ADVENT OF RESIDENTIAL SOLAR PV FINANCING: OPPORTUNITIES AND CHALLENGES FOR THE US INSTALLATION INDUSTRY AND EMERGING TRENDS

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1 ADVENT OF RESIDENTIAL SOLAR PV FINANCING: OPPORTUNITIES AND CHALLENGES FOR THE US INSTALLATION INDUSTRY AND EMERGING TRENDS Deep Chakraborty Centrosolar America Inc Fremont Blvd, Fremont, CA Abstract A new trend is clearly emerging in the residential solar market - approximately 70% of residential solar sales in California in 2011 were on a lease/ppa financing-based model. This trend needs to be understood in the context of the current challenges of the residential PV installation industry - specifically the overall cost roadmap and the key success factors required for residential PV sales and installing businesses to compete in the future. The key conclusions that emerge: as financed-solar takes over the residential PV segment, OEM/distributors will need to take a downstream role in simplifying the entire value proposition combining product and long-term financing as a seamless offer sold by the installer to the homeowner. Installers will also need to adopt a complete PV systems approach, in order to enable reduction in service costs and thereby grow faster with healthier business models. 1. Introduction The US Solar PV industry continues to grow at a steady pace, and the residential segment has grown at above 40% CAGR since 2008, with over 300MW installed in Assuming average system sizes ranging in the 5-7kW range, an estimated 50,000 homes adopted rooftop solar solutions in 2011 alone. Almost 50% of the market i.e. approximately 25,000 homes in 2011 was in California, which continues to be the largest residential solar PV market in the US. This market is served by over 1000 installers that are registered on the California Solar Initiative program. Besides California, residential solar markets like Arizona, New Jersey, Colorado, Pennsylvania, Hawaii and several eastern and south-eastern US states are gaining ground. MW 41% CA G R Figure 1: US Residential PV market A key trend that is emerging now is that residential solar is increasingly sold as a financed offer, either on a lease or a power-purchase-agreement from a third-party that owns this system on the rooftop for years. The homeowner therefore ends up leasing a generating asset or buying solar power generated by a third-party owner for long-period of time. Such a mechanism has enabled a transformation in the residential solar marketplace. The advent of third-party financing has removed the entry-barrier to solar PV usually a high upfront investment thereby making the entire offering now affordable to a new demographic with 1

2 lower annual household incomes. As shown in Figure 2, according to a recent study in the Los Angeles - Orange County region in Southern California there is a clear shift towards third-party financed residential solar sales. US$/Watt % of sales Figure 3: Total installed cost of residential PV Figure 2: Third-party ownership residential solar sales in Los Angeles / Orange County (Energy policy) Another research was done the Lawrence Berkeley National Laboratory has used a dataset of approximately 72,000 California homes to evaluate the impact of PV addition on home re-sale prices. Across a large number of hedonic and repeat sales model specifications and robustness tests, the analysis finds strong evidence that California homes with PV systems have sold for a premium of ~$17,000 over comparable homes without PV systems. Such studies increase home-owner adoption across wider demographics. 2. PV sales and installation : current challenges While the market for solar installations continue to grow, the full cost for installed solar in the US have been relatively stagnant. As shown in figure 3, it is interesting to note that while PV hardware costs have dropped significantly, the overall cost of installations remains high: still above US$6/W. When this cost is broken down as shown between hardware which includes all physical goods and services which includes all labor and overheads, it is clear that service costs remain stagnant in this industry. In comparison to other developed markets like Germany where residential solar installations are now below EUR 2.00/W at similar hardware prices, this suggests a significant disconnect between USA and Germany, on basic economics of the installation business. Upon taking a deeper look into the service portion of the installation business in the US, it is evident that significant efficiencies have yet to be gained. As shown on the attached figure 4, a typical US residential installation project requires several steps that are in addition to the core installation task. Several key steps are not under the direct control of the installer, as they depend on various approvals by external parties. Given the uncertainty on the length of such a process, installers have traditionally resorted to manage difficult steps of procurement and site-engineering activities in-house, and internalized much of the core operational processes linked to system design, sourcing, and inventory management. Such an approach is largely inefficient from an industry perspective, as it adds a layer of cost on top of the typical manufacturer / distributor value chain. Also, during periods of rapid price decline of PV modules that has been common in the last few years, installers are caught in the trap of carrying excess expensive inventory. Figure 4: Steps in the residential installation process 2

3 Due to advent of financing, additional complexities are now being added to the residential installation primarily in the area of sales processes. The key added steps include: A home-owner must now be offered an integrated sales proposal that shows year financing options, along with long-term system production and related energy savings estimates. The financing providers require homeowners to meet certain credit standards which in-turn requires the sales / lead generation strategies to have new levels of sophistication. The financing providers require the installation company to offer long-term maintenance warranties, in some cases for the life of the financing contract. Estimation of such costs upfront is often difficult given the limited market experience in this segment. The home-owner is often being marketed different financing options by a variety of players some that are pure-play financing companies, others that are installer-financiers or pure-play PV OEMs. Offers vary in terms of product content and warranties, and most often the homeowner is presented a long-term financing agreement by a financial intermediary that does not specify any module or BOS hardware details. This obviously points to a basic question: what is the role of the installation business long-term, in terms of its valueaddition in the overall value chain of residential solar? As shown in figure 5, each pillar of the solar value chain requires specialization and has its own success factors. PV module producers have a primary task of managing core technology issues, while downstream distributors often end up creating systems / packages and managing inventory allocation. A new breed of PV financing companies have emerged that aggregate large portfolios of residential PV assets, bundling operational and maintenance risk. The final but critical step is the residential PV installation business, that communicates the entire PV value proposition effectively to the home-owner, one home at a time. This core step makes residential PV market growth a largely organic process, as the channel sales process remains the key bottleneck. Figure 5: Residential PV value chain In any typical PV market, we often see examples where a single business undertakes several of the above core valueaddition steps. There are innovative examples of PV installation companies that are offering financing and PV financing companies that are selling directly to the endcustomer. In the end, there is no perfect business model, and more innovation is yet to come. With the advent of residential financed solar now, high quality installation capacity remains the key bottleneck. Of the ~1000 solar installers in California that were active in the residential PV segment, barely ~250 installers completed 50kW or higher in 2011, highlighting the fragmented nature of the channel. Such a small population of high-quality installers attempts to serve a market of the size of California with 8 million households, which at the current pace of ~25,000 installations per year will not be sufficient to deploy all the financing available in this sector already. There is a strong need for more high-quality installation businesses that can deploy more scalable business models for rapid growth of the residential PV sector. 3. Benefits from a complete-systems approach In order to approach a faster scale-up of the residential channel with the advent of third-party financing, the PV installation industry needs to evolve from sourcing components to sourcing complete systems. The entire process of designing, distributing, financing and selling PV installations could be fundamentally altered if the installation business adopts a complete systems approach. A few companies are already moving this way, and this is leading to the emergence of a new breed of solar installation 3

4 companies that focus on the core sales and installation tasks only, while leveraging a PV system financing platform offered by OEM and/or distribution vendors. Such installation companies operate at a higher level of operating margins, install significantly more residential projects annually, and are also able to successfully enter multiple new markets simultaneously through a more scalable approach to grow their business. As shown in Figure 6, all the core process steps in the life of a residential PV installation cycle are simplified with a complete systems approach: This shift in approach is being driven rapidly by two additional sets of drivers, besides simplified installation. Finance companies drive towards complete-systems as they: Require a complete system long-term warranty, ideally from single party to reduce O&M costs Require low long-term portfolio management risk, achieved through OEM-platform model Require complete system OEMs to stand behind their certified-installer networks, again made possible by training and certification standards enforced by a system-oem The sales quote from the installer references a complete system with OEM performance guaranty. This is perfectly optimized for the home-owner s energy needs that maximize savings. The site engineering drawings become standardized to a specific system type, ideally offered by the OEM / distributor on a standard template familiar to permitting bodies. The installer s task of component procurement for each project is now made redundant by a complete kit delivered just-in-time by the OEM/distributor, therefore resulting in overhead savings for the installer (in addition to savings from no warehousing at the installer) In the long run, post-installation inspection steps become more streamlined if the permitting officials recognize a system-level permit-ready standard The PV end-customer is also looking for a simplified transaction and driving the industry towards completesystems indirectly: Seek guaranteed production and/or savings, predicted best on complete PV system-platforms Demand for best-in-class service, which will require installers standardize procedures for longterm service based on system platforms 4. The path-ahead: PV Systems OEMs/Distributors Going forward, the industry can move forward through faster scale-up of the installation channel through more rapid adoption of the complete systems approach. Such a transition can be made possible through a drive towards standardization and complete-system based products by OEMs and distributors. In 2011, several OEMs in the US were already selling complete systems, and few PV distributors already offering small PV kits were able to enhance the content-level offered on such kits. As shown in figure 7, such an approach enables the entire PV offering to be sold in a manner that is very familiar to the end-customer e.g. automotive i.e. financing by OEMs and sold/serviced by local dealers. Solar should be no different in the long-run. Figure 6: Impact of complete PV systems on the residential installation process Figure 7: Key roles played by industry players based on the complete PV systems approach 4

5 Such a focused approach towards designing, distributing and selling complete PV systems will enable the PV OEM/distributors to focus on their key strengths: PV module production and technology improvement that enables improved system design/integration. Certification of complete PV systems to meet NEC code making permitting faster and cheaper. Focus on complete system distribution and financing as a one-stop provider to the channel. Offer of long-term warranty on complete system, not just individual components in the system. Drive system cost reduction through standardization of components/ design methods. Develop system performance monitoring tools. Manage full-system inventory management and logistics for just-in-time delivery to the job-site. Provide installers with robust point-of-sale IT systems with ERP/CRM integration. References 1. US Solar market insight, SEIA / GTM, 2011 Review 2. The transformation of southern California s residential photovoltaics market through third-party ownership, Energy Policy (42, 2012) 3. An Analysis of the Effects of Residential Photovoltaic Energy Systems on Home Sales Prices in California, Lawrence Berkeley National Laboratory, April 2011 In turn, installers that adopt such a standard and complete system offer can then streamline their business to focus on their key strengths: Improve customer acquisition scale through pointof-sale IT systems and co-marketing programs. Reduce customer acquisition cost through added scale, and from leveraging OEM-brand of system Focus on sales-force productivity and entering new regions/territories with a standard approach Standardize installation practices around systems. Improve cash-flow management through higher number of installations, leveraging financing platform for complete systems. Improve profitability through outsourced warehouse/engineering and reduced overheads. 5. Conclusion As financed-solar takes over the residential PV segment, OEM/distributors will need to adopt a downstream role in simplifying the entire value proposition to the homeowner combining product and long-term financing as a seamless offer sold by the installer. Installers will also need to adopt a complete PV systems approach, in order to enable reduction in service costs and thereby grow faster with healthier business models. 5