How solar finance is driving solar businesses to change
26 Jun, 2014
At the risk of sounding like an old man with graying whiskers, I can remember giving a presentation more than a decade ago about how we needed to stop thinking in terms of capital cost and think about price per kilowatt hour when it comes to selling solar.
I could see that in other parts of the world, solar systems were becoming financial instruments, despite the fact that Australia was in the midst of the triple bottom line boom driving consumers and business to think green. It was therefore entirely logical to predict that successfully selling solar power would come down to its root’s; a financial competitor in lifetime, all-in energy terms not just an environmental nicety.
Environmental concerns waned and are only now starting to re-emerge as deep rooted concerns around carbon pollution surface again. However, the driving force behind solar today is its competitiveness; it’s ability to save you financially and environmentally. Ironically, as costs plummeted and the industry grew many solar businesses fell under its spell. Lowest price became the dominant factor; quality was assumed to be implicit and liability was assumed to be with the manufacturers who could not fail.
Whilst cost reductions resulted in growth, we are now faced with an emerging price to pay and an adjustment period is upon us.
Unfortunately, the quality of some products has been appalling and I am starting to have more regular conversations about how to handle growing warranty liabilities with solar retailers. At the extreme, we have seen fraudulently labelled fake products and safety switches that can cause roof fires.
The poor quality control and lack of diligence by manufacturers is clearly the root cause; but to be fair, buyers who demanded ever lower prices and failed to pay sufficient attention to details should consider how they influenced their own predicament too. As time passed cracks started to appear and the all-powerful Tier ranking got talked about a lot to the point it became a throw-away line used by all and sundry. Australia’s market, unlike others featuring larger projects which were financed, didn’t understand or value yield or quality and government drove politically motivated schemes aimed at buying as many votes as possible.
But now, we are in a rapidly festering pickle and paradoxically, one of our most iconic finance icons famous lines might be more profound than he realised. Aussie John’s catch phrase was “We’ll save you” and I’m starting to see signs that he could well be right in more ways than he could imagine.
Where finance really helped other countries was by enforcing due diligence on supply chain partners and monetarily valuing carefully analysed yield. Quality became valuable and attention to detail lowered risk and cost. There is a very good reason why solar costs are higher in almost every other country in the world.
This trend is now well and truly emerging in Australia in our rapidly growing solar finance market. I work with a number of finance companies today, assisting them to test the veracity of claims, conducting due diligence work and protecting them from future failures and let me tell you, the better ones take this stuff very seriously.
One of my clients often bring new brands and partners to me, looking for guidance and increasingly I am finding myself saying “not with a 100 pole mate; walk away”. Although this can be frustrating for everyone, so often I am faced with a simple reality that with the price gap being so small between Tier 1 and others, I wonder why anyone would bother taking the risk for a few cents of gain.
In fact I had this very conversation with a retailer recently and suggested that if they felt the price pressure was so extreme that they needed to go below Tier 1, they should simply stop offering those products with finance and purely do them as cash sales because there was no way I was going to support them being approved. Equally, there is a very strong focus on the vendors; (that’s you the solar retailer). Finance companies are increasingly looking for sophistication, understanding of the market, marketing panache and comprehensive business and safety compliance. My client reckons he knocks back more solar retailers than he accepts to control his finance risk and I fully support him in that.
Another important element of this equation is the warranty and more importantly the support behind it. Google “solar warranty and insurance” and hey presto, you can find a template for a solar panel warranty and global insurance, I’m sad to say. One supplier I checked on recently couldn’t even be bothered trying to keep the validity dates right on their insurance certificates on the International web site, despite assuring their solar retailer customer that the panels were covered. Fail.
In other cases, we have found utterly fraudulent insurance documents and in eight out of ten cases the warranty documents aren’t even compliant with Australian law, let alone decent. The ramifications of these things can be profound as one solar retailer described to me recently. His wholesaler supplier had gone bust and the solar manufacturer supplying them had also vanished – and now failures were starting to emerge. His entire livelihood is now at stake and although he realised he was liable, I have met solar retailers who had no idea that the buck stopped with them.
He asked me what he could do and I explained how more than a decade ago I used to explain to solar retailers that whilst solar manufacturers had an obligation to support potential warranty claims, so did they as solar retailers. I used to argue that like the manufacturer I worked for, they should be retaining a warranty support accrual and before my beard turned grey, that is what many did. Today however, the competitive pressure has forced many to wrongly assume that they could get away without accruals and it is causing companies into bankruptcy, as we speak. I suspect it could force some very, very large solar companies to the brink as well.
Now clearly finance has a cost and it doesn’t suit every customer or application. It’s also become categorically clear that crude financial products which apply zero due diligence and are extortionately expensive and which have dominated the market are finally starting to lose market share.
We are now seeing far smarter products, carefully tailored to our product and market which are delivering lower cost finance and better solutions. In fact, smart finance changes the whole sale proposition from selling a product, to selling a solution; it’s a different technique and requires a different sales strategy.
The reality is that finance is driving structural change in solar businesses.
Those who are adapting successfully are changing to selling long term value, not just pushing a quick sale based on the fear of rebates or FIT’s evaporating. They are no longer focused on pushing the technological features as a sales differentiator – quality products become implicit, embedded because the financier won’t accept anything less. Instead the focus switches to creating a better long term financial position for the customer – which is what drives many to look at solar in the first place.
The technological and quality focus becomes a back office function and there-in lie’s a big challenge because the majority of solar companies are from trade backgrounds and are very product-centric in their sales approach. Selling finance shouldn’t scare these types of operators, they just need to understand that the technology focus doesn’t have to be front-end focused and arguably, finance companies actually make them work harder to find better products.
One of my finance clients said to me recently “Nige; one of my vendors sells great volume at $2/Watt which has improved the profitability no end. They no longer try or need to compete at $1/Watt because they are selling a completely different value proposition. It’s completely changed their business, they are now growing again and their chance of surviving the ups and downs on the solar market have dramatically improved”
It has to be said of course that the cost of money and the drive towards quality is increasing the cost of solar, compared to cash purchases of less heavily scrutinized product.
I’m actually really happy about that.
Finance companies are having a more material impact on the quality of products and service than I have seen in decades and that is a bloody good thing. They are driving the focus onto lifetime energy cost and away from capital costs and that where we need to be.
They are creating new sales techniques demanding new business models and are setting a high bar for suppliers and consumers.
The evolution of intelligent finance is not easy money, its clever money.
This story is Part 1 of a 2 Part series on finance in the solar sector, stay tuned for Part 2!
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