Solar Water Heating: How an ancient technology can build the path forward

 




Craig Marlowe

Consultant to the Maryland Task Force on Solar Water Heating

(Takoma Park, Maryland)

 

Solar Water Heating: How an ancient technology can build the path forward

Craig Marlowe[1]

904.610.8728

cmarlowe@solarwatertaskforce.org

 

Introduction

Heating water represents twenty percent of all household energy use in the United States (US)[2].  Displacing this energy with solar water heating (SWH) makes economic sense because it is the most cost effective solar energy technology on the market and can be cost competitive with conventional fuels.  First commercialized in the US during the late 1800’s[3], this mature technology has no technological implementation barriers.  Increasing demand for SWH could realistically make it the first mass-deployed alternative energy solution in the US and create a pathway for other technologies to follow.

US Lags Global Adoption

Globally, solar water heating (SWH) is the most deployed alternative energy technology on the market.  As shown in Fig. 1, in 2010 SWH had more global installed capacity than wind and generated more energy than geothermal, photovoltaic and tidal combined[4].  Despite its significant global market presence, the role of SWH is underappreciated by US energy policy.

 

Figure 1   2010 Total Installed Capacity and Energy Generation of Emerging Energy Technology

 

The US is lagging most of the world (Fig. 2), falling behind Africa in the per capita use of SWH[5].  Outside of Hawaii and a single Nevada program, US adoption rates are much less than 1%.  Maryland, despite state incentives of up to 20% of the installed cost (on top of the federal 30% incentive), has fewer than 1,500 systems installed[6].  Some parts of the US are actually seeing a net decline in installed systems as older systems are being removed at a faster rate than new installations.  Even so, historically SWH has been the dominant solar energy solution in the US, primarily because of economics.  Given the same capital costs and collector panel footprint, SWH produces 3 times more energy than photovoltaics[7].  A recent National Renewable Energy Laboratory (NREL) study suggests that installed costs of $5,000 and $2,500 would result in a breakeven value proposition for 50% of the US households using electricity and natural gas, respectively[8].  These installed price targets have been met.

 

Figure 2  2009 Solar Water Heating Annual Energy Generation per 1,000 Inhabitants by Economic Region

 

There is no technological reason for this adoption gap.  Geography is not a concern as Germany, Switzerland, Denmark and Sweden, all in higher latitudes than most of the US, have significantly greater penetrations of SWH.  Nor is potential economic savings the reason, several SWH pilot programs have shown that SWH can save their customers money.  California’s results for a metered pilot in 342 residential, multifamily and small commercial units from 2007 to 2010 in San Diego are listed in Table 1.

 

Table 1  San Diego SWH Pilot’s Monthly Energy Savings

 

Why Our Current Approach Isn’t Working

A national survey on consumer attitudes towards SWH found that 48% of US residential households had a favorable impression of solar water heating and 15% were extremely or very likely to install systems on their homes[9].  This and other studies have found that the current high installed cost of solar water heating and the perceived complexity of the buying process are the primary reasons SWH is not adopted[10] [11].

In the US, the present value of SWH’s energy savings cannot support the current installed price in most markets.  Recognizing the implications of SWH’s finite energy savings is critical to deploying it.  Unlike electricity, which can be exported to the grid, thermal energy in small scale systems cannot be distributed or sold.  The benefit of the generated thermal energy is strictly limited to the individual user’s demand for it.  The resulting hard limit on capital and operating costs strongly suggests that SWH deployment business models dependent upon high margins are fatally flawed.  Nonetheless, SWH’s predominant business model relies upon high margins due to low volume.

The existing lack of demand has created a series of negative feedback loops that work to keep prices high and demand low.  Most domestic SWH manufacturers’ production is less than one-third of their factories’ capacity[12].  Years of low demand have caused many to focus on adding equipment features to maintain or raise revenue, rather than lowering per unit retail prices.  At the other end of the value chain, the lack of installation demand requires installers to maintain an extraordinary level of mark-up, either to keep the doors open or because the installer has limited understanding of the effort required.  To illustrate this last point, last year the median number of annual installs by Maryland’s 43 SWH installers was a single system[13].

 

Consumer Ownership Assumption

Ultimately, it is the current business model for SWH deployment that has stifled demand.  The main assumption embedded in this model is: SWH equipment is owned (or leased) by the consumer.  Given current retail prices, this assumption positions SWH as a consumer luxury good, thereby excluding a large portion of the households that would most benefit from SWH’s savings.  There are several other inefficiencies contained in the assumption of consumer ownership.

A key requirement of consumer ownership is direct consumer financing.  The credit requirements for such financing certainly prevent many low-income, credit-impaired and tenant households from obtaining SWH.  More problematically, consumer financing’s interest rate and repayment terms often results in a payment larger than the corresponding energy savings.  Consumer financing is not the optimal debt structure to build-out widespread SWH infrastructure.

 

As convincingly shown by current retail prices, individual consumers have limited negotiating power in establishing competitive SWH pricing.  The lack of buying power, coupled with limited demand, has resulted in a non-competitive market-place for SWH. A recent Navigant study, which looked at reasons an SWH system cost three times as much in the US as Israel, found that the vast majority of the price differential was due to installer inexperience, higher labor rates, less installer competition, and installer overhead/marketing costs[14].

 

The other primary reason consumers do not adopt SWH is perceived complexity. When electing to purchase a SWH system the consumer must educate him or herself in SWH technology, installation contractors, maintenance requirements and incentives.  Each aspect has a significant learning curve and potential for mistake.  Due to the limited potential savings associated with SWH, even motivated customers become frustrated or overwhelmed, and do not complete the transaction.  Even when the customer does complete the transaction, SWH manufacturers and installers are largely unknown to the public and have limited credibility.  Thus, SWH equipment carries a significant perceived risk of ownership.  Today, the benefits of consumer ownership of SWH in the US do not outweigh their transaction costs and ownership risks.

 

Current US SWH Policy

Three major failings in US energy policy are: 1) poor understanding of SWH’s value proposition – even at the expert level, 2) inconsistent messaging and 3) misaligned incentives.  There is a shockingly limited amount of data supporting SWH’s value and verified energy savings in the US.  The resulting data vacuum causes inappropriate and misleading data to be used.  For example, Maryland uses Solar Rating and Certification Corporation’s (SRCC’s) annual energy savings value to award production-based incentives despite SRCC’s value having almost no correlation to actual energy savings associated with a typical installation.  To provide convincing validation of SWH’s value proposition, localized data, stratified to typical household usage patterns must become widely available.  It is improbable that SWH’s value proposition will move into the mainstream without such data.

 

US energy policy on SWH seems inconsistent at best.  SWH falls neatly into the “generation” versus “efficiency” controversy.  Several signature generation initiatives, such as DOE’s SunShot and Sierra Club’s Beyond Coal, specifically exclude SWH because it doesn’t generate electricity.  Meanwhile efficiency initiatives, such as Maryland’s homeowner efficiency loan program, exclude SWH because it generates energy.  Moving SWH’s value proposition into the mainstream requires that thought-leaders provide a consistent message that SWH is a valuable component of our energy mix.

 

SWH needs volume to achieve cost competitiveness, not price reduction subsidies.  Current state-level solar incentives are focused on photovoltaics cost structure which clearly is not competitive without subsidies regardless of volume.  SWH is already within striking distance of DOE’s SunShot initiative’s goal of $0.06/kWh in Valley Electric Association’s program[15].  Current SWH incentives have rewarded high retail prices to the detriment of volume.  Shifting our incentive focus to volume promises to do the opposite.

 

A Path Forward

As shown by global adoption, SWH can be mass-deployed in the US.  To do so we must address the current lack of demand.  Attacking demand requires SWH to have a compelling economic value proposition that can be easily adopted by as many customers as possible.  Our current approach to deploying SWH lacks both.

An alternative business model that directly addresses value and complexity is providing SWH as a utility service.  Utility service is defined as utility owned equipment, installed on the customer’s property, for which the utility is entitled to a reasonable level of compensation.  Other than the widely distributed nature of the equipment, mass-deployed SWH is similar to other existing capital intensive utility services.  Key benefits associated with deploying SWH as a utility service include significantly lower installed costs, favorable financing, simple adoption and resultant market size expansion.

As shown by at least two comparable programs, centralized buying of equipment and labor has been able to reduce installed costs by 50% or more.  Valley Electric Association offers its members SWH at an installed cost below $4,000 with a monthly payment of $21, well below a typical household’s average energy savings.  Similarly, Lakeland Electric’s program has a reported installed cost approaching $2,000[16].  Taking the NREL study at face value, these costs suggest that the majority of US households would benefit from SWH.

Unlike consumers, utilities have ready access to inexpensive and long-term capital.  Access to financing is uniformly recognized as a key impediment to deploying alternative energy.  Building out a utility-like infrastructure on the back of consumer financing is costly, cumbersome and inefficient.

Offering SWH as a service reduces an individual consumer’s transaction costs and places the ownership risks with a party that has the expertise and motivation to understand the technology, its providers and available incentives.  By aggregating thousands of transactions, the finite benefits of SWH are no longer swamped by an individual’s effort and risk associated with adopting SWH.  As shown by Hawaii’s almost imperceptible warranty claims experience, a well-managed program does not merely shift ownership risk; the introduction of an educated and competent third party mitigates risk.

Policymakers can support this shift by aggressively pushing for utility involvement within our existing regulatory framework.  Established utilities are awakening to the possibilities that this business model offers.  Fostering a competitive environment that encourages new entrants to offer SWH utility service (such as water utilities, with their public service mission) can accelerate this awakening.  Other specific recommendations include allowing new entrants to piggy-back off of existing utility billing services, restructuring state-level SWH incentives to reward low-price and high-volume results, and providing a consistent and clear message that SWH is part of the solution.

 

Conclusion

Today, the fundamental reason that SWH has not been mass-deployed in the US can be traced to the deployment business model.  The resulting high cost and perceived complexity, along with a general lack of awareness about the energy consumed to heat water have stunted demand.  The utility service model eliminates high cost and complexity, and by its very existence begins to change the public’s perception of the benefits.  It is inertia that we must attack.  Mass-deploying the most mature and cost effective solar technology allows us to immediately begin building our future – a future that expects widely distributed alternative energy generation technology to play a meaningful role.

 

 

Works Cited

Anonymous CEO of anonymous major solar water heater manufacturer,  interviewed July 29, 2011.

Butti, Ken and Perlin, John. (1980).  A Golden Thread, 2500 Years of Solar Architecture and Technology. Palo Alto : Cheshire Books

California Center for Sustainable Energy (2011).  Solar Water Heating Pilot Program: Final Evaluation Report, Itron, Inc..

Cooperative Research Network (2008). Solar Water Heating Best Practices and Economics for Electric Cooperatives, Cliburn and Associates, LLC..

Department of Energy, EERE Webinar (2011).  Low-Cost Cold Climate Solar Water Heating Roadmap Webinar. Goetzler, Bill.

Department of Energy, National Renewable Energy Laboratory (2011).  . Break-even Cost for Residential Solar Water Heating in the United States: Key Drivers and Sensitivities, Cassard, Hannah, Denholm, Paul and Ong, Sean.

Florida Solar Energy Center (2002).   Annual Solar Thermal Collector Program in Florida, Colan, Carlos and Curry, Jeff.

International Energy Agency (2011).  Solar Heat Worldwide - 2011 Edition, Weiss, Werner and Mauthner, Franz.

Maryland Energy Administration. Salesforce Database. Annapolis, August 2011 Queuy.

Solar Energy Industry Association (2011).  Public Perceptions of Solar Water Heating Systems: Survey Findings, Gotham Research Group.

 

 

 

 

 


[1] Mr. Marlowe Is a consultant to the legislatively created Maryland Task Force on Solar Water Heating, recently was awarded a Master of Engineering and Public Policy from the University of Maryland and is serving on NCAC-USAEE’s Executive Council.

[2] Department of Energy, National Renewable Energy Laboratory (2011).  . Break-even Cost for Residential Solar Water Heating in the United States: Key Drivers and Sensitivities, Cassard, Hannah, Denholm, Paul and Ong, Sean.

[3] Butti, Ken and Perlin, John. (1980).  A Golden Thread, 2500 Years of Solar Architecture and Technology. Palo Alto : Cheshire Books

[4] International Energy Agency (2011).  Solar Heat Worldwide - 2011 Edition, Weiss, Werner and Mauthner, Franz.

[5] International Energy Agency (2011).  Solar Heat Worldwide - 2011 Edition, Weiss, Werner and Mauthner, Franz.

[6] Maryland Energy Administration. Salesforce Database. Annapolis, August 2011 Queuy.

[7] California Center for Sustainable Energy (2011).  Solar Water Heating Pilot Program: Final Evaluation Report, Itron, Inc..

[8] Department of Energy, National Renewable Energy Laboratory (2011).  . Break-even Cost for Residential Solar Water Heating in the United States: Key Drivers and Sensitivities, Cassard, Hannah, Denholm, Paul and Ong, Sean.

[9] Solar Energy Industry Association (2011).  Public Perceptions of Solar Water Heating Systems: Survey Findings, Gotham Research Group.

[10] Ibid.

[11] California Center for Sustainable Energy (2011).  Solar Water Heating Pilot Program: Final Evaluation Report, Itron, Inc..

[12] Anonymous CEO of anonymous major solar water heater manufacturer,  interviewed July 29, 2011.

[13] Maryland Energy Administration. Salesforce Database. Annapolis, August 2011 Queuy.

[14] Department of Energy, EERE Webinar (2011).  Low-Cost Cold Climate Solar Water Heating Roadmap Webinar. Goetzler, Bill.

[15] This statement is derived from Cliburn and Associates, LLC.’s Solar Water Heating Best Practices and Economics for Electric Cooperatives, published by Cooperative Research Network, 2008.  Dividing the program’s $21 monthly payment by the average monthly energy generation for the participants with the top 10% and 30% energy production, results in a kWhour cost of 7.5 and 8.4 cents, respectively.  The $21 payment does not include any benefit associated with federal or state incentives and is amortized over 15 years instead of the 20 year economic life; however it does carry a 0% interest rate.

[16] Florida Solar Energy Center (2002).   Annual Solar Thermal Collector Program in Florida, Colan, Carlos and Curry, Jeff.

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