A.C. Rich, an inventor and entrepreneur, has come to your venture capital group with a design for a solar water heater. He argues that,
The average home water heater emits over a ton of hydrocarbon pollutants into the atmosphere each year, as much as the average car! A solar water heater can prevent over 1,400 lbs. of these pollutants from being emitted.(1)
He also claims that,
If 50 per cent of the homes in the United States had a solar collector, it would eliminate 12 large nuclear, coal and oil generating plants.
He is clearly committed to his invention and has sunk most of his own resources into it. He asserts that,
Henry Ford had a vision of an automobile for every family, and I have a vision of a solar water heater for every family.
You are a member of a group of venture capitalists whose aim it is to locate and invest in promising new technologies. There are two broad criteria your group considers in determining whether or not to invest in a technology:
Several competing venture capital groups have recently entered the solar energy arena, and this has been targeted by your group as an important area of technological growth.
A.C. Rich is at a critical stage in the development of his company, American Solar Network. He wants your firm to enter into a partnership with him, to permit him to go from manufacturing 10 systems a month to as many as 4000. This would lower the cost per system (installed) from an average of $2000 to an average of approximately $1000.
A separate analysis of the financial status of the company will be prepared by other members of the venture capital firm with strong backgrounds in business. Your goal is to analyze the product itself. You must evaluate whether Rich's claims are justified, in particular, is his product marketable? Does it really benefit the environment? If you recommend his product, then the financial team can consider whether to invest in his company, or simply buy his patents. An independent research team has compiled the following information as a brief synopsis from which you can begin your evaluation.
When asked about his motivations for entering the field of solar power, Al Rich responds, "As a young boy, I was aware that what I was 'going to do when I grew up' wasn't invented yet." But, he added, "I didn't know that I was going to invent it."
Born in 1950, Alfred C. Rich spent part of his youth as an auto mechanic. In July of 1977, Rich took a job at a summer camp in Colorado, where he was asked to help install a solar water heater for the camp pool. He said he 'lit up' at the thought of doing this. Driven by the desire to achieve, he attended Principia College in Illinois and obtained a degree in Political Science. Rich decided to work in the solar energy field because he saw it as one solution to problems like global warming. During his college years, he became active in the environmental movement, organizing and participating in senior seminars and conferences. His exposure to environmental issues at school, as well as the mid-70's oil crisis, further developed his interest in solar power and the environment.
After graduation in 1979, Rich started selling a solar water heating system designed by his father-in-law. Rich was dissatisfied with the design, but his father-in-law didn't want to improve it, so he and Rich parted ways. It was at this time that the U.S. Government implemented the Energy Efficiency Tax Credit that encouraged energy conservation and the development of alternative energy sources. Al Rich saw the tax credit as an opportunity to capitalize on his expertise; he founded his own solar services company, A.C. Rich and Sun, in July 1979. Under the name A.C. Rich and Sun, he contracted with another dealer to sell solar systems. While he founded A.C. Rich and Sun, Rich also worked as a consultant and trainer for companies entering the solar market. Some of his work included installing the first two solar systems for the United States Navy, and holding professional solar sales and installations seminars.
In 1981, Rich became the district manager for Sears Solar at the Herndon, Virginia branch. Over the next four years, he succeeded in making the Herndon office the top producing sales branch of the company in the United States, selling a volume of $2.5 million annually. He was in charge of the management and training of 53 employees from all areas of the company, ranging from sales to installation. In 1985, however, the tax credit that had given such a boost to the solar industry expired, causing Sears Solar to be one of over 5,000 companies to close its doors. A.C. Rich and Sun continued to operate; it was one of the remaining four percent of solar companies to stay in business after the tax incentives were removed.
In order to stay working in the solar industry, Rich started servicing the solar water heating systems that were installed during the tax credit era. The work made him acutely aware of the problems with existing solar water heaters; they were over-priced, unattractive, and cumbersome. He says, "Just from a marketing standpoint I had to decide how I could sell solar. Basically, solar energy had been built and designed by engineers. They had no concept of what the customers wanted, they just produced what worked. And they certainly did work. But the market wasn't that happy with how they looked or their cost, so you had to come up with an artificial subsidy." In 1987, Al Rich decided to use his expertise to design and market a new domestic solar water heater, one that would be less expensive and pleasing to the eye. Actual work began on the "Skylite" water heater in 1988 in the name of the company A.C. Rich and Sun. His second company, American Solar Network, Ltd. (ASN) was incorporated on February 2, 1989 in order to further develop and manufacture the "Skylite" system.
When Al Rich decided to design his own solar water heater, he asked himself, "What do people want?" as well as "Is there a need?" In Rich's opinion, the answer to the second question was a resounding "Yes." In the words of one of his satisfied Skylite customers, "I had always liked the idea of solar water heaters because they could save my family a lot of money. My main objection to them is that, to me, they were ugly and far too expensive." From his experience, Rich knew this opinion of current solar systems was widespread; thus he decided to design and market an inexpensive, aesthetically pleasing, solar water heater. As he worked on his design, it occurred to Rich that his ideas might be patentable. On June 16, 1989, Al Rich submitted an application for his first patent. After almost a year of revisions and debates about the uniqueness of his designs, Rich was awarded his first patent, #4930492, on June 5, 1990. In 1993, Rich was awarded a second patent that detailed further improvements to his original Skylite product.
An overview of Rich's system can be seen in the "Solar Skylite Water Heater" diagram in the "Solar As It Should Be" pamphlet in Exhibit I. The numbers below refer to parts of this diagram.
The "Skylite" works in conjunction with a conventional water heater in order to supply hot water to the home. Water is heated using the solar system primarily. However, during long stretches of cloudy days or during high levels of hot water use, the conventional water heater will fire so that adequate supply is maintained.
The Skylite does not heat the water a family uses directly; instead, it has its own separate water supply. This is known as a 'closed-loop' system. The water is heated in a set of light, plastic panels on the roof (1). When the water in the collectors on the roof is warmer than the water in the tank (4), a differential (2) triggers a pump (3) which circulates the heated water around the tank (4). Inside the tank is the water the household uses to wash dishes, take showers, etc.; this household water is transferred to the regular hot water tank, where it can be heated to the desired household temperature.
Rich's system includes a timer and a drainback tank (5) so that water can be drained out of the system at night. Part of his patent includes a 'floating valve manifold' which allows the water to fall into the drainback tank whenever the pump is not operating, thereby preventing the water from freezing in the exposed pipes during cold weather; a problem in many other passive solar designs. When the pump starts up again, a floating ball rises and closes the L-shaped joint which would have allowed the water to fall back into the drainback tank; the water instead is forced into the solar collector. For more details on this and other aspects of Rich's system, see the copy of his patent on the World Wide Web. He also patented vents in the solar panel which release steam when the water gets too hot.
Rich's goal was to make the system cheap and easy to maintain. He used plastic instead of glass on the panels to make them easy to install and remove. He used EPDM rubber in his collectors because this material was light, flexible and could withstand freezing. Rich also designed the solar panels to look like skylights, so they would enhance the appearance of a house on which they were mounted.
People have tried to harness the power of the sun for centuries. As early as 1877, air blowing over a sun-heated iron was used to heat homes. The first patent involving a solar collector was given to Bailer in 1910. The first widespread use of solar power for heating occurred in the 1930Õs, but was replaced in the 1940Õs with the advent of low-cost natural gas heaters. Increases in the efficiency and productivity of gas and electric heaters paralleled improvements in oil and natural gas extraction. The practicality of solar energy appeared poor and natural resources seemed virtually unlimited. As one gas company official stated in 1954, ÒI donÕt think in our lifetime weÕll see the depletion of the productÓ
The 1973 energy crisis made the United States realize its dependence on natural resources, particularly fossil fuels. Because of the Middle-East oil embargo, oil prices quadrupled; Americans were forced to rethink their ideas on energy and conservation. In 1978, the U.S. Government and many states decided to implement tax credits for anyone who installed a solar water heater prior to January 1, 1985. Federal income taxes allowed a credit of 40% off the entire solar domestic water heater expenditure, up to a maximum credit of $4000. (Note: a tax credit is a deduction in the total amount owed to the IRS, it is not a deduction applied to your taxable income.) This difference resulted in a significant reduction in cost to consumers. Due to increased energy awareness, and the government tax credit, approximately 950,000 active solar systems and 200,000 passive solar systems were installed during this period of remarkable growth in the solar industry.
After the end of the era of federal tax credits, American consumers on the whole were disenchanted with the high-priced, unattractive solar water heaters that were available. The poor reliability and prohibitive cost of these systems, coupled with rapidly declining fuel prices, spelled the demise of a vast majority of companies selling solar water heaters. Fuel prices had dropped from those experienced in the mid-70's, and the country became apathetic to matters concerning the conservation of natural resources.
Rich kept his company alive during this difficult period by taking out a second mortgage on his home, scrambling for backers, and obtaining grants from states like New Hampshire, where he installed his solar heating system in several homes as part of a model project and documented that it saved on heating bills. The state gave him a $14,900 grant under its Appropriate Technology Project in 1991.
Recently, a national environmental focus has returned with the advent of troubles in the oil-producing countries of the Middle East, as well as with the passing of the Clean Air Act of 1990. As pollution and environmental concerns gain increasing national attention, a number of legislators have argued that the U.S. Government should pass more legislation in an attempt to preserve the environment. Already, many states and utilities offer incentives to those consumers who wish to put a solar water heater on their home. With the advent of these policy changes, there appears to be new potential for profit in the solar water heating market.
It costs 8 cents per kilowatt hour for electricity on average in the United States. (For more information, see the Energy Efficiency and Renewable Energy Network Homepage.) Shown below are four of the largest energy consumers in the average household, lead by the electric water heater.
| kilowatt hours per year (2) | |
|---|---|
| Electric Range | 800 |
| Refrigerator | 1500 |
| Central Air Conditioner | 3600 |
| Electric Water Heater | 4000 |
A.C. Rich estimates that the "Skylite" will save between 55% and 80% of the energy used by a conventional electric water heater.
During the period between 1986 when the federal tax credit was dropped, and the early 1990's, the fledgling solar industry suffered heavy losses. However, as environmental issues once again return to the forefront, more and more states are taking the initiative and offering incentives for environmentally friendly solar technologies such as A.C. Rich's water heater. The following table summarizes the pertinent tax incentives of twenty-seven states in 1993.
Note: Tax exemptions, are based on the cost of the system, therefore, a sales or property tax will not be levied on the cost of the system. A tax deduction is the percentage of the cost of the system that can be subtracted from your taxable income.
| State | Sales Tax Exemp. | Property Tax Exemp. | Income Tax Credit | Income Tax Deduct. |
|---|---|---|---|---|
| Arizona | X | |||
| California | 10% | |||
| Hawaii | X | 35% | ||
| Idaho | 100% | |||
| Indiana | X | |||
| Iowa | X | |||
| Mass. | X | X | 15% | |
| Minnesota | X | X | ||
| Mississippi | ||||
| Montana | X | |||
| Nevada | X | X | ||
| N. Hamp. | X | |||
| N. Jersey | X | |||
| New York | X | |||
| N. Carolina | 25% | |||
| N. Dakota | X | 15% | ||
| Ohio | X | |||
| Oregon | X | 35% | ||
| Penn. | ||||
| Rhode Is. | X | |||
| S. Dakota | X | |||
| Tennessee | ||||
| Texas | X | |||
| Utah | 25% | |||
| Virginia | X | |||
| Wisconsin | X | |||
| Wyoming |
In addition to the state incentives for solar technology implementation, several utility companies have resorted to Demand Side Management Programs (DSM) (See "Electric Utilities and Energy Efficiency" by the Energy Efficiency and Renewable Energy Network). The goal in DSM is to reduce demand, specifically peak demand, in order to mitigate the necessity of building additional, costly power generation facilities. Utilities are required to supply power to all the customers in a specified area, therefore, when demand exceeds maximum capability, a new plant has to be built or the utility must find a way to reduce demand. Therefore, several utility companies around the nation offer incentives to consumers for demand reducing technology such as solar water heaters. A summary of the programs that directly cut the purchase cost of a solar water heater are shown below.
Note: Grant programs immediately reduce the purchase cost of the system, while rebate programs return a percentage of the purchase cost to the consumer once a system has been purchased.
You need to decide whether A.C. Rich's system is superior, in terms of price and performance, to other alternatives. In your research, you should compare his system with at least one alternative. Other group members will be comparing it with others. The list of alternatives might include:
If you conclude that Rich's system cannot compete with alternatives nationally, could it compete in specific states that offer tax incentives or districts where utilities subsidize purchases? You might focus on a single state to illustrate the possibilities (see chart above).
The above image of the Sun was taken from a page by Calvin Hamilton. Here is the text that accompanies it: " This image was acquired from NASA's Skylab space station on December 19, 1973. It shows one of the most spectacular solar flares ever recorded, propelled by magnetic forces, lifting off from the Sun. It spans more than 588,000 km (365,000 miles) of the solar surface. In this photograph the solar poles are distinguished by a relative absence of supergranulation network, and a much darker tone than the central portions of the disk." If you want to see more, look at Mr. Hamilton's pages about the solar system