The residential solar industry is facing its most challenging period in years. High interest rates, sweeping policy change, and stubbornly high customer acquisition costs are all causing a contraction after years of rapid growth.
In this episode of Open Circuit, we examine this market transition. We’ll look at how the industry may emerge from the current downturn — through cost reduction, community-driven models, and evolving beyond a “bad product” to something that provides real grid services.
We’ll also talk about troubles at Sunnova, and what it means for the company’s $3 billion DOE loan guarantee.
Plus, as data centers get creative about sourcing power, a novel solution: off-grid solar microgrids that could bypass grid constraints entirely. Recent analysis shows hybrid solar-gas systems could deliver power at costs competitive with conventional options. Is this an answer to the AI power crunch?
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Credits: Co-hosted by Stephen Lacey, Jigar Shah, and Katherine Hamilton. Produced and edited by Stephen Lacey. Original music and engineering by Sean Marquand.
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Transcript:
Stephen Lacey: Have either of you ever worked in door-to-door sales?
Jigar Shah: My dad bought a ton of books from door-to-door salesmen back in the seventies, but those people had to carry 70 pounds of books in their bag, like college students selling door to door.
Stephen Lacey: Katherine, did you ever do door-to-door sales?
Katherine Hamilton: Girl Scout cookies? That’s it, man.
Stephen Lacey: A rite of passage.
Katherine Hamilton: Yeah, exactly.
Stephen Lacey: I have a weird relationship with door-to-door sales though, because I hate being solicited.
Katherine Hamilton: Me too.
Stephen Lacey: I can’t stand it when someone comes to the door, but I’m also incredibly nice, so I talk to them and I work through it. Inside, I’m like, please make this end. It’s a very confusing way to live.
Katherine Hamilton: I’m lucky that I have dogs that are a deterrent.
Stephen Lacey: From Latitude Media. This is Open Circuit. This week, a perfect storm for residential solar. With interest rates still high, massive shifts in state and federal policy and major installers struggling financially. What’s the path forward for an industry that has long face cycles of boom and bust? We’ll look at how the industry may emerge from the current downturn and also ask what could happen to Sunnova’s loan guarantee as the company faces its own struggles. Plus, as data centers get creative about sourcing power, a novel solution off-grid solar microgrids that could bypass grid constraints entirely. Is this an answer to the AI Power crunch?
Stephen Lacey: Welcome. I’m Stephen Lacey. I’m executive editor at Latitude Media. I’m joined as always by Katherine Hamilton and Jigar Shah. Katherine, you are in a new recording location. It’s so beautiful. It looks like one of those fake backgrounds on Google.
Katherine Hamilton: Yeah, it’s my “she shed.” I’m in the mountains and we took an old nasty old tool shed that was really full of animal traps and rusty nails and old axes that Lord knows what they were used for, and I made it into a place where I can work and have tea by myself.
Stephen Lacey: No CERAWeek?
Katherine Hamilton: No. One of my kids is on spring break and we had a bunch of family things going on, so I was just like, okay, I’m going to skip it this year and just see how it goes. Evidently the Secretary of Energy literally gaslighting everybody.
Stephen Lacey: Why did he gaslight people?
Katherine Hamilton: Basically the message being that gas is cheap and plentiful and we need more of it, and renewables are super expensive and are causing consumer rates to go up, which is that last point is simply not true.
Stephen Lacey: Katherine Hamilton is the co-founder and chair of 38 North Solutions and Jigar Shah is a clean energy investor and former director of the DOE’s Loan Programs office. Why were you not at CERAWeek this week, Jigar?
Jigar Shah: Oh, I did a lot of CERAWeek the last three years. I feel like I need to recover from CERAWeek. This is my therapy of not being at CERAWeek.
Stephen Lacey: You didn’t want to join Chris Wright on stage?
Jigar Shah: No, I thought he commanded the room all on his own. I think people were like, who wrote those talking points for you?
Stephen Lacey: Well, it was interesting because NextEra CEO John Ketchum was on stage and he basically said what we explained a couple weeks ago, which was like, we don’t have the equipment to be able to meet a significant portion of demand with gas. We can only meet a very small sliver of demand with gas plants.
Jigar Shah: And then Joe Dominguez went on stage from the CEO of Constellation and said that he didn’t think that he was going to build a lot more nuclear plants because you could pretty easily unlock capacity through the use of batteries and bottlenecking the grid, which, and he referred to Tyler Norris’ paper from Duke University. And so I was like, that’s pretty amazing to get a shout out from Joe Dominguez on stage. But so I thought it was a fascinating tale of two stories, but the story coming out of CERAWeek is definitely like the president is talking down oil prices and everyone’s like, we don’t make money at $50 a barrel, and gas is ascendant, but GE Vernova and others are not sure whether it’s ascendant, so they’re not going to spend a ton of money on new manufacturing capacity and solar and wind and battery storage continue to provide 90% of everything that gets connected to the grid. So there you have it. You didn’t have to go to Sarah week for that.
Stephen Lacey: Should we just call that the end of the episode?
Jigar Shah: Yeah, man.
The state of residential solar: Industry challenges
Stephen Lacey: Let’s take a ride on the solar coaster, shall we? There was a point in my career when I covered the residential solar industry extensively, and it’s been a while since I’ve immersed myself, so this feels like a good time to do it.
The residential solar industry is going through one of the most challenging periods in years. Just last week, Sunnova, the second largest residential solar financier in the country, issued a going concern warning in its earnings call, saying there’s substantial doubt about its ability to continue operations for the next year. The company’s stock plummeted nearly 60% in a single day, and earlier this week, CEO John Berger stepped aside.
This follows SunPower’s Chapter 11 bankruptcy filing last summer, where they sold off three business units and laid off hundreds of employees. Meanwhile, companies across the country are shutting their doors, with hundreds of solar dealers and installers shutting down or declaring bankruptcy in the last couple of years.
Stephen Lacey: We’re seeing a reversal from the hypergrowth that defined residential solar for much of the past decade. In Q2 2024, US residential installations declined 12% year-over-year, marking the third consecutive quarter of decline. This trend is consistent across major solar markets internationally.
Before we get into the industry-wide factors, I want to start with Sunnova specifically, which is both a story about the market and about the political moment. In 2023, the company secured a $3 billion loan guarantee from the Department of Energy when Jigar was leading there. It was the first loan guarantee for a virtual power plant and the federal government’s single biggest commitment for solar. It was designed to support over $5 billion in financing residential solar battery storage and tying them together for virtual power plants.
But that loan has faced significant scrutiny from congressional Republicans who have called it the next Solyndra even before Sunnova’s recent troubles. So let’s talk about Sunnova as a company and some of those political dynamics. Jigar, what’s happening with Sunnova?
Jigar Shah: Well, let’s first get out of the way that I personally have never owned Sunnova stock or made money on Sunnova, although I get accused of it.
Stephen Lacey: Was that a claim?
Jigar Shah: Oh yeah. I get accused of all sorts of things, but I think it’s important to understand what we actually did with Sunnova. The US government did not directly loan Sunnova any money.
What Sunnova does is provide loans to customers to buy solar, or they might do third-party owned systems where they raise tax equity and debt. Then they go to Wall Street and ask the credit rating agencies how much of their cash flows are considered creditworthy. What we did at DOE was say, “If you use this DOE data showing that lower-income people actually pay back their energy loans, would you extend more credit?” We then guaranteed those bonds – the federal government guaranteed those bonds.
We never actually wired money to Sunnova like we did with other loan recipients. And today, as of this taping, the bonds are still trading at par, which means that no one believes those bonds will fail. Everyone still wants to buy those bonds.
Stephen Lacey: Jigar, why is Sunnova struggling as a company right now?
Jigar Shah: Sunnova took on corporate debt at the Sunnova corporate level, and their business has had tough gross margins, so they’ve been having a hard time paying back that corporate debt. When you can’t pay back corporate debt, you either have to renegotiate with the lender to avoid default, or if they do put you in default, you might have to go through restructuring where courts force the debt provider to take a loss on what they get paid back.
But it’s important to understand – the underlying bonds for the individual loans that Sunnova provided to residential homeowners are all doing fine. Not just the ones that the Loan Programs Office guaranteed, but also lots of other bonds they’ve issued. Those are all performing well as an asset class. This is really about Sunnova corporate taking on corporate debt that they shouldn’t have.
Stephen Lacey: So is there any risk to taxpayers?
Jigar Shah: No, not as of now. The way the guarantee is structured, we would need to have a financial crisis on the level of the 2008 global financial crisis before the government would have to pay out. A mild recession wouldn’t trigger any payments. You would need to see the kind of mass failures we had during the global financial crisis before we’d have to pay out on that guarantee.
Stephen Lacey: So the struggles at Sunnova are unique to the company, but also representative of a broader contraction in the residential solar market. But here in the US and globally, Katherine, what are the forces at work here? What are the anxieties gripping the industry right now?
Katherine Hamilton: Yeah, there was a really interesting survey done by solar reviews. It’s the 2025 solar industry survey, and it captured between December 2nd, 2024 and January 3rd, 2025. So they did a survey of 59% of this survey respondents were resi and small commercial developers, 8% equipment and manufacturer, 4% sales, 2% energy storage installers, 6% utility scale, and then 7% C&I solar or O&M companies. And most of the companies remember, do business in five states, California, Colorado, New York, Texas and Florida. But they had some respondents from every single state and DC and Puerto Rico. So they did have some representation from everywhere. And I would just say that some of the fears that are gripping the industry are that 56% said new tariffs and there’s a reason for that. Then the tariff issue has been seemingly capricious in that the administration and the president changed their tune on taxes constantly, and I think that’s just the uncertainty is huge in that regard.
Katherine Hamilton: On tariffs, 50% said changes in solar incentives. So you look at both state and federal incentives, what are the changes that are going to happen? 46% said legislative and political uncertainty, and again, that’s what’s going to happen. That leads to the fear on the solar incentives. 35% said supply chain challenges, although the supply chain issues are getting better now. And then 30% said financing challenges, and I think that would include some interest rate issues that are still lingering, although not as bad. So those are kind of the big fears that this survey indicated the industry was feeling.
Stephen Lacey: Jigar, which of those anxieties do you think are most acute in the residential solar industry in the US right now?
Jigar Shah: I mean, I don’t know that I care.
Residential solar has a bad product today, and no amount of financing innovation can solve that fundamental problem. We’ve talked for years about how it costs just a dollar a watt to install residential solar in Australia, or $1.20 a watt in Germany. Anya Schoolman at Solar United Neighbors runs these solar co-ops where they can get it to $1.90 a watt installed in the United States.
That should be the target. Everyone needs to hit $1.90 a watt in the United States – put your big boy pants on and fix your product! Don’t expect that financing or net metering or additional incentives will solve the fact that you have a bad product.
It doesn’t have to be bad. If you were to do DIY solar, you could buy a solar kit on your credit card for about a dollar a watt, have it shipped to your house, and install it yourself.
Jigar Shah: If you need help from an electrician or a laborer, you could put it in for 50 cents a watt and install it in your house. But for whatever reason, we have this cockamamie scheme where people are paying above $3 a watt for stuff and then they’re blaming that metering, they’re blaming this, they’re blaming that. Grow up. As an industry, grow up. We should be able to install solar for a cost-effective point. You should add batteries so that utilities actually like you because utilities want capacity. They do not want additional power being shipped back into the grid from noon until 2:00 PM when all the utility scale solar is flooding the markets with power. We just have to grow up as an industry. We were great 10 years ago when we were fledgling fine, but now we’re on track to 10 million rooftop solar units because the demand hasn’t gone away. To be clear, people desperately want solar on their roof because their investor owned utilities have failed them and have raised rates by 40% the last four years. So they want an alternative. So they want solar, but they want to be treated fairly. They want good customer service, they want equipment that works. They want a 24 hour response time. They don’t want to wait six months for someone to get their system fixed, and so the industry just has to grow up.
Stephen Lacey: Strap in, Katherine. Jigar’s hit the accelerator.
Katherine Hamilton: Well, I was going to actually dig in a little bit on Anya Schoolman’s Solar United Neighbors, because that’s a slightly different model. Of course, it is a nonprofit model, but it’s also very much about local advocacy and kind of self-determination. And she’s getting, she says in most states she gets a dollar 80, so they’re also able to drive the cost down, and that’s often because of bulk purchases. But they have a partnership with a Dutch company where that’s really good at marketing and really good at getting local companies vetted, really getting many, many more installations than having somebody come in from outside to do this. And it feels like what she’s doing and just by the numbers that also all of her reports show that they have really good success and that it’s also not only are they installing systems that are cost effective, that aren’t causing issues with salespeople, but that they’re also more durable and sustainable because of where they’re coming from, because they are coming from the homeowners driving the market and communities driving the market.
Stephen Lacey: Alright, so I wanted to talk about policy. I wanted to talk about business and financial models, and then I want to look at what the path looks like out of the current downturn. Let’s just continue on this conversation around business and financial models. The industry has had a number of high profile, very bad customer experience problems, a lot of lawsuits, people feeling like they’ve gotten tricked into signing solar contracts, they’re not getting the promised savings, they’re stuck with panels on their roof that are not working. I mean, this is a small percentage of solar on rooftops, but it’s still a significant high profile challenge and a lot of this is a result of the financial models that drive solar. So Katherine, there are serious concerns about sales tactics, about the fundamental financial models behind residential solar. How have they created poor experiences for customers and how severe are these challenges?
Katherine Hamilton: And I don’t want to downplay customers that are feeling pain from something, from listening to salespeople who are not being truthful. And a lot of these solar, I know Solar United Neighbors has on their website and I’m absolutely sure that all the other folks do have, here’s what you need to watch out for so you’re not fleeced by somebody who comes to your door. They are, as you mentioned, a very small percentage, but those are the stories that people like to tell, not to downplay their pain and suffering of those people. I just think whenever there’s a boom of anything, there are going to be some bad actors and trying to make sure that you have good people doing the jobs is going to be really important. And maybe that means we don’t do as much door to door sales. Maybe we figure out other ways to make sure people get solar in a way that actually does save them money.
Stephen Lacey: Jigar, what is causing some of these problems with customers? Is it the basic financialization of solar leases that is causing this door to door sales pressure, forcing bad experiences with customers? Break down the root of the problem.
Jigar Shah: Yeah, in a way I think that’s right. The financing companies really just want volume because that’s what you need to do financialization. But I think the bigger part of this is that the financial companies have only one rule, which is that the customer has to save money. If the customer saves 5% on the payment, they’re fine with that. The fact that the customer could have gotten the system for half of what they paid for it, they don’t care. And so if someone pays $4 a watt for solar, even though they probably should have paid $2 a watt for solar, they were not driving that. They were saying, look, it’s not really our place. The dealer makes a deal with the homeowner and the fact that we have all this data and we know that some of the projects were sold at $2 a watt and some of the projects were sold at $4 a watt is not something we have to police.
Jigar Shah: And so then as Katherine suggested, a very small percentage of customers are feeling bad about their purchase on solar and whatnot, and some of them have had bad experiences when they buy a house with solar on it and they had to transfer the lease or whatever it is. But ultimately the bigger problem is that when they found out that they could have gotten cheaper solar, they’re trying to figure out, well, who’s to blame for that? Who is supposed to protect me from unscrupulous practices, from local dealers or just bad business people, dealers? And the answer is no one, right? The answer is no one, right? But in the mortgage industry, everything’s regulated. You have a regulated realtor, you have a regulated person that makes you sign 77 pages with your initials, you have a standard contract, you have all that stuff. So part of what Anya has been trying to do is to put together a cover page on every single financing proposal so that there’s truth in lending that makes it crystal clear on who’s doing what.
Jigar Shah: But I do think that the big challenge that we here is that the financing companies do not feel any responsibility at all on driving down the cost of solar. They’re just saying as long as it’s a legal contract between a dealer and a customer, and they check, by the way, no one’s getting fleeced. I know that everyone claims that they’re getting fleeced, but they record every single phone call that they do to check with the customers before they finance it. They say, did you sign up for this price? Do you know that you’re only going to save 10% on this thing? Do you know that you agreed to these terms? Right? All of that’s recorded and not because they want to protect themselves on this side. It’s because the Wall Street banks make them record that and make sure that it’s crystal clear that no one got fleeced, right? Is it your name that was signed on the contract? Am I talking to the person who signed the contract? They check all of that, right? So no one’s getting fleeced, but it is true that no one’s in charge of driving the cost down everyone’s value pricing and saying, oh, you’re paying 42 cents a kilowatt hour for your power. Well then I can charge you more for this solar project. And that just feels icky all around.
Stephen Lacey: So we have a soft cost problem here in the United States. The cost of installing solar, these soft costs are 13% higher than they were two years ago. What are these costs, Katherine, and why are they a problem for us Solar?
Katherine Hamilton: Yeah, so one is fragmented permitting and regulation like permitting is done state, local, municipal level, it’s all over the map. All the processes are different. So DOE has the solar app that NREL developed, and that’s been great. I mean, adoption has been a little bit slow, but that’s the way you could essentially be able to get through some of those processes more quickly. Customer acquisition costs are high, of course, there’s just less awareness of solar than there are say in HVAC or windows or roofing, things that people think about on their home all the time because it’s a little bit different. And so just having education and people understanding what they’re getting makes it a higher cost. Labor costs, the US has higher labor costs than other countries. And also just installation efficiency. And that goes back to all these different permitting regulations and requirements, inspections, utility issues, interconnection and utility resistance.
Katherine Hamilton: Interconnection is a huge issue. It’s expensive and it’s slow. Utilities are not really, I’m not going to say all of them, but some utilities cause issues. I work with this really interesting company called Connector that has a meter socket adapter, and there are a few companies that have meter socket adapters, and basically what you can do is just plug it into the meter and then plug your solar into this adapter or plug your EV into it. And that prevents having to upgrade your panel. Sometimes you have to upgrade your panel to get all of these extra pieces of equipment. So having things like that would be helpful. Also, just lack of standardization, standardized equipment. And Jigar had talked a little bit about Australia. They have standard equipment installation practices that just allow scale more easily and cheaply. So there are a bunch of different soft costs, and that’s always been the case. Soft costs have always been the biggest issue with solar installation, and I think those are highlighted, especially when you have a tight labor market and increased cost, financial costs and interest rates.
Jigar Shah: I think the big thing that people don’t cover is that there’s a lot of dealers who just don’t want to fix these things. They’re like, the fact that it’s super hard to do solar and I know how to do it makes it awesome. I’m the oligopoly who can handle all of this pain and suffering. And I was like, well, that’s a weird thing to be for. You want a weird byzantine set of rules for your permitting and for interconnections so that you can’t have competitors. That doesn’t make any sense. And this is why I’m saying I just think there needs to be someone who’s actually driving these savings and saying to mayors, look, we’re just not going to serve your town with financing and your people aren’t going to get solar unless you just fix all this stuff.
Stephen Lacey: You have said Jigar, that residential solar companies don’t solve problems for utility, so they don’t have much to sell right now at public utility commissions. What do you mean by that?
Jigar Shah: Yeah, I mean, right now we have an affordability crisis in the United States, and so a lot of customers are going solar because their rates have gone up and they want to save money with solar, but the regulator and the utility is in charge of making sure your neighbors actually save money too. And so the question becomes how does your choice of putting solar and battery storage on your house save your neighbor’s money? And that’s by joining a virtual power plant. And that’s why Sunrun and Sunnova and others have now rebranded themselves as virtual power plant companies. They recognize that unless they’re actually helping neighbors reduce power, there’s going to be a lot of animosity towards the people who put solar on their roof. I don’t believe in all the cost shift stuff that folks have accused the solar industry of. So I’m not suggesting that there’s this major cost shift issue, but I am suggesting that solar alone doesn’t really help you per se.
Jigar Shah: It doesn’t provide you any resiliency. It saves you some money, but if you have a power outage and you have a grid connected inverter, you have to shut down your system. So you need a battery to get backup power, and people are buying backup power in record numbers. Generac is sold out for the next six months. So I think that when you think about what the utilities need, they need batteries so that they can shift load to get more utilization out of the distribution grids we’ve already paid for and make rates more affordable. And what solar residential customers need is batteries, because otherwise when they have power outages or public safety shutoffs or other stuff, they don’t have backup power. And so I just think that in general, the solar industry needs to be solving a problem for utilities, otherwise they’re going to lose the license to be able to deploy this stuff quickly and there won’t be enthusiasm on the utility side.
Katherine Hamilton: So I think what Jigar is saying really brings us into policy. And how many states and local jurisdictions also have policies that are really helpful to solar. And those have been around a lot longer, of course, than a lot of the federal policies have. So state tax credits, energy storage, rebates, solar rebates, state green banks are doing a ton with low interest loans, SRECs. So all the renewable energy credits, demand response programs for batteries. I know that’s happening in states that really are desperately needing to curb their peak demands and they have all these solar and batteries, why not use them? And then also just community solar gardens and structures that are starting to make sure that those are in place and that they’re not illegal. And in fact, ALEC, which is the right wing legislative council, just passed a resolution on community solar gardens to make sure that we can get community solar. So state policies are huge and we should be able to leverage those to bring down the cost of all these programs.
Stephen Lacey: Jigar, how is state policy evolving to push the industry for these more whole home energy offering VPP models?
Jigar Shah: I mean, we’ll see, right? I mean, California is a hot mess right now, and so their sales numbers are way down and the California Public Service Commission has not actually created any real solutions to the problem. When you talk to PG&E or Southern California, Edison, they recognize that they need things like the DCP, the distributed capacity procurement stuff that Pier Lafarge has been doing or other things. And so they need to figure out how they integrate this industry into their models. And right now they kind of are doing it. They’re kind of not doing it. And so they’re in this weird spot where we have all the technologies needed to make electricity affordable, but they have a huge cultural problem where they’re like, but we want to do things the old way. And we’re like, well, you’ve been raising rates by 10% a year doing things the old way. You’ve hit your breaking point. And so I don’t know how this is going to get resolved, but I do think that the residential solar industry and the utilities are going to have to find a way for one plus one to equal three. Otherwise, I think we’re just going to be muddling along.
Stephen Lacey: So on the policy side, Katherine, in that survey you referenced earlier, it clearly showed that people are concerned about tariffs and they’re concerned about broader policy changes either with tax credits or broader legislative changes, and this can be on the state level or the federal level, so there’s a ton of policy anxiety. What specifically do you think the industry should be concerned about in this current environment?
Katherine Hamilton: Yeah, on the federal side, we have more incentives than we ever had, and I’ll mention in a second what people are doing already, but certainly the investment tax credit for solar, for storage, for interconnection, there’s also an adder for low income projects. There’s also the EPA Solar for All program that was a Bernie Sanders kind of vision to get solar financing and inexpensive solar to low-income customers. And that program is percolating along so far, so hopefully that will keep going. That was a 7 billion program that’s going to all states everywhere. I think what folks are doing is twofold to try to help push back on any reduction in those programs. One is of course they’re meeting with Congress like SEIA has done all these hill days CEOs and everybody is coming into town to talk to members of Congress. But even more importantly, people are going out into talk to their mayors, their local press, their towns to really talk and having folks like Anya has a million people out there who are part of this advocacy network and they are talking and saying, why would you even dream of taking away this program that is saving me money every single day?
Katherine Hamilton: And so there are a lot of ways to get at it. The hope is that because there is so much support on the federal side that those will not be significantly reduced. I do think the uncertainty is almost worse than just whether or not they’re going to do anything right now. And we’re just in this period of uncertainty, which kind of paralyzes folks on the investment end and on the financial end,
Stephen Lacey: Jigar, you are one of the most opinionated people I know on solar policy, so if you could wipe the slate clean and get us beyond the stop start nature of promotion policies, what do you think the magic combination of policy would be that feels sustainable?
Jigar Shah: Look, I mean, I think our industry is like every other industry. It wants to be valued for the product that we produce, not for the financial engineering of tax credits and whatever it is that we do. I think we are at a unique moment right now where we are hitting load growth. We have a platinum plated grid that we have overpaid for, and we’re now at a place where we’re using it 25% of the time for residential distribution circuits. I think that the solar industry is the best position to figure out how to work with the utilities to actually get these grids used in a much more sustainable way. And I think we should get on with it. We have all the products. We have virtual power plant companies, we have smart panels, we have figuring out how to prevent people from having to upgrade their service.
Jigar Shah: We have batteries, we have control systems that can control your backup generator if need be. We have all of this stuff and instead of talking about how to get more value for the stuff that we’re doing because we’re 90% cheaper than upgrading the distribution circuit or the transformer, we’re talking about net metering or we’re talking about tax credits and I don’t want to talk about that anymore. I want to talk about how we get paid for the essential services that we provide as an industry. Our products are the best products on the market, and I want people to recognize that when I mean people, I mean electric utility companies and their regulators who continue to want to raise rates by 10% a year instead of putting out these products that we have perfected in a way that is super awesome.
Katherine Hamilton: Yeah, Jigar, that is the nut of it. We wouldn’t need all of this if utilities played straight, if utilities let us in and gave us credit for the value that customers can bring to the grid, we wouldn’t be having this conversation. But that is not the case.
Solar microgrids for data centers: A new approach
Stephen Lacey: Let’s turn now to another application of solar that could help solve one of the biggest challenges facing the tech industry and the electricity sector today — powering data centers.
It’s now widely understood that AI data centers consume enormous amounts of electricity, and their power needs are expected to grow exponentially in the coming years. The biggest constraint to data center expansion is securing power grid connections, which often have waiting times of five or more years. Building dedicated gas plants can also take many years given current equipment shortages.
I was struck by an analysis from Stripe, Paces, and Scale Microgrids that suggests there might be a faster solution: off-grid solar microgrids. The researchers modeled many different potential system configurations, ran 20-year power flow simulations, calculated the levelized cost of electricity (LCOE) for each scenario, and found that off-grid solar microgrids could be the fastest and potentially most competitive option for serving large data centers.
Let’s dig into the research. Katherine, you talked to one of the contributors of the report, Duncan Campbell from Scale Microgrids. What did he tell you about the range of options they were analyzing?
Katherine Hamilton: Katherine Hamilton: Yeah, super interesting. Duncan is so smart and I hope I do him justice here. So here is the list of options for meeting AI needs, right? One is you can expand the grid. This takes a really long time and it’s very expensive. You can do things like grid enhancing technologies. You can do things to try to squeeze electrons out of the current grid, but expanding the grid as we know is really difficult to do. The second thing is restarting mothball facilities like three mile island. Again, that’s a great idea, but they’re not that many of them, so that’s not going to solve everything. Another thing is to build off grid clean farm energy like next generation geothermal or new nuclear facilities. Those are great options. Again, not quick and expensive until we can scale. The fourth thing is building data centers and infrastructure next to already built utility scale solar and batteries.
Katherine Hamilton: The problem is that those facilities were built generally to serve other loads and do they have enough capacity to then also serve new data centers? Another thing is power them with rented portable gas or diesel generators, and that’s kind of a good stop gap, fast solution, but probably not sustainable. Another thing is to build off-grid co-located natural gas. And we’ve talked about natural gas and how hard it is to get that equipment, and also not just the equipment, but getting gas through committed lines is also difficult. So that was also an issue with that. Not all of these will probably need to be done in some way, but the one piece that has been, as you said, conspicuously absent from the conversation is off-grid solar microgrids, and those allow for scale and speed, and they found that these are actual competitive alternatives to all of these other options.
Stephen Lacey: Did he say anything about why this solution hasn’t really been considered in the conversation?
Katherine Hamilton: Yeah, I think folks just didn’t realize that it was something that was viable. So the seal hadn’t been broken. People had not thought outside the box to include that, and he said, now that’s happening with Intersect, but that the keys of trying to get to power quickly, time to power is everything for hyperscalers. And that led them to the conclusion that this is going to be an enormous option. It has a massive total addressable market out there for microgrids.
Stephen Lacey: So Jigar, the analysis found this hybrid system delivering 44% of energy from solar with the rest from gas backup comes in around $93 per megawatt hour, virtually at parity with a pure gas solution, which is at like $86 a megawatt hour. And as Katherine mentioned, remarkably, even a system with 90% solar priced at $109 a megawatt hour is still cheaper than what Microsoft is reportedly paying to restart the three mile island nuclear plant. What’s your reaction to some of these numbers?
Jigar Shah: I love it, right? I love seeing all of this work being done to try to help ground people in what the costs of the alternatives are, right? I mean, theoretically if we have two gigawatts of solar wind battery storage projects sitting in internet connection queues waiting to get connected, they could just be built anyway and powering a data center. So I think having these conversations is super helpful just to ground people in how far our technology has come to be able to solve these problems cost effectively. Do I think they’re going to happen? Hell no. You would just never in a million years build an off grid solar plus storage, plus natural gas backup power system. The grid is there for a reason. It’s right there. Just figure it out. When you look at Tyler Norris’s paper from Duke University, it says that if you basically solve for 50 hours a year, then you could get way more out of the grid that we’ve already paid for.
Jigar Shah: So the fact that we have options now is awesome. I’m glad that we have now defined what it costs to put this off grid, but would I want the hyperscalers to do that or would I like them to interconnect to a place where they then add 12 hours of battery storage, co-locate the data center, and now their infrastructure and investment is helping poor people on the grid as well, not just off to the side, like doing nothing. I would like for them to add to the grid that we already paid for and figure out how to provide more tools to grid operators to help provide better resiliency and reliability for everyone who’s on the grid.
Stephen Lacey: You don’t think that off grid co-located facilities are going to be a significant answer? I mean, there’s so much pressure to build these facilities so quickly. I would think that there’s enough pressure to make some of this a reality.
Jigar Shah: I mean, it could be off grid for a little while and then three years later you connect it to the grid and then provide all of this service to the grid. But I just think that this notion that it’s every man for himself and that we’re not part of a collective anymore that actually helps share all of these services across all of us. That seems like quite a big departure on a one-off basis, maybe as a systemic solution to data centers. No, I don’t think so.
Katherine Hamilton: So Duncan is talking about, first of all, he says this is just one option, and they wanted to prove that this option would be cost effective, and they also want people to play with their model. So it’s open source, you can go in and full with it and adjust numbers and just see what you come out with. So this is just to put it on the table as one of the options because there’s a 1.2 terawatt data center capacity issue. That’s the addressable market, and there’s probably room for everybody, but this is one piece of it. He also said that if you get an anchor tenant to build one of these systems, you may very well create a power hub. Essentially, these projects have to be so large, that’s almost like building a utility. And so of course that also brings us to the policy issue of are you a utility and are you getting into the utility franchise issue?
Katherine Hamilton: But then you have sort of a hub, and they’ve done this, they had an El Paso symposium where the mayors came in and everybody talked about what are we doing here with this? Is this going to attract other businesses? Because if you have a big data center out in the middle of nowhere on a microgrid, well, you need a gas station or a EV charging station, you need a 7-11. You need all of the services, and you may often attract other businesses, other community issues. And so part of it is do you want it as part of a community? Do you want it as its own ecosystem? But I think that this report just gives you some of the background numbers to be able to actually think about that and think about what you want to do with it.
Stephen Lacey: So you don’t think that this is a viable option. It sounds like maybe as a bridge to an eventual grid connection, but does this put solar on the table in a way that it wasn’t before?
Jigar Shah: So my goal over the last four years has been to educate the solar industry. It’s not like we’re already dominant, right? 70% of everything that added to the grid last year was solar. So we’re already dominant. So part of what I’ve been trying to do the last four years is teach the solar industry on what clean firm power is and what does it mean to be clean firm, and why is it valuable to be clean firm? And it basically means that if you’re dumping power onto the grid at the time at which no one needs it, right, then prices go negative on the wholesale market prices. If you’re able to time shift it for four to six hours, well then it could be worth more, right? Duncan has taken it to its logical conclusion and said, if you want to do this whole thing off grid, what would it cost?
Jigar Shah: And he is like, well, 44% solar plus battery storage is fully optimized. If we didn’t want to be fully optimized and we wanted to spill some solar, then you can be at $109 a megawatt hour, which is great. And so now we actually have a bounded cost structure, and we can say, if nuclear power costs this and natural gas combined cycle plants cost this and solar plus eight to 12 hours of battery storage costs this, well, now you actually have an understanding of what it means to turn solar power into clean firm power. And that’s where we need to go if we’re going to decarbonize our grid. Solar’s got to provide all of these services. So that’s why I love this paper. I love the arguments. I love the fact that people are arguing with each other about different variables and getting into the weeds on this stuff.
Jigar Shah: But do I think that we’re going to have a bunch of off-grid data centers? No, but I think that the intellectual part of this is super fascinating, and I hope that all of the solar people are educated and not saying anymore, oh, solar plus battery storage is $42 a megawatt hour. No, it’s not, right? That’s like solar plus two hours of battery storage, which is basically useless. If you actually want clean firm power, you need 12 hours of battery storage. And then there’s lots of other conversations we can have. Once people understand the basics of what Duncan is putting down.
Katherine Hamilton: Yeah, he ran a scenario called the abundance scenario that basically says, how far can we get with this? Can we, and an off-grid microgrid would be solar storage and gas and say that the hyperscaler is already putting in batteries for power quality issues or UPS. You’ve already got that kind of built into the mix. You’re like, how far can you get? Because the gas is going to hold you up on price volatility on equipment on whether you can actually get gas there or not. So what if you got rid of that? What could you do and how far could you get? And you could probably get, Chris Clack is saying seven to 80%, but you could maybe get into 95% and then Jigar, maybe put a few more batteries in or over time, install your geothermal, then you’ve got it. Then you’ve got a clean system if you build as much as you can. So it is an incredibly interesting thought exercise and also kind of forces the conversation of can we do this in a way that is really clean and not have to rely on natural gas, which is what solely on natural gas, which is what a lot of folks are discussing right now.
Stephen Lacey: Well, that is it for Open Circuit. Jigar, Katherine. Good to see you both. Open Circuit is produced by Latitude Media. Jigar Shah and Katherine Hamilton are my regular co-hosts, and the show is edited by me. Sean Marquand is our technical director. He also wrote our theme song. Anne Bailey is our senior podcast editor. Latitude Media is supported by Prelude Ventures. Prelude backs visionaries accelerating climate innovation that will reshape the global economy for the betterment of people and planet. Learn more at preludeventures.com.
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