Solar - Understanding the solar industry

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What are the players?

  • customers
  • installers / dealers
  • financiers / banks
  • tax equity investors

How do solar installers make money?

Installation (or dealer) business earn profits much like any other contractor does, by finding customers and getting them to pay for an installation of equipment.

How does a financier / bank make money with solar?

Financing business earn money by investing money in solar system up front and collecting fees over a long period of time. A financier either give the homeowner a loan to pay for the solar panels and installation cost, or the financier pays for the solar panels and installation, retain the ownership of the solar panels, and lease the solar panels to the homeowner.

Some companies, like SolarCity and Vivint, are vertically integrated in these business. Others, such as Sungevity, acquire customers and provide financing but rely on others to do installations.

What are the factors involved in a financing business?

  • The financier's cost for the solar system: This is what the financier pays the dealer / installer for the completed solar system. Some states are more expensive to operate than others. Some houses are more expensive to build on than others. Financiers also pay installers more when the installer does the customer acquisition. There are a variety of federal and state incentives that can effectively reduce this cost. Taking advantage of the federal incentives is complicated and done with so-called tax equity. See
  • Revenue the financier collects over time: As part of PPA or lease agreements, each month consumers usually pay something like 10-30% less than they would have paid to their utility if they did not have solar. Therefore, what they pay varies a lot between states like Hawaii, where utility prices are over $0.30 / kWh, and Texas, where there are about one quarter of that. In addition to customer revenue, financiers also may be entitled to performance based incentives or to earn SRECs, which they can then sell.
  • The financier’s cost to operate the solar assets: These are costs like billing, repairs, and insurance for the solar systems. Technically, the solar systems are often owned by joint ventures between the financier and tax equity investors, but the financier usually takes operational responsibility for items like those above. The joint venture typically pay the financiers somewhere around $25 / kW / year to take responsibility for these activities and their costs. We have seen these payments range from $10-50 / kW / year, but note payments from the fund are not necessarily the same as the financier’s cost to perform the activities.
  • The financier’s cost to run its business: Finally, we have the cost the financier has to run its own business. These include the cost of project finance professionals who can source and negotiate investments for project financing, such as from tax equity, cash equity, or debt providers. These are the same folks who will work on any sort of securitization. The legal expenses of such a business are significant, too. First, there are the expenses associated with negotiating and structuring investment deals. Then there are the fees associated with making sure leases and PPAs are legal in the various jurisdictions where the financier wants to operate. Third, many of these business are not wallflowers when it comes to government relations. Companies like SunRun, SunPower, and Clean Power Finance also have significant expenses associated with marketing to and working with a number of partner organizations, each of which has their own preferred way of doing business. Some finance companies do consumer marketing as well. We think people often underestimate these costs. SunRun and CPF each employ on the order of 100 people. If the fully loaded cost of each of these employees is $150,000, that suggests at least $15M per year in such expenses. Performing these tasks is probably somewhat less expensive for SolarCity, Sungevity, and Vivint, who don’t have to deal with the complexities of working with several dozen partners. However, even if the expense is 50% of that at independent finance companies, the cost of running such an organization is substantial.

What is the average return on investment for a financier?

The estimate return on investment is around 8 to 11 percent in 2014. These have been decreasing over the past few years.

Is 8 to 11% return on investment profitable for a financier?

Whether 8-11% is a good deal for the financier depends on its cost of capital. If a financier’s cost of capital is 10%, the net present value of its investment is essentially zero. On the other hand, if its cost of capital is 5-7%, the NPV of each solar system is several thousand dollars.

Why is solar sales hard?

The purchase of grid-tied solar is never urgent. There is no particular reason homeowners have to buy now and not next month or next year. The lights will stay on in any event, and we have other things to do! On the other hand, if your roof is leaking or it is 100 degrees in your house, you are unlikely to put off calling for a year.

This is why the cost of customer acquisition is so high in solar. Customers have to be found and sold to. They have to be convinced to act now instead of later. It’s a complicated sale and often requires making a 20 year commitment. Fundamentally, then, dealers with a differentiated, cost effective way of reaching customers and getting them to act will be able to earn returns in excess of the industry average.

For example, dealers like Vivint and Galkos have done very well with door-to-door canvassing. However, it seems like virtually every dealer is canvassing now, albeit often not well. It remains to be seen whether firms can develop a sustainable advantage through marketing execution.

Another question is whether firms can leverage an existing customer base to get a proprietary advantage. For example, could telecom firms like DirecTV or Dish Network also sell solar power? Could competitive energy suppliers also sell solar, or solar companies also sell retail energy? Could Vivint Solar or ADT leverage their alarm monitoring customer bases?

What are the frictions between dealers and financiers?

One caveat to this is that there is considerable operational friction between dealers and third-party finance providers. Dealers regularly complain about the paperwork back-and-forth and unpredictability of timing of financiers’ responses. There is even extra work, as dealers make a system design that then must be reviewed and approved by their finance provider. Dealers with their own financing capability may avoid this friction.

Why does scale helps improve core hardware cost?

According to our research, large dealers typically pay $0.19 / Watt less for standard crystalline silicon modules and inverters than small dealers. Assuming a net cost benefit of $0.10 per Watt after the cost of internal distribution, large dealers should have a two percentage point advantage in operating margins simply from this purchasing effect.

Beyond the obvious fact that as dealers grow their purchasing costs improve, this also suggests that dealers that have also have significant commercial, utility, or distribution operations should have a cost advantage over other companies with similarly-sized residential businesses.

Why does scale not differentiate operational efficiency between large installers and small installers?

One of the most surprising things we’ve found in our work is that large dealers have essentially the same installation costs as small dealers when you exclude modules and inverters—they don’t seem to get significant operational efficiencies from their scale.

We’ve found three reasons for this. Large dealers do no better than small ones at permitting and interconnect—probably because these areas are so balkanized they don’t benefit from centralization. Second, large dealers spend more on project management and certain other non-core installation labor expenses, probably reflecting the challenge of managing multiple remote branches. Finally, large dealers spend more on vehicles, freight, and tools. This may reflect the diffusion of responsibility across managers in large organizations. In a small dealer the owners sign every check.

What this tells me is that I’d rather see a dealer with double the market share in a particular region than one that has the same scale but that is spread out geographically. Such a dealer would avoid the overhead of running far-flung operations, allow the owners to keep a close eye on expenses, and perhaps gain some efficiency in dealing with the local permitting and utility authorities.

The counterintuitive conclusion that scale doesn’t yield operational efficiencies, though, also suggests that this may be an area where large dealers have further opportunities to improve. They should be able to benchmark across branches, standardize system designs, and reduce BOS hardware and labor expenses relative to small dealers.

What is typically included in labor cost?

Our labor cost includes all the labor required to do the installation, including site survey, design, permitting, and project management, in addition to the labor cost incurred at the home.

How should we price our system?

We would all do well to study Apple. They have always had more expensive stuff, but it has been sleek, desirable and durable. And now they are the most valuable company on Earth! My solar company prices our systems to ensure quality installations (paying workers a living wage, having health benefits, not rushing jobs, etc.). We also price, with the intention of being around for a long time to service systems and honor warranties. See

What is included in soft cost?

Soft cost include administration, marketing, consumer education, labor, shipping, permitting, grid connections, and everything else other the actual cost of the solar panels.

What will it take to drive solar adoption?

  • lowering manufacturing cost
  • lowering soft cost
  • eliminating inconsistencies in local permitting

What are the problems facing the solar industry?

  1. Resistance from utilities
  2. Overcapacity and falling price lead to smaller profit margin, which lead to cutting cost on the quality side.
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