas mentioned two business oppor-

tunities in the solar industry. First, there is a great opportunity

to build a strong solar brand, as solar companies currently lack

a consumer presence and credibility among investors. Second,

there is substantial opportunity to make solar technology more

affordable and expand its use through innovative financial tools

such as equipment leasing, power purchase agreements,

and electricity futures.

Mr. Stolarski discussed the U.S. regulatory regime and

the status of debt markets for financing renewable energy proj-

ects, particularly in the wind energy space. He identified the

Center on Japanese Economy and Business February 5, 2009 3

1992 Energy Policy Act as the regulatory change that spurred

the U.S. wind industry’s growth. Prior to 1992, the primary

wind subsidy was an ITC, under which most of the tax bene-

fit was gained quickly, therefore disincentivizing long-term

operation of the asset. The 1992 Energy Policy Act changed

the subsidy to a production tax credit (PTC), whereby tax ben-

efits were earned over 10 years based on the asset’s actual

production. This drove innovation, as wind turbine manufac-

turers were incentivized to make better, more reliable products

to meet the new long-term demands of wind farm developers.

Mr. Stolarski noted that an increasingly widespread aware-

ness of the environmental costs and national security risks

associated with conventional energy resources has also pro-

pelled the rapid growth of the wind industry over the last decade.

This boom for the wind industry may have even led to a bubble

in the market for wind projects that peaked about a year ago,

according to Mr. Stolarski. He said too many investments were

made in speculative wind projects for which there was a lack

of due diligence. While the financial crisis is causing a lot of

pain for the wind industry, Mr. Stolarski said the silver lining

is that it has imposed discipline on the wind energy market.

Mr. Stolarski said he shares the concerns expressed by Mr.

Kaltsas over the shrinking tax-equity market and increased

cost of sourcing tax equity as a result of the financial crisis. He

said this problem is especially acute in the wind industry because

the current PTC offers tax benefits only to the owners of the

wind projects, as deemed by the Internal Revenue Service,

which severely limits the number of investors who can take

advantage of the tax credit. Mr. Stolarski said this poses tremen-

dous short-term constraints on the development of wind farms,

and he suggested increasing tax appetite through a policy shift

back to an upfront grant in the form of a substantial ITC, or

to a refundable PTC that would allow more investors to use the

tax credit. Furthermore, he emphasized that there must be cer-

tainty among market participants that government subsidies

will not expire in the near future. These subsidies contribute

a substantial amount of the capital cost for a project, and most

projects are not viable without them.

Mr. Stolarski also noted that the financial crisis is mak-

ing it very hard for wind and other renewable energy projects

to source debt capital. Without significant capital market solu-

tions for renewable energy projects, project developers rely

on the bank debt market, which has recently become much

more expensive as bank capital is scarce and competition

for it has increased. He added that European banks have been

the main providers of term debt financing and they have been

among the hardest hit by the financial crisis. He said Japanese

banks are also involved in debt financing, albeit to a lesser

extent, and fortunately they seem to have avoided the losses

that the European and American banks are experiencing. Mr.

Stolarski said that while recent events have been hard on

the renewable energy industry, it means that renewable energy

projects are very cheap right now for any entity that does have

capital to lend.

Finally, Mr. Stolarski suggested national regulatory steps

to ensure the long-term development of the renewable energy

industry in the United States. He said such policies must be

consistent with the needs of various aspects of the industry,

from equipment manufacturing to project development to own-

ership and operation. He encouraged the U.S. government

to set a national renewable portfolio standard (RPS) and there-

fore eventually transition away from tax credits, as they hide

the cost of renewable electricity from the broader public. He

said that once the public realizes that electricity costs 20 or

30 percent more, there is reason to believe there will be greater

conservation.

Mr. Ito addressed three critical aspects of the PV indus-

try, which he termed the “3Gs”: “glocal” (a combination of the

words “global” and “local”), government, and grid. He began

by emphasizing that the global PV market is rapidly growing

and, in the future, companies must seek to achieve economies

of scale in order to maximize their market share. This is diffi-

cult at present because, while crystalline silicon technology

has dominated the market to date, many competing PV tech-

nologies, including various thin-film technologies, show promise

and make picking a winner difficult at this stage, according

to Mr. Ito. For this reason, Mr. Ito explained, Sharp, Q-Cells,

and other leading PV companies are currently diversifying their

research and development to cover many technologies. He

noted that large Japanese companies such as Sharp, Sanyo,

Mitsubishi, and Kyocera are well positioned to do this because

their solar businesses only comprise a small percentage of

their total business, thereby allowing them to absorb the inher-

ent risks of investing in multiple technologies. But once a winning

technology is evident, Mr. Ito said, it is important that Japanese

companies invest heavily in that technology to achieve

economies of scale and maximize their global market share.

In choosing a PV product to standardize for the global mar-

ket, PV companies must consider that installation markets vary

greatly, even among developed countries, said Mr. Ito. He

encouraged the Japanese PV companies to learn from the mis-

takes of Japanese cell phone companies, which manufacture

amazing cell phones for the Japanese market but are not com-

petitive in the global market. With respect to local PV markets

in the United States, China, and the Middle East, the demand

for PV installation is primarily from the commercial sector,

whereas in Japan, the demand is overwhelmingly for resi-

dential installation. Accordingly, in the Japanese market there

is a high demand for rooftop installations with very high con-

version efficiency, which is not necessarily compatible with

4 Japan’s Solar and Wind Ambitions: How Bright Is the U.S. Market?

the other markets that care more about total price than con-

version efficiency. Mr. Ito suggested that Japanese companies

should be willing to compromise the quality of their PV prod-

uct in order to offer a cost that makes them competitive in

important foreign markets.

Mr. Ito next discussed the role of government in foster-

ing the solar industry, saying that consistent supportive policy

is essential. He explained that Japan had been the leading mar-

ket in the world for PV sales until 2005, when the Japanese

government ended subsidies to the solar industry, hoping that

the market had become self-sustaining. As a consequence,

the market declined in 2006 and 2007, and now the Japanese

government has corrected the mistake by instating a new

subsidy policy. Germany is now the largest PV market, and Mr.

Ito attributed this to the German government’s strong feed-

in tariff, whereby since 1991 it has committed to purchase

unlimited amounts of solar electricity at nearly three times

its actual cost. In the United States, Mr. Ito commended

the positions of the Obama administration, particularly the

aggressive RPS goal of 25 percent by 2025; however, he said

meeting such a target will require an array of very effective

supportive policies.

In conclusion, Mr. Ito said a modern public electricity

distribution grid is a precondition for achieving a high national

RPS. Solar and other renewable energy sources produce

variable power according to the weather, which means they

require a national electricity grid that is able to compensate

by coordinating power generation and usage, thereby pro-

viding a stable flow of electricity. Mr. Ito said the very outdated

U.S. electricity grid represents a major impediment to achiev-

ing a high RPS, and he praised recent U.S. initiatives to allocate

money from the February 2009 stimulus package toward grid

modernization.

Professor Heal echoed the concerns of the other speak-

ers about the effect of the financial crisis on the financing of

wind and solar projects. He noted that renewable projects have

high fixed costs upfront and very low running costs, which

makes them particularly sensitive to capital market conditions.

Accordingly, he said fixing the credit market is the most press-

ing issue to address in order to promote the growth of renewable

energy sources like wind and solar.

Professor Heal noted that renewable energies have trou-

ble competing with fossil fuels, in part because the prices of

fossil fuels are increasingly volatile. When oil reached $150

per barrel in July 2008, renewable energies were highly com-

petitive; however, in a few months the price of oil dropped to

around $30 per barrel and renewable energy was no longer

competitive. Professor Heal said that once the global econ-

omy returns to a path of growth, fossil fuel prices should rise

again. Further, he pointed out that while it is well known that

the renewable energy industry is dependent on government

subsidies, it is important to understand that the fossil fuel

industry is also heavily subsidized and receives significant tax

advantages.

Agreeing with the prior speakers, Professor Heal expanded

on the need for a sensible and stable U.S. policy environ-

ment to foster the development of the renewable energy

industry. He explained that to date, renewable energy policy

in the Unites States has consisted of various uncoordinated

initiatives at the state level and tax and related incentives at

the national level, which have not been guaranteed to be

renewed. Such an uncertain policy environment makes it very

difficult for business development. However, he was optimistic

that following years of poor U.S. policy, the Obama adminis-

tration is committed to making real improvements.

The most important policy step according to Professor

Heal is to put a price on the emission of carbon dioxide by intro-

ducing a national cap and trade system. Because the environ-

mental and social costs of fossil fuels are so high, Professor

Heal explained that a cap and trade system is a way to impose

those costs on the producers, thereby creating a level play-

ing field in which solar and wind energy, which have high private

costs but very low environmental and social costs, are com-

petitive. He said this policy would have the effect of immediately

raising the price of fossil fuels, according to how tight a car-

bon dioxide cap is set. For example, at a price of $20 per ton

of carbon dioxide, which is less than the current trading price

under Europe’s cap and trade system, Professor Heal esti-

mated the cost of coal-generated electricity would rise 40–50

percent, thereby making wind and solar competitive alterna-

tive energy sources without government subsidies. Such a cap

and trade system would produce the kind of long-term, sta-

ble regulatory landscape in which the renewable energy industry

could flourish.

Given the inadequacy of data on the relative costs of solar

and wind energy, Professor Heal said it is difficult to know if

solar or wind energy would fare better given a level playing field

in a competitive environment. However, he said that wind tech-

nology has come further down the learning curve, largely

because of its extensive use in Europe, and is therefore more

competitive at present. He also mentioned that solar ther-

mal technologies, which are distinct from PV, are also very

promising. He ventured that solar thermal energy may currently

be more cost effective than that of PV, and more likely ready

for large urban installations. Professor Heal concluded by pre-

dicting that if the Obama administration is able to implement

a cap and trade system—one with a relatively tight cap and

without many exemptions—there will be a large boom in wind

projects in just a few years, and solar projects will also progress

quickly, but at a somewhat slower initial pace.

Center on Japanese Economy and Business February 5, 2009 5

6 Japan’s Solar and Wind Ambitions: How Bright Is the U.S. Market?

Center on Japanese Economy and Business February 5, 2009 7

8 Japan’s Solar and Wind Ambitions: How Bright Is the U.S. Market?

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Mitsui Sumitomo Insurance Company, Ltd.Mitsui USA FoundationMori Building Co., Ltd.

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