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Invention & Design

American Solar Network Module

This case was prepared by Michael E. Gorman and Wendy Warren, School of Engineering and Applied Science, University of Virginia, and Patricia H. Werhane, Ruffin Professor of Business Ethics, Darden Graduate School of Business Administration, University of Virginia. Copyright 1997 by School of Engineering and Applied Science, University of Virginia, and University of Virginia Darden School Foundation. All rights reserved.

• Introduction
• Brief Review of the Solar Water Heater Industry
• The Background of Albert C. Rich
• The Solar "Skylite"^TM Water Heater System
• Problem Statement
• Solar Water Heating Patent
• Exhibit I: Diagram of the Solar "Skylite" Water Heater Design
• Exhibit II: Summary of Energy Use and Costs
• Exhibit III: State and Utility Incentives in 1993
• Bibliography

A printed version of this case may be ordered from the Darden Case Bibliography.

Introduction

A.C. Rich, an inventor and entrepreneur, has come up with a design for a new solar water heater. He argues:

"The average home water heater emits over 5.8 tons of carbon dioxide into the atmosphere each year (when the electricty is produced by coal), which is more than what the average autombile emits! Electric water heaters also produce over 850 pounds of nitrogen oxides and 91 pounds of sulfur dioxide--both major contributors to acid rain and smog. A solar water heater can prevent over 4,000 pounds of these pollutants from being emitted."

Rich also claims, "If 50 percent of the homes in the United States had a solar collector, it would eliminate twelve 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."

However, as of 1992, A.C. Rich was a long way from being able to accomplish this goal--so far that he had to consider moving or going out of business.

Brief Review of the Solar Water Heater Industry

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 1930's, but was replaced in the 1940's 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, "I don't think in our lifetime we'll see the depletion of the product."

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, forcing Americans 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. (A tax credit is a reduction in the total amount of taxes owed to the IRS. It generally saves more than a deduction, which is applied only to the taxable income, not the total amount owed.) 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. (An active system seeks to produce electricity from the sun with which to heat the water, and a passive system uses solar energy to heat the water directly.)

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. While reliable, the high-priced cost of these systems, together 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.

The Background of Albert C. Rich

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."

In July of 1977, at the age of 27, 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 by 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 founded AC-Rich & Sun--a solar sales, installation, and service company. During this time, he also worked as a consultant and trainer for companies entering the solar market. Some of Rich's work included installing the first two solar systems for the United States Navy, and holding professional solar sales and installations seminars.

In 1983, Rich became the district manager for SEARS Solar Systems in Herndon, Virginia. Over the next year, 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 at the Herndon location. Unfortunately, the market for solar water heaters at SEARS eventually ceased. As a result, Rich began to repair the systems he sold, and started researching for innovative ways to market solar water heater systems.

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." Rich was challenged to design a system that would be attractive, inexpensive, easy to install, and dependable. 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 aesthetically pleasing to the eye. AC-Rich & Sun began work on the solar "Skylite^TM" water heater in 1988. His second company, American Solar Network, Ltd. (ASN), was incorporated on February 2, 1989, in order to further develop and manufacture the new system.

The Solar "Skylite" Water Heater System

When Al Rich decided to design his own solar water heater, he asked himself, "Is there a need?"as well as ,"What do people want?" In Rich's opinion, the answer to the first 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." This customer feedback helped to answer his second question. 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 his first patent application. 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 design. An overview of the solar "Skylite" water heater design can be found in Exhibit I.

The system 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 solar "Skylite" water heater does not directly heat the water a family uses; 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 controller (2) triggers a pump (3) which circulates the heated water through a heat exchanger in 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. (Note: the above numbers refer to parts of the diagram found in Exhibit I). 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. Instead, the water is forced through the solar collectors absorber. (For more details on this and other aspects of Rich's system, see the copy of his patent. 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, and, in his opinion, he accomplished this. 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 the house on which they were mounted.

Rich had to evaluate his product and situation. If he was to succeed, he had to demonstrate to customers that he had an enivornmentally sound and economical design. He was also pursuing the idea of moving from Virginia to an area where subsidies (such as loans, fiscal incentives, tax deductions, etc. to induce the use of environmental technologies) could greatly reduce the cost of his system to customers. Otherwise, he feared he would have to give up his dream of putting active solar technolgoy on thousands of homes.

Problem Statement:

If A.C. Rich is to succeed, he must demonstrate that he has a sound design and that it is economical. He must also decide whether to remain in Virginia or move to a state where subsidies (such as loans, fiscal incentives, tax deductions, etc. to induce the use of environmental technologies) are offered to greatly reduce the cost of his systems to customers. Furthermore, one can look at his situation and apply the design principles of William McDonough, Dean of the School of Architecture at the University of Virginia. (Please read A Centennial Sermon: Design, Ecology, Ethics, and the Making of Things and The Nine Hannover Principles to learn about his principles.) Imagine William McDonough were asked to evaluate Rich's design using the standard design criteria of performance, aesthetics, and cost, but also adding 'environmental intelligence'. As seen in the sermon, he uses phrases like "waste equals food", "work from current solar income" and "cradle-to-cradle, not cradle to grave" to describe what he means by environmental intelligence.

Given the limited amount of time you have to look at this case, it is not practical to conduct a thorough analysis of all of the components of A.C. Rich's system; however, it is possible to imagine how McDonough would begin to consider Rich's system in terms of his design criteria. Is Rich's design attractive? Does it produce any wastes that are not biodegradable? How long will it last, and what will happen to it after its effective life is over? Do you see any ways in which it could be improved?

Regarding cost specifically, consider that Rich's goal was to manufacture 4,000 systems a month in Virginia, as the large manufacturing volume would decrease the manufacturing cost of each system to about $1,000 (no subsidies were available). In 1992, he was actively pursuing the possibility of moving from Virginia to an area where subsidies could greatly reduce the cost of his system (see Exhibit III) to customers, thus potentially increasing sales and revenues for his company.

Summarize your sense of Rich's design and his business prospects by deciding whether he should abandon this project, move to a different location, or stay in Virginia (see Exhibit III).

Exhibit I: Diagram of the Solar "Skylite" Water Heater Design

Exhibit II: Summary of Energy Use and Costs

It costs 8 cents per kilowatt hour for electricity on average in the United States. Shown below are four of the largest energy consumers in the average household, led by the electric water heater.

A.C. Rich estimates that the "Skylite" will save between 55% and 80% of the energy used by a conventional electric water heater.

Exhibit III: State and Utility Incentives in 1993

During the period between 1985 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. As stated previously, a tax credit is a reduction in the total amount of taxes owed to the IRS.

X - State has the incentive described.

In addition to the state incentives for solar technology implementation, several utility companies have resorted to Demand Side Management Programs (DSM). Through DSM, utility companies can either buy and install or provide financing for the purchase and installation of solar systems. Studies sponsored by utility companies have revealed that the use of solar energy can reduce peak power demand, thus reducing the need to build new and costly power-generation facilities to adequately supply power to all customers in a specified area. 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.

Grant Programs: Atlantic Electric in Pleasantville, New Jersey - up to $500. Northern States Power in Minneapolis, Minnesota - up to 50% of cost.

Rebate Programs: Eugene Water and Electric in Oregon - performance-based from $200 to $400. City of Austin, Texas- up to $250. Madison (Wisconsin) Gas and Electric - performance-based from 10 - 50% of cost. Sacramento Municipal Utility District (SMUD, in California) - $1,000 as of 1991.

Bibliography:

Allred, Johnny, et al. An Inexpensive Economical Solar Heating System for Homes. Washington: U.S. National Aeronautics and Space Administration, 1976.

Plante, Russell H. Solar Domestic Hot Water. A Practical Guide to Installation and Understanding. New York: John Wiley and Sons,1983.

Shirley, Larry E. and Jodie D. Sholar. "State and Utility Financial Incentives for Solar Applications." Solar Today. Volume 7, No. 4 pp. 11-14 (July/August 1993 issue).

Solar Energy Research Institute, Engineering Principles and Concepts for Active Solar Systems, New York: Hemisphere Publishing Corp.,1988.