solar innovation in the united states.pdf

7/27/2019 Solar Innovation in the United States.pdf

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U.S. Solar Cluster Properties, Evolution, and Externalities

Taking a closer look at CAs and OHs Solar Clusters

Natalia Rivera Mack1,John Paul Maxwell1,3,

Varun Rai1,2

1 LBJ School of Public Affairs, The University of Texas at Austin2 Mechanical Engineering Department, The University of Texas at Austin

3 Jackson School of Geosciences, The University of Texas at Austin

Abstract

This paper seeks to analyze various elements of solar cluster policy within the UnitedStates. By examining two examples of solar clusters, we attempt to determine where solarcluster-targeting policies succeed and fail in determining an optimal outcome through the

deployment of innovation. The two theoretical frameworks used for investigating andanalyzing the clusters are Porters Diamond Model and Marshalls industrial district.These frameworks were applied to two cluster areas: California and Toledo, Ohio. Ourfindings show that demand creation policies seem more influential and effective atencouraging the deployment of solar technologies. Additionally, these policies helpeliminate excess capacity that accumulates within a cluster when policymakers seek tomake investment decisions in firms and in clusters. We conclude that with a strongemphasis on upstream research and downstream demand creation policies, solar clustersare expected to become more robust, especially as the entire solar supply chain evolves tomeet the needs of the clusters themselves and other interconnected industries.

Keywords: Solar PV, U.S., Cluster, Innovation, Policy, Industrial districts

1. IntroductionOver the past few years, the solar industry has been experiencing a rapid growth in theUnited States. As of the end of the second quarter of 2012, there was a cumulative 5,161MW of photovoltaic (PV) capacity spread amongst nearly 248,000 individual systemsand a cumulative 546 MW of concentrated solar power (CSP) in operation in the U.S.(GTM Research 2012). In 2011 alone, there was 1,845 MW of PV capacity installed, ofwhich 324 MW (17.6 percent) was on residential buildings, 822 MW (44.6 percent) sited

on non-residential areas, and 698 MW (37.8 percent) in the utility sector (Sherwood2012). Yet, in spite of rapid growth, solar energy generation is responsible for less than0.1 percent of the total electric generation in the U.S. (Platzer 2012). Nevertheless, somemodels suggest that, with continued government support, the share of solar generationfrom PV could be as high as 25 percent by 2050 (Wang et. al. 2012).

The growth achieved thus far has been a direct result of two factors: (1) governmentsupport for solar technologies and (2) innovations spurred by private actors. However, as


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solar scales up globally, government support is likely to decline. Currently, this dynamicis playing out in Europe and even in regions of the United States, where renewableenergy tax credits and subsidies for solar energy generation are slated to expire within thenext (five) years. Previous studies have examined the role of government policy in thediffusion of solar products, but few have focused on the role of technology clusters and

their associated policies in driving solar innovation. We focus on this understudied part ofthe domestic solar industry.

1.1 U.S. Solar Industry

The U.S. solar industry, which pioneered ground-breaking advances in solar technologiesin the last several decades (REF), has faced severe competition in recent years, largelydriven by cost advantages afforded to Chinese manufacturers (REF). Coupled with thefact that research and development (R&D) generally tends to follow manufacturing, thisdynamic has serious implications for the U.S. ability to regain and retain a competitiveadvantage in solar technologies.

In order to resuscitate its solar manufacturing capability, the United States could employa strategy to foster and encourage technological innovations through the expansion ofsolar clusters. Clusters are geographical concentrations of interconnected firms, suppliers,and associated institutions.

The creation and support of clusters can create packs of entrepreneurs which providelegitimation and positive local externalities (Bergek et al. 2008). These externalities,which buttress the local support for constructive innovation, include access tospecialized human resources and suppliers, knowledge spillovers, pressure for higherperformance in head-to-head competition, and learnings from the close interaction withspecialized customers and suppliers (Ketels 2003). Clusters may be enabled to do more,

such as providing more training and funding to educational institutions to help spuradvances in R&D. Also, manufacturers could facilitate the application and flow of ideasbetween workers and researchers, while policies can help ameliorate market failures(Lowrey 2012).

Technologies with easy and viable deployment tend to be pursued by the private sectorwithout government assistance. However, some technologies that yield large spillovereffects and have longer-term product cycles may be ignored by the private sector. Tosupport developing technologies that fall under this category, governments oftenintervene via policies intended to spur demand or provide economic support. However, ifgovernment support continues after the industry has matured, market failures often result.

These failures distort market information for firms and/or consumers, such as price.Certain technologies or products may contain externalities that are not accounted for inthe products price. For example, the deployment of less expensive energy generationfuelssuch as shale gasrepresents a market failure since these fuels are finite. Shalegas extraction is performed via private firms, and requires little if any governmentsupport. (REF) Therefore, there is incentive to deplete shale reserves first, prior todevelopment of viable alternative energy sources. The lack of a mechanism to ensurefuture energy supply cannot be calculated by today's standard practices. The government


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could step in to mitigate this market failure by accounting for full life-cycle costs of gasextraction and attaching a premium. However, this action may be perceived as a kind ofheavy-handed policy, which is akin to picking winners and losers (Goetz et al. 2009).

Still, politicians can meet the goal of sustainable energy development by focusing effortson building clusters. The Innovation Policy Continuum [Figure 1] (Atkinson & Ezell2012) provides a framework for policy makers to support the growth of a particularindustry through cluster development, within a competitive environment, while stillsupporting factor conditions and key technologies. Policy solutions to market failureswithin clusters provide an answer to the lack of innovation.

Figure 1: The Innovation Policy Continuum


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1.2 Research Methodology

Companies need labor, financing, natural resources, and a forum to exchange ideas, all ofwhich influence the location of a cluster. However, other forces, such as the cost oftransportation and increased rents, encourage companies to spread out. This researchaims to investigate the balance created by these forces in two important solar clusters andthe role of policy in strengthening these clusters and creating others to ensure that theU.S. is able to continue competing as a relevant player within the solar industry.

Our hypothesis asserts that clusters can play an important role in the innovation process.Solar cluster targeted policies have led to the proliferation of solar technologies in theUnited States. Therefore, the US should intensify its policy efforts, specifically clusterpolicy, to aid U.S. solar clusters gain a competitive advantage, and compete on the globalstage.

In order to carry out our research, we first aimed to answer questions surrounding clusterformation in the US. Specifically, we were interested in understanding the role clustersplay in the proliferation of PV technologies and on the USs position within the globalmarket. To do so, we identified two existing solar clusters California and Toledo, Ohio, assessed their strengths and weaknesses, and explored how these strengths andweaknesses affects the USs ability to compete within the global market economy.

Secondly, we examined existing policies and their effects on solar clusters. We attemptedto understand how U.S. policies affect cluster formation and development, and whetherthey provide sufficient support to the solar industry, relative to how other countriesencourage and support their own solar clusters. Given these policy implications, thedegree to which a competitive advantage can be achieved was also of interest in thisresearch.

Finally, we studied how industrial innovation and development, separate from clusterpolicy, is encouraged through US policy. We investigated these strategies and analyzedwhether the US would benefit from re-thinking its current innovation strategy to gain agreater competitive advantage in the global solar market.

2. Clusters2.1 Introduction to clusters and their components

Before examining solar clusters in the US, we must understand what is a cluster and thebenefits it provides. Many researchers, practitioners, and policymakers have differentunderstandings of the term cluster. Porter, who is unarguably the most influentialchampion of cluster theory, defines clusters in such a way that encompasses mostdefinitions.


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Clusters are a geographically proximate group of interconnected

companies and associated institutions in a particular field linked by

commonalities and complementarities. (Porter 1998).

Particular products or functions do not define these networks. Instead, clusters are

defined by relationships across multiple types of classifications, which make drawingcategorical boundaries quite challenging (Andersson et al 2004).

Cluster participants include:

Companies firms providing similar and related goods or services; Research institutions includes related research, education, and training centers; Institutions for collaboration includes actors such as chamber of commerce,

industry trade groups, professional associations, and cluster administrators;

Government institutions local, regional, and national agencies or entities; Financial institutions includes banks, venture capital investments, or other

entities that help provide seed funding, loans, or grants.

Figure 2: Cluster Participants

Source: The Cluster Policy White Book, Anderson

Porter indicates that the main actors are private sector firms operating within a particularindustry. Although they play a fundamental role in the formation and operation of thecluster, private firms are dependent on other entities, such as research institutions,institutions for collaboration, government, and financial institutions. These actors areresponsible for fostering a hospitable environment for private sector firms. Althoughthese entities are found within most clusters, they are not all required and their level ofinvolvement varies greatly from one cluster to the other (Demiralp 2012).


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Clusters represent a potent source of productivity at a moment of national vulnerability toincreasing global competition, threatening our ability to grow and maintain a competitiveadvantage (Mills 2008). Within this fast evolving environment, regional industry clustersrepresent a valuable source of innovation, knowledge transfer, and improved productivity

(Mills 2008).

2.2 Cluster Theories

Three main theories that explain the lifecycle of a cluster and provide support for clusterpolicies are Porter's theory of cluster growth, Marshall's industrial districts, and theGREMI's Innovative Milieu. The terms 'industrial district', 'clusters', and 'innovativemilieu' have made their way through the literature and have sought to define and organizethe development of industries within specified geographic areas. These frameworks havebeen used for many years to explain and promote explanations of the development ofcertain types of technologies, which occur in certain geographic locales.

In examining U.S. solar clusters, we use these frameworks to analyze and understandhow to grow innovation within a cluster. Each will be discussed below with the maintopical areas that allow for continued improvement.

2.2.1 Marshall

Alfred Marshalls work surrounding the benefits of clusters focused on local spillovereffects. He portended that "spillovers" are initially unanticipated outcomes of a successfulmatch between firms' location requirements and the supply of location factors (Maskell,et al 2006). He explained that the existence of clusters is the result of centripetal forcesderived from cost advantages in transportation, infrastructure, skilled labor, specialized

suppliers, and/or institutions among others. Marshall also found that clusters eventuallybegin to lose cohesion due to inevitable factors, such as congestion or an increase in theprice of land, labor, transportation, goods, and services. Finally, Marshall explained that aclusters decline is the result of fully utilized factors of production that undercuts keylocational advantages (Maskell, et al 2006).

The strength of the Marshallian district is the locations ability to efficiently allocatelabor and technology within a given area. The district model fosters the innovativeability of firms and helps promote the adoption of innovations continuous innovationis an intrinsic characteristic of industrial districts and a vital condition for theircontinuous change and growth" (Boix & Galletto 2009).

This paper will not attempt to take a position on validity of 'meso-economic' theory, butinstead will seek out an intuitive explanation of the process involved in sorting out theroutes in which a Marshallian industrial district is used to explain solar innovation withina specific geographic area.


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2.2.2 Porters Cluster Theory

Michael Porters contribution to cluster theory applies within the context of the globaleconomy and the factors that grant a nation a competitive advantage. The advantagesprovided by proximity are rivalry, exchange of R&D, joint problem solving, andinformation flow between customer and suppliers. Additionally, clusters attract like-minded, skilled workers and entrepreneurs, reinforcing continuous innovation andgrowth. Although Porter agreed with Marshalls ideas regarding the overextension ofclusters due to congestion and the increase in prices, he believes the decline of clustershas to do with the ebbing of rivalry, regulatory inflexibility, technology lock-in,deteriorating factor conditions, and changes in demand.

2.3 Measurement of Innovation/Local Production Systems

De Propris and Lazzaeratti 2009 indicate that studies have used both qualitative andquantitative measurements for evaluating local production systems through 'industrialfactors' such as demand, innovation and knowledge. The quantitative studies have

examined the local production systems over time and have focused mainly on firm entryand growth. Other studies, Boix & Galletto 2009, have used 'input indicators' (R&Dexpenditure or jobs) and 'output indicators' (patents, new product announcements). Ourstudy will focus more on the qualitative aspects, similar to previous studies, by usingmeasures of innovation and competitiveness.

2.4 Benefits of clusters

Scholars have found that specialization and diversification within a cluster can occursimultaneously and without conflict. This phenomenon is visible in large metropolitanareas where there is sufficient mass in individual clusters to support an overall portfolio

of clusters that provide improved knowledge and capabilities (Ketels 2011).

Furthermore, high specialization and diversification within a narrow industry clusterencourages higher productivity and growth (Ketels 2011). Clusters with high levels ofspecialization also experience higher productivity levels. This is because having highlyspecialized suppliers and service providers reduces reaction times and the need for higherlevels of working capital (Ketels 2011). Intense competition and specialization also driveefficiency, and often result in longer work days (Ketels 2011). The pressure to remaincompetitive, in addition to richer sources of ideas, and lower costs to materialize them,coalesce to increase the clusters ability to innovate (Ketels2011). Finally, clustersprovide a beneficial environment for entrepreneurship.

2.5 Cluster formation

Economic theory suggests four main reasons for cluster formation. First, the industry maydepend on a particular natural resource, such as a body of water or solar radiation.Second, the concentration of firms creates a pool of specialized labor that benefits bothworkers and employers. Third, subsidiary trades supply specialized inputs that contribute


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to the economies of scale for firms within the cluster. Lastly, ideas spill over from onefirm to the next, as Marshall observed (Raffaelli et al 2006).

2.6 Cluster evaluations

2.6.1 The Diamond Model

In 1990, Michael Porter published the Competitive Advantage of Nations, whichexplained the reasons why some nations, and industries within nations, tend to be morecompetitive than others on a global-scale. Porter explained that interrelated forces affectthe dynamics and performance of clusters, in addition to the ones internal to the firms. He

used the diamond model to portray the interplay between these factors:

Factor conditions include human resources, physical resources, knowledgeresources, capital resources, and infrastructure. Specialized resources are often

specific for an industry and important for its competitiveness. Specific resources canbe created to compensate for factor disadvantages.

Demand conditions are the forces that create demand for a particular industry. Theseconditions can help companies create a competitive advantage when sophisticatedhome market buyers pressure firms to innovate faster and to create more advanced

products than those of competitors.

Related and supporting industries produce inputs, which are important forinnovation and internationalization. These industries provide cost-effective inputs, butthey also participate in the upgrading process, thus stimulating other companies in the

chain to innovate.

Firm strategy, structure, and rivalry refers to the way in which companies arecreated, set goals and are managed is important for success. In addition, the presence

of intense rivalry in the home base is also important; it creates pressure to innovate inorder to upgrade competitiveness.

In addition to these factors, the government can use policies to reinforce or increase thedeterminants of competitiveness.


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Figure 3: Porter's Diamond Model

Source: Business Mate

3. Role of the GovernmentIn the US, there is a general consensus that government should play a role in thetechnological development of new technologies. However, there is significantdisagreement regarding its proper role and whether its influence should be exerted vianational or state level policies (Norberg-Bohm 2000). There are benefits and drawbacksto both approaches. For example, state governments can provide a more manageablescale for policy development, while creating provisions that meet special geographicalneeds.

Regardless of the approach, government policies can be classified as upstreaminvestment, which influence the supply of new knowledge (technology-push), or asmarket creation policies, which seeks to create new customers (demand-pull) (Taylor2008). Most of the literature reflects that most national-level policies tend to focus onupstream investments, while state-level policies tend to focus on market creation. A thirdcategory of policies is interface improvement, which seeks to bridge the gap betweeninnovators and technology consumers (Taylor 2008).


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Measuring the effects of these policies is particularly challenging. Evaluating theeffectiveness of a specific type of policy on a cluster is very difficult because it requiresthe complete isolation of a clustersimilar to a control group in an experimenttocompare it with other clusters. This process is obfuscated further by two factors: (1) themultidimensional composition of clusters and the interdependent and interrelated nature

of industries within a cluster; and (2) the hybrid character of policies, which maycombine elements of various policy areas.

U.S. initiatives to develop industrial clusters have been few and far between. This isespecially true at the national level. The U.S. government historically has not consideredregional competitiveness i.e., clusters a priority. Rather, federal policies largely havefocused on supporting optimal inputs for economic development (Porter 2007). Existingpolicies for regional development suffer from a lack of coordination and centralization.(These programs are spread across 14 different agencies, each with its own particularpolicy focus)

3.2 State policies

Many statesmost notably California and New Jerseyemploy a variety of marketcreation policies designed to create downstream demand for solar technology. There aretwo main types of approaches: (1) the state government becomes a customer via itsprocurement policies, or (2) it creates customers via carrots and sticks mechanisms or byworking through investor-owned utilities (IOUs). Procurement policies range frommandates to construction standards for state buildings and parking facilities (Taylor2008). It is important to point out that procurement policies have limited reach and thatcustomer creation policies have a larger market potential.

3.3 Cluster and other solar cluster-targeted policies in the US

Marshalls theory supports policies that provide inputs in short supply; maximize labormobility; offer tax relief during the cluster infancy stage; invest in education and training;enhance firms tools for collaboration; and provide physical infrastructure, seed, andventure capital. Nevertheless, Marshall also makes a case for the support of the creativedestruction process during the clusters decline stage. Support for the creative destructionprocess is important because it may pave the way for another clusters formation, such asin the case of Toledos glass industry and its evolution into the a cluster.

Porters theory endorses policies that increase competition; facilitate government demandvia regulation and enforcement of standards; lack of government intervention into the

markets via subsidies, protection, arranged mergers, or joint R&D initiatives; andnational level policies that support all clusters without picking winners and losers.

It is important to distinguish between cluster policy and economic development policies.Although they both affect industrial agglomerations, the two categories differ in rangeand scope. Economic development strategies can focus on a wide-range of efforts,including demand-pull and technology-push strategies, while cluster policies focus onenhancing spatial externalities.


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Christian Ketels identified three main types of cluster externalities. First, there arecoordination failures arising from individual firms decision-making processes.Coordination failures exist because individual companies consider only the impact totheir own welfare, not others. Individual firms miss opportunities or benefits that may

otherwise be available if the decision had been taken in association with another clusterparticipant. Second are information asymmetries. Even if the incentive problems arecorrected by controlling coordination failures, the knowledge necessary to make thesocially optimal decision is scattered among cluster participants. Third is pathdependency. The decisions made by cluster participants tend to affect the evolutionarypath of the cluster in the future (Ketels 2011).

Governments around the world use cluster programs for different purposes. Most pursuetraditional economic policy objectives such as to stimulate innovation, spur regionalgrowth, and increase diversification. Cluster programs also differ significantly in thetools they use. The vast majority provides financing for specific activities conducted in

the cluster.

4. Cluster Research4.1 Toledo, Ohio

4.1.1 Scope and composition of cluster

Toledo attempted to create a competitive advantage by development the solar PVindustry through seeking an outlet for the historic manufacturing capacity already

existent in the region. Calzonetti outlined the drastic decline of nearly 40,000manufacturing jobs, which exited the Toledo Metropolitan Area from 1980 through 2008.This represents a shift of investment from local labor into low-cost foreign, as well asmanufacturing technology and capital investment.

With its proximity to raw materials and its geographic centrality, the city of Toledo grewinto an industrial hub beginning in the 1880s. The Great Lakes afforded a reliable andcheap way to ship bulk goods throughout the upper part of the United States and anumber of industries thrived, including glass manufacturing.. Due to access to highquality sand, Great Lakes shipping, and available natural gas supplies glassmanufacturing industry became so prevalent that Toledo became known as the Glass

City (Calzonetti 2009).

This industry emerged as a cluster by allowing its glass expertise to transform itself alongwith the changes in the greater economy. Toledo moved from producing glass bottles, totable glass, to flat glass for automobiles and finally to fiberglass. It then transformed oncemore when one entrepreneurial innovator named Harold McMaster decided to redirectthe Toledo glass cluster to a new purpose: developing glass for solar photovoltaics(Compaan 2009). McMaster began two companies: Glasstech Solar and Solar Cells Inc.,


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which eventually became the company that is today known as FirstSolar. This oneinnovator is the driving force of the creation and development of the Toledo solar cluster(Compaan 2009).

Toledos first advantage is a trained, specialized, and flexible labor force, providedthrough the presence of an antecedent industry: glass. This laid the groundwork forinnovation to succeed with built-in institutional knowledge and labor skills.

The second property is specialized suppliers within all stages of the production chain.The spatial concentration permits the existence of specialized (and differentiated) firms atall stages of the production process, each forced to innovate in order to survive, whichsimultaneously reinforces both integration and the links between them. The ability ofcertain companies to survive the innovation phase and take a new idea to market helpsreinforce suppliers within the supply chain and allows capital investments to focus onmore productive areas with the highest return on investment.

The last property is knowledge spillover effects. The diffused industrial culture made up

of a set of intangible elements pertaining to the local production systems as a whole(entrepreneurship, cooperative spirit, technical know-how, knowledge specialization),which Marshall referred to as an 'industrial atmosphere'. This allows knowledge to flowand allows firms in the district to benefit from higher rates of innovation andproductivity.

Taking all three main properties together, it is clear that the structures which supportsolar in Toledo help foster PV innovation more through the network effects of havingconcentrated R&D around supporting manufacturing. This is an important distinction toargue in favor of the industrial district and the way that a supply chain is supported ratherthan an environment of aspatial innovation as would occur in a cluster setting such as

California with its more diffuse location of firms and research.

4.1.2 Cluster indicators of growth and innovation

The scorecard used to evaluate the solar cluster in Toledo consists of a Porterian critiqueon a traditional Marshallian industrial district. For a Porter cluster, specific factors arescored to determine a competitive basis that boosts the nexus amongst thoseentrepreneurs within the district. The agglomeration of different locations will lead to anindustrial equilibrium within the region. For Toledo, this equilibrium was reached withthe glass industry, but due to the accretion of institutional knowledge and manufacturing

capacity, the glass cluster became a limiting feature in the region. The glass knowledgewas a positive factor in economic growth until such time that glass locked-in theeconomy and the regions system.(Bergmann & Feser2000)

Bergmann and Feser define the lock-in effect of path dependency for regions that gain anadvantage in an industry: [path] dependence refers to the general notion thattechnological choiceseven seemingly inefficient, inferior, or suboptimal onescanassume a dominant lead over alternatives and be self-reinforcing, though not necessarily


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irreversible given a significant enough shock (Bergmann & Feser 2000).The first part ofthis statement the choices made by firms, government and universitiesdescribes howregions pursue growth in new industries, which may appear to be inefficient. The secondpart of the statementdealing with shockswill be addressed in a few sections.

4.1.3 Porterian Cluster Evaluation

a) Context for Firm Strategy and Rivalry: The solar industry in Toledo experienced a steepdecline in the last five years. Since the expiration of the American Recovery andReinvestment Act (ARRA) or stimulus,

o Risk Taking/Entrepreneurship Environment FirstSolar led the development of the solar industry in Toledo. However

the presence of a sole, dominant firm can hurt the overall growth of theindustry. This primarily occurs because the labor market loses some of itsflexibility and new suppliers are crowded out by increasingly squeezedmargins sought by the dominant manufacturer.

The incentives to expand the business and take an innovation risk issomewhat lessened in Toledo. The venture capital community is limited aswell as the overall entrepreneurial spirit. The former head of the Clean andAlternative Energy Incubator at the University of Toledo indicated thatToledo is not a community that is used to getting a lot of venture-capitaland so it doesn't have that same risk tolerance.

o Dependency on subsidies or government funds The funding for the industry has been reliant on government grants to continue the

funds for development. While this allows for continual pursuit of university R&Dwhich helps attract upstream companies, the over reliance on this form of funding isdistorting to sending true market signals to the firm. The government funding shouldfall along the Innovation Policy Continuum [Figure 4] and allow for competitivefirms to expand and not expect the government grants to underwrite true privateinnovation.


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Figure 4: Toledos Solar Supply Continuum

b)

The ARRA funding provided needed funding to solar firms, but it alsodistorted the market and gave rise to excess capacity, blinding the industryfrom seeing the global trend of PV manufacturing migrating to low-costcountries.

o Shale Gas Availability Due to the discovery of shale gas in the eastern part of Ohio, the Utica and

Marcellus plays, has pushed policymakers away from solar and toward theshort-term development of natural gas, though the production is currentlyranks 20th in the nation and reserves at this time do not appear to besufficient for electrical generation demand. One expert mentioned that

there is a lot of excitement around shale development in Ohio, but this ismainly coming from publicly elected officials(Calzonetti, 2012). Theirincentive is to get elected, a very short-term outlook. The cluster looks to amore long-term outlook for the relationship between solar PV and the stateof Ohio.

b) Demand Conditions Average to weak part of the cluster


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a. Ohio ranks 16th in build-out of solari. Even with the attention paid to the solar industry in the Toledo area, Ohio

ranked 16th in the U.S. in 2011 (NEO, 2011) with 31.6 MWp whichranked behind Pennsylvania and New Jersey even though it does not rate

that much below those states on a solar potential map(Sherwood 2012).

b. Lack of feed-in tariffi. The lack of a feed-in tariff in Ohio prevents the PV industry from gaining

a long-term contract with terms that would provide certainty to those whoare considering an investment in promoting a build out in PV capacity.The creation of a feed-in tariff could eliminate the need for any otherstatewide policy financial policies save for the current net meter statute(NARUC 2010).

c.

Stronger than the average state in the U.S. for net metering policies

i. Though Ohio lacks a feed-in-tariff policy, the Freeing the Gridorganization ranked Ohio one of top states in regards to Net Metering andhas given the state a letter grade of A for the past four years for NetMetering. The best policy is that at the current time there is no limit to thecapacity limit at which systems are eligible for net metering (Freeing theGrid 2013).

c) Related and Supporting Industries Stronger: This part of the diamond has greaterstrength to it compared to firm rivalries and demand factors. Toledo has had strongmanufacturing and skilled labor for many years to support its glass industry

i. Labor and glass manufacturing has been located in the Toledo area sincethe late 1880s.

d) Factor Conditions Strongest: The support from structures that undergird the Toledosolar cluster have been key to keeping Toledo along the forefront of the PV industry andpushing along innovation within the cluster. Three main structures that exist to supportthe solar industry are found in the state, university and private business.

a. The State of Ohio The Wright Center for Photovoltaics Innovation andCommercialization (PVIC) was formed in January 2007 with $18.6 Million insupport from the Ohio Department of Development. This direct support of thestate built test locations and hired staff at Ohio State University, Bowling GreenUniversity and at the University of Toledo. This state contribution along withidentical assistances of $30 million from various other entities, has allowed thePVIC become one of the premier innovation supporters within the Toledo cluster(Wright Center 2011).


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b. University of Toledo The University has a strong commitment to research &development within the PV field. In 1986, the University began to expand its PVcapabilities. The University hired several faculty members and physicists to pushforward improvement within the PV field. The University has continued to addPV research and development skills amongst its faculty and among the structures

which have supplied the PV industry with new technologies. Incrementalimprovements in materials and manufacturing processes have allowed Toledokeep its foothold in the PV industry through the strength of the university support.

o FirstSolar anchor Perhaps the most important part of the Toledo solar cluster isthe anchor that FirstSolar has provided. Norm McMaster was the driving forcebehind the Toledo cluster becoming realized. Similar to Michael Owens ahundred years before him, McMaster looked to the competences that were presentin the local area where he was manufacturing glass products. McMaster took hiscompany and determined that PV was the next direction to take his core focus to.Mr. McMaster started Glasstech Solar and SolarCells Inc., which later became

FirstSolar. It is unlikely that Toledo would have any PV industry at all withoutNorm McMaster and the support that he gave to PV to shepherd a nascentindustry from natural advantages, which were co-located in the Toledo area.

The cluster analysis shows that of the four factors, which form the foundations of thePorter criteria show that Toledo is weak in two of the categories, but has strengths intotwo. The continued focus on upstream research and development has helped to ensurethat developments in PV are part of the regions economic plan. The overall cluster isweakened by a lack of demand creation policies. The firms, policymakers and universityis ultra-focused on R&D to the detriment of the expansion of the supply chain of PVdeployment. As shown in the Toledo Supply Chain Continuum [Figure 4], theconcentration of the industry at the upstream part of the spectrum has helped to keep thesolar industry alive in the region but has not allowed for further firm development byallowing for creation of the entire value-chain of solar PV. With the expansion intodemand creation, the solar expansion could proceed and strengthen the firm competitionenvironment and would clearly enhance the demand conditions.

4.1.4 State of Ohio Policies

These policies taken together form the support which has seen the government choosingto issue money to both the university and companies which can help build out the solarindustry. In addition, there has been ~$300 million of private capital invested into thesolar industry (Compaan 2012).

4.1.5 Cluster Evaluation through the Theoretical Frameworks

As mentioned above, external shocks can throw a region into disequilibrium and illustratethe limitations that when a region pursues a cluster that is faced with a change infundamentals becomes a millstone around the neck and forces contraction in theindustry. The initial decisions to transform traditional glass knowledge into a solar PVwas a choice first made in private industry, but then was supported by others within the


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cluster and subsequently by state actors. This path dependency is an initial advantage thatallows several smaller firms to achieve economies of scale through the regional synergiesamongst firms. Path dependency subsequently becomes a liability once external factorsdiminish the early advantages of the industrial district. In the case of Toledo, decisionsmade a decade ago locked-in the region to pursue solar to the detriment of other goods

and services. As a result, the industry will face decline to the point at which the region,mainly the upstream research and development of PV at the University of Toledo, stillhas an advantage over others pursuing similar development.

4.2 California

4.2.1 Scope and composition of cluster

Building on the research of Michael Porter and Christian Ketels, the core of Californiassolar energy cluster is comprised of two main components: (1) traded products, driven bylocal, national, and global demand; and (2) local services, driven by state governmentsubsidies to boost local demand. Moreover, the clusters ability to remain competitive

depends on traded products, while its ability to innovate is driven by local demand(Porter et al 2011). Additionally, the clusters supporting institutions foster demand forproduction, which in turns affects the demand for local services. The related andsupporting clusters help develop the clusters core activities (Porter et al 2011).

Figure 5: Californias Solar Cluster Participants

Source: Porter et al 2011


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4.2.2 Cluster indicators of growth and innovation

Today, California is the largest solar energy cluster in the United States and is home to 30percent of domestic solar companies (Porter et al 2011). Yet researchers and academicsbelieve that it is on the brink of decline as it is losing market share to other countries,such as Germany and China.

In November 2011, California exceeded 1,000 megawatts (MW) of solar capacity. Notsurprisingly, CA leads the nation in installations per year. This can be attributed to CAsaggressive goal of 3,000 MWs of distributed solar energy through the Million SolarRoofs Initiative. Additionally, CA has the largest solar energy capacity installed in all 50states (Henton 2012).

In spite of the high-profile collapse of several solar firms and the debate over the viabilityof the solar industry without subsidies, CAs solar industry has been growing consistentlysince 1995. According to the 2012 California Green Innovation Index, the total numberof business locations has increased by over 170 percent, while total employment hasgrown by over 165 percent(Henton 2012).

Along the production value chain, employment has been increasing steadily since 1995by 166 percent, with Installation and Manufacturing constituting most of the employmentforce (Henton 2012). Even though manufacturing jobs continue to climb in the state,most of the panels installed are produced abroad. This represents both a threat and anopportunity to the cluster. Global competition is regarded generally as healthy because itdrives down the prices of solar installations, leading to a growing number of solarproduct consumers. For the same reason, this trend can result in a complete loss ofmanufacturing capacity, which could also lead to a loss of R&D capacity.

Another indicator of market growth and innovation is the amount of venture capital (VC)investments in solar technologies. In 2011, California received 62 percent of total globalVC investments in solar and 77 percent in the US. VC investments bottomed between2008 and 2009 due to the financial crisis, but have been slowly climbing up, reaching 1.9billion in 2011 (Henton 2012).


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Figure 10: Venture Capital Investment in Solar Technology by Segment

Source: Henton 2012

Patents also can be regarded as an indicator of innovation. The percentage of U.S. patentsfiled by California firms increased from 20 to 45 percent in the last 30 years (Henton2012). Globally CA accounts for 24 percent of all solar related patents registered.

4.2.3 Porterian Cluster Evaluation

Michael Porters diamond model analysis of the CA solar cluster, we learn the followingabout the microeconomics of its business environment (Porter et al 2011):

Factor Conditions:

Abundance of natural resources: CA receives high quantities of solar radiation,specifically 240 sunny days on average per year, placing CA at the top three stateswithin the US.

CA also has high quantity and quality of solar scientific research, technology, andeducational institutions. Among them, it has four federally funded renewable

energy laboratories, a state funded research institute, and world-renowneduniversities.

Although CAs workforce is highly educated, it has a shortage of high-skilledsolar energy workers, able to perform solar installations. CAs workforce is on parwith the US average in education. However, it lacks sufficient skilled workers tomeet the states goals for installed PV modules.


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CA enjoys close proximity to Mexico, a source of labor. CA has an extremely complex, bureaucratic, and inconsistent solar permitting

process, which adds an average of $2,500 in installation cost.

CA has inadequate transmission infrastructure, which limits the state fromreaching its RPS goals.

Context for Firm Strategy and Rivalry

CAs Innovative GoSolar California[initiative] enables firm coordination There is a high level of competition, especially from foreign solar component

imports

CAs Solar Initiative is the most robust incentive program in the US, with cleargoals and a plan to reach its goal of installing 3,000 MW of new solar over the

next decade and reducing the cost of solar generating equipment, which havedecreased by 28 percent since 2007 (CAPUC).

Expensive corporate tax structure, especially when compared with Arizona, whoalso enjoys the same level of solar radiation and has similar RPS standards, buthas a much lower corporate tax rate.

The cost of labor in CA is very high relative to some competing internationalclusters and surrounding states; i.e. Chinas minimum wage of $1.09 per hour.

Related and Supporting Industries:

Pertaining to the level of collaboration between clusters, interaction is extremelyhigh, especially between venture capital, Silicon Valley, and the solar energycluster.

Pertaining to collaboration within the cluster, there are 13 solar-specificinstitutions for collaboration, which is high, but there is limited informationsharing between them.

The state enjoys an extensive network of homebuilders and commercialconstruction

CA also has polysilicon and other local supplier available to supply firms needs.Demand Conditions:

Consumers have a higher degree of buyer sophistication and willingness to payfor the green energy brand. According to some studies, 20 percent ofCalifornians are willing to pay up to a 30 percent premium for solar energy.


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Since the 1970s, CA has been setting the national standard in environmentalpolicy and regulation.

CA has a high degree of consumer protection.

Table 1: CAs Cluster Porterian Evaluation

Strengths Neutral Weaknesses

Factor

Conditions

High solar radiation; high

quantity and quality of solar

research, technical

expertise, technology, and

institutions.

Averagely educated

workforce and shortage

of high skilled

workforce; proximity to

Mexico.

Extremely difficult

permitting process;

incomplete energy

transmission grid.

Context for

Firm Rivalry

Efficient firm coordinating

initiative; high degree of

foreign competition.

Expensive corporate tax

structure; high labor

costs

Related and

Supporting

Industries

Extremely high interaction,

especially with VCs;

collaboration within cluster;

large construction industry

for residential and

commercial sectors.

Local availability of

specialized materials.

Demand

ConditionsHigh buyer sophistication;high environmental

standards and regulation;

high consumer protection.

4.2.5 Cluster Evaluation through the Theoretical Frameworks

In spite of positive indicators, the CA cluster is at a crossroads. It has lost over 40 percentof its market share for traditional PV solar cells to Chinese companies, which enjoy

robust subsidies from their government, low-cost labor and economies of scale (Woody2010). Many experts believe that in order for CA to re-gain its competitive advantage, thecluster must redefine its niche within the global market, especially since there is a largepool of VC available to invest in innovations (Henton 2012). However, CA must improveits factor conditions, such as its transmission infrastructure and permitting process, andexpand demand creation policies that provide incentives to consumers, instead ofproviding capital directly to businesses (Porter et al 2011). These moves would enhance


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Californias ability to retain businesses that may be moving to other well-endowed solarmarkets nearby, such as Arizona.

Other factors outside of the solar industry affect businesses decision to open up andsettle in CA. Factors such as its fiscal state, are influenced by its unemployment, and tax

rates. These issues affect all industries, not just solar.

5. Cluster ComparisonCalifornia and Toledo, OH offer two models of solar clusters with different origins.California has strong points in all areas of the Porterian diamond model, in addition to alarge number of firms throughout the solar value chain. In contrast, Toledo, OH, waslargely dependent on one large firm (FirstSolar) and is much less healthy than theCalifornia solar cluster because of its lack of diversity, which weakens the related andsupporting industries aspect of the diamond model. Additionally, California has a muchhealthier demand environment resulting from a purposeful policy environment designedto stimulate demand through favorable policies.

A main difference between the California and Toledo solar clusters is the fact thatCalifornia lacked a manufacturing base it could leverage to become a solar cluster leader.Californias chief advantage was the existence of an information technology-focusedcluster, in addition to the university system and the open-entrepreneurial environment,which allowed new ideas to flourish. Toledo, OH is a small-scale version of a clusterdesigned to take natural factor conditions, an antecedent glass industry, and expand thesefavorable features into innovation strengths to gain advantages in innovation andeconomic growth. In the case of California, human capital is a strength, relative to

Toledos physical capital.

Both clusters are at a point where they must innovate and evolve in order to stay relevantwithin the industry. However, recent downsizing in the Toledo solar cluster seems toindicate that having human capital as a strength, rather than physical capital, is moreadvantageous for purposes of re-inventing and re-deploying assets into moreproductive use. This is because adapting physical assets for use into a new field orindustry is more challenging than acquiring the human capital and technical expertisenecessary to give rise to a new cluster.

6. ConclusionOur research has examined the role of government and policy frameworks in theinnovation process. Clusters have been the primary means by which this team has soughtto understand the process of solar innovation in the United States.


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The Porterian cluster framework is a useful analytical tool to critique and enhance clusterpolicy at a local and national level. Cluster policy can serve as a as a blunt politicalinstrument to eliminate short-term political and financial pressures and pursue long terminnovation goals.

The proliferation of solar technologies within both clusters has been a direct result ofpolicies intended to do just that. Since solar technologies are subject to market failures,government intervention may be justified. From this perspective, government policieshave been essential to driving solar to the point of grid parity, within the microcosm ofthe US.

Most experts agree that solar will only become competitive in the US through costreduction. For this reason, federal policies focus on upstream investments in R&D. Thishas led us to wonder whether our disorganized funding of basic science is more effectivethan a centralized effort like the race to the moon. In looking for answers, AlanGoodrich indicated that PV efficiency is not likely to increase much (Alan Goodrich2012). Therefore, incremental change and innovation will have to come from otherprocesses. Additionally, the nature of innovation has changed; most innovation ishappening at the business model level (Alan Goodrich 2012). The innovation currentlytaking place is likely a result of market forces, instead of policies.

Absent a rising competition from China, the United States was on a trajectory for a fullscale solar PV manufacturing boom. However, the static analysis of the solar industrydone in the mid 2000's has not borne out to be true. Chinese PV manufacturing with lowcost of labor; inflation; preferential tax treatment, supply side subsidies, low cost accessto capital, scale benefits; and supply chain benefits have led to an extreme decline of theUnited States PV industry. (Alan Goodrich 2012). The United States can choose to letthis situation continue and eventually cede the manufacturing and R&D of solar PV toChina in similar ways that televisions and semiconductors were ceded to Asia in the1980's. But that is not the only way for the United States to proceed. As we haveinvestigated, clusters are away for the government to support industry in a non-distortiveway.

Financial pressures from shareholders, who require a quarterly return on their investment,present a barrier to long-term innovation strategies. To alleviate some of these pressures,which exist within solar PV innovation, the United States should focus on the principleslaid out in the Innovation Policy Continuum and utilize clusters to provide support forinnovation. As the clusters in California and Toledo, OH demonstrate, supportinguniversities and broad areas of research is a way to strengthen innovation.

Though this research did not perform econometric analysis, through our interviews andstudy of solar clusters in the United States, we provide an alternative answer to thegrowing chorus of the decline of the United States.


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Appendix:

Marshall I-district:

Feser describes this broadly in two parts: (1) the interrelationships between economicactors that clusters describe and (2) the implications of such interrelationships foreconomic growth and development. (Feser 1998) For the level analysis in the case ofToledo and California, these separate clusters exist at the meso-scale level whichcorresponds to Inter- and intra-industry linkages in different stages of production chain ofa single end product (Solar PV) This definition of the Porterian cluster stands in contrastto the National (Macro) scale which seeks to coordinate the aspects of innovation in thenational economy.

The literature provides a set of parameters to help to define the boundaries of theMarshallian district. These parameters consists of: (Boix & Galletto 2009)

1. A trained, specialized and flexible labor force - workers are more specialized and skilledin the local industry and in the different stages of the production process.

2. Specialized suppliers in all phases of the production chain - the spatial concentrationpermits the existence of specialized (and differentiated) firms at all stages of theproduction process, each forced to innovate in order to survive, reinforcing at the sametime both integration and the links between them.

3. Knowledge spillover effects - the diffused industrial culture made up of a set ofintangible elements pertaining to the local production systems as a whole(entrepreneurship, cooperative spirit, technical expertise, knowledge specialization),which Marshall referred to as an 'industrial atmosphere'. This allows knowledge to flow

and allows firms in the district to benefit from higher rates of innovation andproductivity.

Interpreting Marshall today draws much more on a view of the industrial district as both amanufacturing hub but also as a technology transferring mechanism.

Industrial District vs. Cluster

The difference between the Marshallian industrial district and the Porterian cluster issimplified in the interpretation of the system.

A cluster can be viewed as comprised of a set of firms that exist in concert, but can

follow the set of life cycle growth steps, similar to a single product. To illustrate, Swann1998 lays out the four stages of the life cycle:

1. A cluster emerges when new firms are attracted to the cluster by 'entryattracting factors', thus contributing to creating a critical mass of firms.


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2. A cluster experiences its 'take off stage' when agglomeration economieskick in and incumbent firms grow either in the same sector or in different sectors('growth-promoting factors').

3. Clusters reach maturity when the entry of new firms peaks and the clusteris no longer attractive for new entrants; this is due to congestion especially inmono-sector highly specialized clusters.

4. Finally, clusters reach saturation when no new firms are attracted to it.

Selection of Policies:

Federal policies

A survey of major policies at the national level targeting solar clusters:

SunShot and other DOE Initiatives The DOE, whose goal is to have 14 percent ofthe nations electricity demand be supplied by solar energy by the year 2030 and 27percent by 2050, runs a number of efforts intended to create a strong PVmanufacturing base under the SunShot Initiative(DOE-SUNSHOT). The programsmain objective is to decrease the total installed cost of solar by 75 percent by the year2020. To achieve this goal, the program focused on three main target areas: (1)research into solar technologies; (2) grid integration projects; and (3) deploymentprojects to enable the streamlining of installations, reduce non-hardware balance ofsystem costs, and develop a skilled workforce (DOE-SUNSHOT).

Advanced Energy Manufacturing Tax Credit The Obama Administration passedthe American Recovery and Reinvestment Act (ARRA) in 2009, which provided a 30percent tax credit to advance energy manufacturers that invested in new, expanded, orre-equipped manufacturing facilities in the U.S. Funding reached its cap of 2.3 billionsoon after in 2010 (Platzer 2012).

1705 Loan Guarantee Program The Department of Energy administered loanguarantees for renewable energy projects funded through ARRA, of which 82 percentor $13.27 billion went to solar projects (Platzer 2012).

Investment Tax Credit - The Energy Tax Act of 1978 was the first to allow forresidential and commercial owners of solar projects to offset 30 percent of the costthrough tax credits. Most recently, the Energy Policy Act of 2005 re-introduced ituntil 2016, when it will revert to 10 percent for commercial owners only (Platzer2012).

Modified Accelerated Cost-Recovery System (MACRS) plus Bonus Depreciation This is a corporate depreciation scheme that allows businesses to recover the cost ofinvestments in certain qualifying properties through depreciation deductions(DSIRE).


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U.S. initiatives to develop industrial clusters have been few and far between. This isespecially true at the national level. The U.S. government has not historically viewedregional competitiveness i.e., clusters as a priority. Rather, federal policies have beenlargely focused on supporting the right kind of inputs for economic development (Porter2007). Existing policies for regional development suffer from a lack of coordination and

centralization, as there are programs are spread across 14 different agencies, each with itsown particular policy focus.

One of these efforts was the Workforce Initiative for Regional and EconomicDevelopment (Mills 2008), spearheaded by the Department of Labor (DOL). Developedin 2005, WIRED provided one time grants of up to $15 million for qualified regionaldevelopment projects (Mills 2008). Although coordinated by the DOL, grants aredistributed through other agencies. Although WIRED has had limited success, it hasproven to be a useful source of additional funding for cluster projects.

In 2010, the Small Business Administration launched the Regional Cluster Initiative, apilot program to promote and support ten clusters throughout the US. The initiative

provides funding to each clusters administrator to increase opportunities for smallbusiness participation, promote innovation within the industry, and enhance regionaleconomic development and growth.

A study measuring the effectiveness of the Regional Cluster Initiative on cluster growthand competitiveness found that during year one, all ten clusters grew and developed theirnetworks across a wide spectrum of stakeholders. The greatest growth was in smallbusiness participation, which grew by over 275 percent. Cumulatively, the clusters had179 small business participants, which grew to include 672 small businesses (Demiralp2012).

Small businesses themselves also experienced growth during the first year. The averagerevenue of small business participants increased by 13.7 percent. The findings alsosuggest that the clusters played a role in spurring innovation among small businessparticipants. Approximately 69 percent of the small businesses that indicated using theSBAs cluster services reported that they developed new products or services. In addition,54 percent of the small businesses that received cluster services reported havingcommercialized new technology as a result of their cluster participation. Regardingpatents, only 22 percent of the small businesses reported having pending patentapplications as a result of their participation in the cluster. However, the expectation isthat over time, as clusters strengthen and build networks, the number of patents appliedfor and obtained will increase (Demiralp 2012).

State of Ohio Policies

The state polices for Ohio mainly consist of grants from funds. The two main funds thatgrants are issued from are the Advanced Energy Fund and the Ohio Energy GatewayFund. In addition, there are several other tax incentives as well as an Alternative EnergyPortfolio Standard with a 0.5 percent carve-out for solar. The specifics detailing the Ohio


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funds will be expanded in the Toledo cluster section. In addition to these three maindemand stimulation policies, there are several tax incentives, which seek to induce solarPV development in Ohio. There is a property tax exemption for qualified energysystems of 250 kilowatts (kW) or less. (DSIRE) This exemption, which applies to PVprojects, will exempt small-scale energy projects from property taxes. For larger systems,

>250 kW, will also eliminate normal property taxes and will institute a flat fee paid to thecounty. (DSIRE) In addition, Ohio has a sales tax exemption and solar easement policy,which seek to boost small-scale solar purchases.

The policies that Toledo has used to its benefit are mainly focused on upstream researchand development grants and research dollars.

Advanced Energy Fund Grants - this program, which could collect up to $5 millionper year through 2010, was funded by a $0.09 charge through the four Ohio investorowned utilities. Though this program is not solar specific, 401 projects were fundedwith over $20.4 million dedicated for photovoltaic developments. (SOO 2011)

Ohio Energy Gateway Fund - funds from the ARRA used for public-privatepartnerships to stimulate job creation and growth in the clean energy sector. This fundwas created with $40 million from the ARRA and matched by $40 million of private

investment.

Wright Centers of Innovation (Center for Photovoltaic Innovation andCommercialization) - These were established for large-scale, world-class research and

technology development centers designed to accelerate the pace of Ohiocommercialization. The Center for Photovoltaic Innovation and Commercialization

received ~$19 million to support the research amongst 3 universities, 4 non-profitresearch centers as well as 12 Ohio companies which are working within the solar

industry.

For the market creation element of the solar industry, the state of Ohio enacted theAlternative Energy Portfolio Standard, which requires Ohio to produce 25 percent ofelectricity sold in Ohio to be generated by renewable sources by 2025.

However, the most important policy that has supported the Toledo solar cluster has beenthe research and development funds that have been given by the federal and stategovernment as well as private grants that pushed Toledo to develop solar PV and create asurrounding cluster (Calzonetti 2012).

In the late 1980's the initial grant of $1.2 million from Harold McMaster to the Universityof Toledo helped create the physical location for the beginning of the solar industry.From 1987 through 1990, there was approximately an additional $1 million, which camefrom the state and the federal government to support Glasstech and Solar Cells Inc. whichbecame the anchors of the Toledo Solar cluster (Compaan 2009).

The next stage where there was a large infusion of R&D funds to accelerate the solarcluster was from 2002 to 2006. During this time PV came to the forefront of the industry


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with a direct tie to driving growth in the industry. During this second stage, the state ofOhio created the Wright Center for PV Electricity. In addition, the U.S. Air Force becameinvested in the development of PV and looked to the University of Toledo to assist withthis research. The second stage of R&D funneled ~$10 million into the University ofToledo and the other supporting organizations for solar research. In this timeframe, the

university created the Clean and Renewable Energy Incubator which helped to fosterinnovation and competition amongst nascent firms within the local area.

The third stage saw the largest amount of money into the solar industry in Toledo. From2007 through 2009, the University and the solar industry saw nearly $30 million tofacilitate the Wright Center as well as the Air Force solar research and the University ofToledo PV Product and Process Development Program. This time period saw therecession in the U.S. as well as the American Recovery and Reinvestment Act (ARRA)or 'stimulus' which brought in nearly $5 million of the $30 million of the total (Compaan2009).

State of California policies

According to the US Solar Market Trends Report of 2010, CAs solar market growth canbe attributed mostly to state policies and/or incentives (Sheerwood 2011). There is a widevariety of policy tools designed to facilitate the growth and innovation of solartechnologies, and level the playing field relative to other sources of energy. In California,most policies employed focus on market creation or enabling access to financing. Muchof the rapid growth is a result of generous feed-in tariffs, which provide a payment foreach KWh generated. An in-exhaustive list of policy tools used is discussed below inchronological order.

In 1996, net metering (NEM) was introduced to encourage residential installations of

solar PV systems. NEM is a special type of billing arrangement that credits customerswith solar installations for the full retail value of the electricity their system produced.Under NEM, the customer's electric meter calculates the amount of electricity generated,consumed, and how much is sent back into the electric utility grid, so the customer onlypays for the net amount of electricity used from the utility (Go Solar California).

In 1997, CA established the Public Interest Energy Research (PIER) program, an energyR&D program to advance science and technology in the energy efficiency, renewableenergy, advanced electricity technologies, and energy-related environmental protection,among other fields. PIER does this by distributing research grants to various members ofthe solar industry (businesses, utilities, energy companies, advocacy groups, and

universities and national laboratories) (CA Energy Commission).

One of CAs most influential policies is the Renewable Portfolio Standard (RPS)Program originally established in 2002. The RPS program requires that Californiaselectric utilities have 33 percent of their retail sales derived from eligible renewableenergy resources in 2020 and all subsequent years (DSIRE).


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In 2007, California launched the $3 billion Go Solar California Campaign. This campaignis composed of several programs, the main one being the California Solar Initiative(CSI). The Public Utilities Commission administers the CSI, awarding cash rebates andperformance based incentives for customers who install solar generation on residentialand commercial buildings. The programs goal is to install 1,940 MW of new solar

capacity by 2016. The incentives are tiered within a 10-year time span and are reduced asthe aggregate capacity of solar generation installed increases. This method of incentivedisbursement allows the industry to enjoy a certain level of reliability, an importantelement for long-term growth (Sheerwood 2011).

Figure 13: Go Solar California Program Components

Source: Go Solar California

Another influential program is the Property Assessed Clean Energy (PACE) Program,which provides financing of solar systems and energy efficiency retrofits through loansoffered by municipalities. These loans are paid back through the homeowners propertytax bills. PACE is particularly advantageous for the following reasons: (1) the

homeowner does not have high upfront costs because the payments are distributed over15 to 20 years; (2) it offers low interest rates due to senior property liens; and (3) the loanliability remains with the house even after it is sold. Another program with a similarfocus is the New Solar Home Partnership program, administered by the CaliforniaEnergy Commission, which incentivizes PV installations on new homes, includingsingle-family and multi-family affordable housing units (Sheerwood 2011).


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In 2008, California began to require that all municipally owned utilities offer solarincentives. The California Public Utilities Commission approved a feed-in tariff toincentivize the development of small-scale solar installations (Henton 2012). It achievesthis by offering long-term contracts to renewable energy producers, typically based onthe cost of generation of each technology. Investor-owned utilities and publicly-owned

utilities with 75,000 or more customers must make a standard feed-in tariff available totheir customers. The feed-in tariff is meant to help the utilities meet California'srenewable portfolio standard (RPS), all green attributes associated with the energy,including renewable energy credits (RECs), transfer to the utility with the sale. Sincethen, the amount of installations has more than doubled (Sheerwood 2011).

In 2009, a California law became effective that provided a property tax exclusion fromthe real property tax assessment for active solar energy systems constructed on buildingrooftops or on land (Energy.gov).

In December of 2010, the California Public Utility Commission approved the Renewable

Auction Mechanism (RAM) program. It requires that CAs largest investor-ownedutilities procure jointly 1,000 MW of power from solar and other renewable energysources over the course of two years (DSIRE). Additionally, RAM will help streamlinethe procurement process for distributed generation projects up to 20 MW in capacity,while ensuring the lowest costs for ratepayers (DSIRE).

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