Thursday, February 15, 2007

Controversy Erupts Over Citizenre

All is not harmonious in the solar world after the publishing of an article about Citizenre in Renewable Energy Access.

The highly critical opinion piece, entitled "Citizenre: A House of Cards?" accuses the secretive renewable energy start-up of setting impossible expectations in the minds of it's "Ecopreneur" sales force and for potential renewable energy customers.

REA has followed up with a highly informative and balanced Podcast on Citizenre.

Citizenre's business model has been one lightning rod of criticism. Rather then selling PV systems, their model is to rent them to consumers at the same cost they are currently paying for electricity. Claiming that they will be able to start doing this in September 2007, in any state with net metering, implies that Citizenre has found a way of achieving "grid parity" -- that is, solar electric generation that is the same cost of buying energy for the utility.

Adding to the furor is the fact that Citizenre is employing the technique of "multi-level marketing" (MLM) to sell their systems. Amway is the best-known company to employ this technique. Independent Ecopeneurs who sign up with the company are given some training, then go out to and get customers signed up and build their "downline". The more levels beneath them in their "downline", the more potential money a Ecopeneur can make on the "residual" income streams passed up the line. This model has it's share of critics.

Adding fuel to the fire, an internal strategy memo was leaked this week that calls into question the underlying economics and marketing strategy. Claiming that the organization has lost control of it's sales associates and their claims - now posted all over the web, of free solar power and millions to be made by signing up - the memo posits a major PR disaster looming for the company. Said PR disaster appears to be unfolding at a rapid pace.

It is quite clear that most informed commentators simply can't get their heads around how it's possible that Citizenre can lower their costs enough to achieve grid parity all the way down to utility rates at $0.07 / kWh.

Citizenre claims the following will allow them to do this:

1) Vertical integration. Citizenre will build out a 500 MW cell and module plant (the largest in the world), coming online in 100MW phases. They claim that Phase 1 will be online in September and 500 MW will be online in 24 months. They will also be building their own inverters, and will standardize the installation systems. They claim this will increase efficiency and reduce the amount of markup in the value chain.

2) AC modules. Each module will have an inverter and this will save installation time, eliminate DC redundancies, and improve efficiency.

3) Low-cost, unconstrained silicon supply. Citizenre will be making cells from ingots that are produced partially with metallurgical grade silicon rather than solar grade polysilicon, which is in relatively short supply due to production constraints and high demand.

5) Claims competitors are not focused on reducing costs, and are trying to rake in "feast year" profits after "famine years" in the industry.

6) Claims they have $650 Million in funding.

Much has been written about the financial aspects of Citizenre's offering. Let me just state that their model implies, in most states, an installed system cost of around $4.00 / Wp. It seems quite a feat given that the average retail price for PV modules in the US is $4.80 / Wp.

Keep in mind that this is before the cost of installation, balance of system components, overhead or margins. I know, but can't tell you wholesale module pricing to a large integrator; and what it costs us to put in systems of all sizes (efficiently). I also know, but can't tell you what it costs a module manufacturer to make a module. However, I can tell you that no amount of vertical integration or standardization gets you to $4 /W installed, in 2007, using crystalline modules. It's not even possible to get there using the most inexpensive thin-film technologies, because they are so inefficient that all of the fixed costs are spread out over fewer installed watts.

Also, I have to point out the $650 million is a lot of dough, yet no investors have been announced, and despite many requests Citizenre has yet to confirm that they actually are in possession of the funds. This has led some to believe that the funding does not exist.

However, assuming for a moment that Citizenre is totally legit and aboveboard, I'd like to focus on some of the technical issues implied by these claims.

First, lets get this out of the way: a new company with no track record in the industry claims to be building the largest solar module production facility in the world. They have not yet selected a site for said plant, never mind started construction nor even gained permits.

From this facility, they say they'll be able to produce UL Listed modules at the rate of 100 MW per year within 8 months. These will be AC modules - PV modules packaged with small integrated inverters of the company's own design.

For reference, industry experts say that in normally would take 18-24 months to bring a 100 MW plant online. Typically, it takes about 6 months to obtain a UL Listing on a module (after production on a pilot line produces product to test). I am speculating that Citizenre may be considering the use unconventional materials in their PV laminates in order to lower costs. If unconventional materials are used this could stretch out UL Listing further. Presumably getting an AC module approved could significantly complicate the Listing process.

Moreover, one would expect that anything done differently along the lines of module construction would also significantly delay product roll-out because of the long-term testing required to validate the reliability of the product. Even with conventional laminate construction, introducing AC modules is a very significant change from normal practice and there will be a steep learning curve; taking customers along the ride up that curve can be painful, if not fatal for any company. Taking shortcuts on reliability testing, while tempting, would be a major mistake. Even small changes in module construction have resulted in major issues, BP's recent experiences being a prime example - they have had two recent recalls, one due to a fire hazard and another due to shorting from a minor production process change.

Most PV manufacturers are extremely focused on quality and reliability because they are on the hook for 25 year performance warrenties, and their brand is at stake. However, reliability is particularly crucial to Citizenre's model. In order for their finances to work, they must be vey confident that their systems will actually produce what they are predicted to produce. This means these guys need to be very sharp with their energy modeling capabilities (which is difficult even for experienced industry players) and they need excellent reliability from their products, both in terms of avoiding physical failures and performance degradation. In order to keep their costs down, they will need to avoid service calls.

Getting back to the AC modules for a moment, let's recall that inverters are the Achille's heel of any grid-tied system. Well engineered power electronics, like inverters, typically demonstrate a Mean Time Between Failures (MTBF) of 100,000 hours -- which is to say about 11 years. Like many systems, failures tend to lie on a "bathtub curve". The rate of failures is relatively high for newly installed products; this is often referred to as "infant mortality". Any slight defect in power electronics tends to be revealed quickly once energized (the magical go-genie typically escapes from the device in the form a of a puff of smoke). Over time, failures stabilize at a low level. Then, as the 100,000 hour mark approaches, there is an accelerating frequency of failures as the old dogs lie down for a last nap.

This is relevent because with AC modules, 10-20 of these devices will be deployed instead of one. This means that there is a 10 - 20 X chance of failure. Now, it is true that ACPV will degrade more "gracefully" in case of failure - one failed inverter doesn't take the whole system out of commission. This seems at first blush to be an advantage, but consider a few things. One, if a central inverter goes down it is very obvious if you are paying the slightest bit of attention to system performance. Two, swapping out a centrally mounted inverter is pretty easy. It's mounted in an accessible location and is designed to be readily installed. Three, once you swap out an inverter, it's very unlikely to fail again at that location unless there is a separate problem (i.e. dirty power on the utility side).

Now imagine that you have 20 inverters on a roof. If one fails, system output decreases by 5%. It might be hard to ascertain that this has occured due to normal variations in the weather, but if you are Citizenre, it's hitting your bottom line. The loss will continue until the problem is discovered and technicians are dispatched to fix it - in most cases, said technicians will be from local installers who will be more likely inclined to do a higher margin job, like putting in a system, on any given day. To service it, you have to get on a customers roof, figure out which unit has failed and partially disassemble the array to access and replace it. It all costs time and money. Not only that, but your chances are then 20 times higher that you will have to go back to the same house to replace a different inverter, also a vicitim of infant mortality, a week, a month, or 6 months later. If there is a secondary problem like dirty grid power, it will probably take even more service calls, and scrapped inverters, to figure out what's going on.

Moreover, module-integrated inverters will be operating in a harsher thermal environment -- i.e., much hotter. This will result in reduced lifetime.

Something else to point out on costs - in order to have a fighting chance of determining that an inverter has gone down in a timely fashion, and determining specifically which one has gone down without a snipe hunt, requires that there be fault monitoring & communication capabilities in each inverter; that will add cost. From what I've seen in my time in the PV industry, it's almost always better to have fewer, bigger inverters than many small inverters. The redundancy just isn't worth it - it only leads to deferred replacement and ends up costing more money in the end. There are advantages to AC modules, but the idea has been around for years, and the advantages have never outweighed the liabilites.

So, my point is that the use of ACPV really cuts against their business model, where reliability has to be absolutely paramount; any small gains in efficiency (and these are questionable) will quickly be overwhelmed by reliability problems.

Onto another issue - Citizenre's claim that they will be using metallurgical grade silicon. This means they will be using a silicon source that has no commercial track record and which will result in low efficiency cells and modules -- this will drive cost per watt up, not down. Moreover, it poses both schedule and reliability risks. Let's be clear about this - no one has ever made photovoltaic cells from metallurgical grade silicon outside of pilot lines. Dow-Corning is currently producing this type of silicon from the first factory of it's kind, in Brazil, but it is not intended to replace polysilicon, rather it is typically blended at only 10% with polysilicon. If Citizenre is truely building it's plant around this technology, it is an audicious move indeed - especially given that polysilicon prices are set to fall dramatically starting in 2008 as expected production comes online.

As far as the solar industry not being "lean and mean", I can tell you from experience that at least where I sit, the solar industry is cutthroat about cost reduction. Standard efficiency PV modules are becoming a commodity, with low cost Chinese cells and modules flooding into the market (still significantly more expensive than the cost Citizenre requires). Standardization is not yet a reality in the retrofit market, because it is quite difficult to accomplish. However, successful large system integrators have driven the costs of large-scale PV installations downward very aggressively through standardization and sophisticated logistics; still, costs are significantly higher than Citizenre claims it can achieve in the much more difficult to serve retrofit market. The PV industry is highly competitive at every level of the value chain. It consists of many large, well funded entities staffed with extremely savvy technical and business people, as well as a multitude of small, scrappy, hungry (and increasingly well funded) startups, all competing for market share. Citizenre is correct in identifying the residential retrofit installation market as fragmented and relatively inefficient. However, the fragmentation that exists is a response to market conditions. Small, agile companies with low overhead, a laser-like focus on their local market, a desire to do quality work, and a committment to educating their customers are successful; word of mouth referrals are key. An attempt to parachute in with "standardized" offerings and a slick marketing approach is likely to collide messily with the facts on the ground.

Finally, some thoughts on the use of MLM by Citizenre. This method of sales and marketing is normally used to sell customers on the emotional value of products. Products typically offered by MLMs are things like cosmetics, vitamins, water purifiers, and motivational books - which often have little inherent value, aside from the extent to which the customer (and the salesperson) believe they "need" it. The technique tends to encourage hype and sales for sale's sake.

It heavily depends on motivational themes and "positive thinking" to encourage low level sales associates to work hard for little gain, while often framing questions or dissent as negativity and a lack of will. Rob Styler, the current VP of Marketing at Citizenre, was formerly at Equinox - a MLM company that had numerous civil and criminal suits filed against it, and which eventually dissolved it's assets and setted with victims for $40 million. Interestingly, Equinox focused on "eco-friendly" consumer products. Styler has written a book about the experience. As MLM models often veer dangerously close to illegal pyramid schemes, many question this choice of business model.

This aspect of Citizenre deeply concerns many in the PV industry, because there is clearly a powerful emotional element. Most people who are in the business are "true believers". Those who buy the systems do so, in part, because they want to do right thing and help to solve serious problems. However, PV is fundamentally about technology and financials. Those who have been in the industry for a long time, seem to have a consensus that the right approach is to have a deep understanding of these fundamentals and educate their customers so that they have the facts. In contrast, it appears that Citizenre Ecopreneurs and executives are promising many things that are physically impossible to deliver, at least in the time frame that is claimed.

The problem is that if enough people are taken in by unrealistic hype, once it is revealed that they've been taken for a ride they may turn, not just against Citizenre, but against PV. Once people's trust has been broken, it is extremely difficult to regain it. The solar industry was incredibly burnt by the solar thermal debacle of the early '80s -- another era when the hype machine significantly outpaced reality, and fly-by-night manufacturers dumped shoddy products into an overheated market. That experience, and the long solar winter that followed, has led many to say never again.

For myself, I think that there are many interesting aspects to Citizenre's model. Offering no-money-down financing to residential customers would greatly accelerate PV acceptance. It's not a new idea, it's just that no one has gotten it to work in this difficult market segment. If Citizenre can do it, more power to them.

That said, I hope that if there are unseemly shenanigans frolicking in Citizenre's shadowy recesses, that they are brought to light now. Rumors abound that there are still other shoes to drop with regards to this story. No money has yet changed hands and Citizenre hasn't yet done any permant damage to the reputation of the PV industry. So, now's the time to get it all out in the open. It will be much to Citizenre's credit to transparently address these issues, move forward, and be successful in rolling out solar power to the masses.


Save and Conserve said...

Great post - very interesting comments regarding the inverters

Should be interesting to see if the VC money ever materializes

John Raynes said...

You're one of the first persons I've seen that brings up the issues of quality and reliability in a manufacturing operation. These things don't happen overnight.

Further, many people (such as yourself) stress the 18-24 month time frame to bring up a new plant. I agree. But even that time frame assumes the existence of a crack technology/operations/process team. Where does this team typcially come from? From other parts of an existing operation, where much of the basic knowhow (incoming, in-process, and final inspection procedures, automated test strategies and equipment designs, automated manufacturing cells and lines, etc.) already exists. Developing all of that manufacturing infrastructure from scratch, when none can be appropriated and modified from other existing plants, takes an enormous amount of time. I know, I've been a part of such initiatives numerous times in my career.

Given their claims of great leaps forward in solar panel mfg. costs, there must be lots of automated assembly involved, right? I mean how else do you have a chance of competing with existing operations, that are either themselves highly automated, and/or depend on lots of inexpensive Chinese labor? Who is designing and programming all of this automated equipment? Do they have any engineers or consultants working on this? That type of talent doesn't come cheap. Does that work not even get underway until the funding is in place?

Forget the engineers for a minute - have they even hired the plant operations manager? Is there any portion of the plant management team already in place? IMO it's going to take a year or more just to put the team of people in place before they can begin to move forward significantly in specifying all of their processes, procuring equipment, etc.

Giving them the benefit of the doubt for a moment (that is, that they have something unique and revolutionary that is going to drive costs down as they predict) I doubt we would see any quality product in any meaningful volume before 2010 or 2011 at the very earliest. If they rush it any faster than that, given the complete absence of a technology brain trust to run the operation, they'll just shove a bunch of unreliable junk out the door, and they'll crash and burn within a few months.

Let's all keep the light on this puppy.

Carl Lenox said...


I completely agree.

Spire is now offering turnkey module autolines, interestingly enough, in up to 100 MW increments. I'd guess that this is how Citizenre believes they will pull it off. That would give them access to an experienced team to get the place set up; however, they would still have to staff it and you can't hire just anyone to run an autoline, especially at that kind of scale.

However, there's been no announcement of any deal like that so it's safe to assume that there's nothing firm.

In any event, I don't think it's possible to even get a building of that size permitted and erected in 8 months, never mind fully built out with equipment in place and (minimally) a pilot line running.

Actually, to start shipping product in 8 months implies that they will have a pilot line up in 2 months due to UL testing.

It seems to me that either these guys have no idea what they are talking about, they are lying through their teeth, or I and many others are completely misunderstanding some key aspects of their plan.

In any event I look forward to hearing some clarification from Citizenre.

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robert veach said...

"Onto another issue - Citizenre's claim that they will be using metallurgical grade silicon. This means they will be using a silicon source that has no commercial track record and which will result in low efficiency cells and modules -- this will drive cost per watt up, not down"

That has changed, they will be making panels from solar grade silicon.

Carl Lenox said...

Re. silicon supply -

According to Robert Veach, Citizenre will be using solar-grade silicon. Clearly they don't have a "magic bullet" to end-run current silicon supply constraints.

Since we still haven't heard anything about a very sizable silicon supply contract to Citizenre this makes me wonder where they will be getting their feedstock.

Also curious if this has effected their projected cost targets. Certainly their costs will increase over their assumed costs with (unfeasible) metallurgical-grade silicon, in the short term anyhow.

outtathebox said...

Excellent post, thanks. I would like to offer another hypothesis.

The information you provided was logical and well presented. It seems very likely that the "business model" for Citizenre is not viable. It just does not make sense...when viewed in a traditional way.

Suppose the reason for Citizenre was quite the opposite than their stated intentions. Would it make sense for a competing energy industry, already established but threatened by the massive growth of solar, to wage a campaign designed to discredit the industry?

After spending considerable time reading about this company, this is the only conclusion that makes sense to me.

The only tangible thing about the company (that I have found) is their very slick web site. It is well written and designed to pull people into the plan. Those in the know find little substance, but it's not necessary for the average person who just wants to do the right thing.

In an attempt to cut through the hype, I called Citizenre's corporate headquarters in Delaware. I was hoping to speak to someone in management who could spare a few moments to at least show me there were real people in the office.

I got an answering service, during normal business hours. The operator had to look up the company name on a list before she could acknowledge that it was the correct number. I left a message that has not been returned.

For the cost of a web site and an answering service, Citizenre's backers stand to create havoc in the solar industry. No plant, no products, no customers, no technicians, no viable business plan.

So there you have it. I propose that Citizenre could very well be a smoke screen campaign, designed to fail, but only after doing serious harm to the existing solar industry in this country.

If you think that is too far fetched, then you haven't read "Big Coal" or been paying much attention to how the "game" is played by the coal companies. The term "ruthless" comes to mind.

Disinformation is a fact of life in the U.S.

I don't have proof of any of this, it's just food for thought. At least my mind can now understand why a concept like Citizenre even exists.

robert veach said...

I can assure you that CitizenRe has no interest in helping the coal/energy companies of the U.S. - other than helping to influence them to get national net metering laws in place.

cow said...

Carl, thanks for the very informative post.

outtathebox, I like your theory albeit pretty far fetched. Another possibility is that a new renewable energy start-up has created the fictitious CitizenRe in order to conduct cheap market research.

Rob Styler's part in CitizenRe almost single-handedly convinces me that this is nothing more than the next hot pyramid scheme.

Anonymous said...


Cliff Ageloff said...

Extraordinary claims require extraordinary proof - and so far CitizenRe has made the former and not the latter. Seems like the whole 'plan' is built on a series of "ifs" that have no basis in realistically being achieved. I was 'hired' by CRE after a brief phone interview; that was odd to begin with after having several close-but-no-cigar interviews with known solar players. I went to many other ecopreneurs URLS or just called them asking where and when the plant would be built; they all had different answers. I asked them how it takes half a day to install and they all had no idea other than 'its been worked out'. I asked many questions...none answered to any degree of satisfaction.

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