The following is a review of the general trends that I’m seeing in the renewable energy industries, with a description of what they are, specific citations when needed, and how these trends impact your business. I’ll be looking at the 3 forms of renewable energy that are most commonly used in residential applications, solar PV, solar thermal, and geothermal heat pumps.
Our focus is on helping small and medium size business, working to arm them with the materials needed to beat the big guys. We want to make sure that Joe the Solar Installer can go head-to-head with SolarCity, and win.
First, I’ll tackle solar PV and then address the other technologies in later posts.
Trend #1 – Driving Down Customer Acquisition Costs
As hardware costs are getting cheaper and cheaper, acquiring customers is becoming more and more the bottleneck of a the business.
A few interesting notes:
- SolarCity spent 44% of revenue on customer acquisition in 2012. That means for every dollar in revenue collected, $.44 was spent on marketing and sales. Don’t do this.
- A report by Berkley Laboratory released in December 2012 says that US installers pay on average $.67/watt acquiring customers, while our German counterparts spend $.07/watt.
- What’s unclear in the report is whether these costs are higher or lower in a competitive market, where more installers exist but more homeowners know about solar, or a newer market, where few installers exist but there is less buzz.
How does this impact your business?
If you cannot acquire customers, and if you cannot acquire them cheaply enough you will not stay in business. It will be wise to understand what the average customer acquisition costs are in your area then understand what your customer acquisition costs are. If they are above the average, something should be changed.
- Determine what your most profitable and least profitable sales funnels are. Eliminate the unprofitable one, double down on the most profitable, if possible.
- If you’re an electrical contractor or electrical distributor, you know 90% of the technical material you need to know, you just need to learn about solar but there is tons of policy, marketing, sales, and finance information you need to learn. Read more about how to position electrical contractors for solar growth.
- For more specifics, see Peter Toast’s article on Solar Web Marketing Best Practices, or Solar Fred’s article on how small solar companies can “out-market” the larger ones.
Trend #2 – Reducing Transaction Costs for Financing Light Commercial Projects.
There is plenty of capital for thousands of residential solar projects, and megawatt projects, but less attention is being paid to the light commercial space, an area where there is huge demand and potential. How many commercial projects do you have in your pipeline that you could close if you could finance them?
The investment in residential and MW projects has been led by institutional banks, they want to standardized the process and remove a significant amount of risk. The same has not happened for commercial solar projects.
Why have commercial roofs not seen the same financing as residential projects?
- Commercial projects in the built environment have more economic variables than residential projects. Every commercial roof is custom made, and vary greatly in terms of roofing and electrical equipment, compared with residential projects.
- The due diligence required for a commercial project is only slightly less then megawatt projects, but the revenue potential for an individual project is much smaller.
- For the above two reasons, it’s hard to put commercial projects into a standard due diligence process that each project can go through quickly and easily, each job tends to be custom from a legal and technical perspective.
- For the above two reasons, the transactional costs of financing a commercial project by itself can be significant. The total legal and accounting costs for a project, or fund, might start around $40k – $100k. For this reason, it’s clear MW projects are the low hanging fruit. It’s easier to spend $100,000 on legal fees for a 4MW, $20 million project, then $50,000 in legal fees for a 100kW, $500,000 project.
- Companies that are best suited to sell to commercial PV are companies that have existing relationships: think electrical shops, roofers, general contractors that have existing customers that own huge amounts roof space.
- The investor profile for light commercial is different. Institutional banks are investing in MWs of solar at a time, while commercial investors tends to be buying into 1 or 2 projects at a time. Investors in commercial projects tend to be to be private investors, small corporations, or real estate holding companies with passive income. This can make finding the right investor much more difficult.
- The contracts and risks are becoming more widely understood, and cheaper, which will reduce the cost to finance a project.
- If you’re a solar business owner, executive or manager that needs to learn how to finance commercial solar projects, and you want to get $40,ooo of all the contracts need to finance a project, look into HeatSpring’s “Solar Executive MBA Training”, or download our free commercial solar PV.
Are you positioned well and do you have the experience to sell commercial projects?
- Are you positioned to sell to commercial clients? You answer will be yes if you have an existing book of business. If you’re having trouble getting interest from clients, you need to be more sophisticated in communicating the financial implications of a project.
- If you’re serious about commercial solar, do you know how to value a project and screen a project quickly? Can you determine the profitable projects, for you and the client, quickly? hint – “payback” period has nothing to do with it.
- Do you know the different legal structure that can be used to finance a project?
- Do you know what tax efficient vs tax inefficient structures are and why an investor would select one structure over another?
- Do you know how to write a compelling executive summary of the investment/project so the investor will be interested?
- If you don’t answer yes to all of these questions, then selling, financing and finding an investor is going to be impossible or very, very difficult for you. In our Solar Executive MBA Training, we will provide you the information to answer all of the above questions, and provide access to mentors that have done what you want to do.
Trend #3 – Big Banks Using Debt to Finance Residential Solar, Competing with 3rd Party Financiers
There’s been a lot of buzz about 3rd party residential financiers in the past 4 years. Some think they’re the magic bullet, others not. It’s impossible to predict. There’s one trend that is clear. Larger banks are getting interested and comfortable in solar – offering capital to homeowners that want to buy solar.
There are pros and cons to everything, debt is attractive to homeowners for one large reason
- Debt can still be no money down, but the homeowner will save more money from day 1 and eventually own the system.
A few other notes:
- There are two banks currently offering capital for residential property owners GE Capital and Admirals Bank
- If you cannot find a good 3rd party financier to work with, and/or you tried working with one and didn’t like it – Try a bank.
How this impacts your business?
- By increasing the number of offerings, you increase your ability to sell to more clients. Some clients might demand 3rd party financing, while others want solar, don’t have the cash, but don’t want to finance.
Trend #4 – General Contractors Are Flooding the Solar Market, Making it More Competitive for Pure Play Solar Installers
There’s a battle going on the solar industry between general contractors and pure play solar installers. It’s true that the pure play solar guys, the ones that really loved the technology, kept the industry alive long enough to get policy in place that would increase growth, but it’s general contractors that are taking things to the next level.
Just to be clear, when I say general contractor, I’m referring to a general, roofing or electrical contractor where solar accounts for no more than 50% of their business. Pure play solar installers derive 100% of their revenue from solar projects.
It’s becoming clear that more and more general contractors are getting into the solar industry as fast as possible. It’s making life more difficult for pure play solar installers because property owners have so many options. This is a natural progression and it’s good for the industry, the key to both surviving is going to be positioning and focusing on their strength.
Why are general contractors getting into the business?
- All the numbers prove it, it’s a huge growth industry.
- General contractor’s customers are asking about it. You may turn down a job 1,2,3, or even 4 jobs, but you’re not going to turn down 10, $30,000 jobs.
What are the general contractors strengths and weaknesses that need to be addressed?
- Strength: they have lower customer acquisition costs because they have an existing book of business and can cross sell from other projects. “Already need a service upgrade or new wiring, have you ever considered solar?”
- Strength: They can turn down unprofitable jobs because they have other work to do.
- Weakness: They need to get good at sales and marketing. In the solar industry, most customers don’t come to you, you need to go to them.
How does this impact a pure play solar installation business?
- Double down on sales and marketing. Really understand your numbers and metrics in each sales funnel. You’re already better at this and it’s how you’re going to beat general contractors in the solar game.
- Double down on understanding the financial implications of investing in solar. Contractors tend to have to do a lot of learning about policy and financials, you’re already good at this. Make sure your sales team doesn’t use “payback”. Get lease and debt products if needed.
- Weakness: Keep your installed costs down. Use your volume.
Solar PV Trend #5 – More Transparency and clarity in the SREC Markets will Reduce Risk
2012 was a fun year for SREC markets, and by fun, I mean crazy and unclear. The industry is still trying to figure everything out.
Notable 2012 Experiences:
- Prices close below the Massachusetts floor price. Everyone wonders, does the floor even exist? It appears the gold standard is no longer.
- Many people start to realize that SREC holders must pay taxes on their SREC income, decreasing the effective value of each REC. Learn more here, “Are SRECs Taxable?”
- New Jersey Increase their RPS requirement in an attempt to increase SREC prices.
In 2013, I expect to see more stability and transparency around the SREC markets and here is why:
- As markets become larger, there will be less volatility. If the market is small and 10MW facility is put on line, that could oversupply the market, and prices will plunge overnight. As markets increases in size they will be less volatile because added supply will not impact them as much. The same 10MW coming online has much more impact in a market where only 100MW exists, compared to a market where 1,000 MW is online, all else equal.
- As more and more dollars get invested, more and more due diligence will be performed and things will become more clear.
- State and regulators will get better at communicating what is happening in the market.
How does this impact your business?
- More clarity and stability around SREC prices will remove risk for system owners, decrease risk will means more projects get build. If you’re in an SREC market, you need to be an SREC master. Make sure to study up, HeatSpring has a number of free courses that can help you.
- If you need to become an SREC master, take the Free SREC Course: Understanding SRECs.
Solar PV Trend #6 – Lower Installed Costs
Hard costs will continue to drop for the foreseeable future until the industry maximizing the economies of scale and becomes a true commodity.
This is simple, but you can’t expect it. The relationship has been found that when manufacturing capacity doubles (increases by 100%), the costs of the equipment decreases by 20%.
One of the things that lower manufacturing costs is doing is making manufacturers lose a lot of money. In 2013, expect to see a number of manufactures go out of business. Most manufacturers are losing money, and the only one that will be able to weather the storm are ones with huge amounts of cash in their balance sheets or ones able to raise outside capital.
How does this help your business?
- Decreased installed costs help the industry as a whole without helping a specific installer or distributor. It will help the general industry by simply making the technology more available to consumers.