Solar for $1/W – really?

28 Mar, 2014

Can you get a solar system at under the magical $1/W? You betcha. But I am increasingly of the view that systems priced at these levels are either built with smoke and mirrors or there is a magic formula that a very select number of companies have managed to find.

If you shop around you can find a surprising number of offers from a wide variety of companies at $1w or even less. A consumer wrote to me yesterday about one such offer and my advice was blunt; don’t do it.

I listed a bunch of reasons, but in the simplest of terms my view is that any solar company selling at this level is extraordinarily unlikely to survive in the medium term (if not short term), making it a bad long term investment.

Now to be clear, low cost solar at this price (or better) is clearly a wonderful thing for the growth of our industry; its been talked about as the “tipping point” for PV parity for decades. So I want to see it as much as anyone else and we need to get there. However, pricing systems at this level before we are truly able to do so in a financially sustainable way has only two possible outcomes in my humble opinion; bankruptcy or customers getting junk products and services.

If there are any solar magicians out there who would like to share their secret formula with me for how to do it well at this price, I’m all ears. I looked (again) at a bunch of data points to see where things are up to and see if I could unlock secret formula myself and this is what we found.

Up until late last year, the Clean Energy Regulator used to publish data on “out of pocket expense” (OOPE); the net PV price after STC’s and fully installed. It was an awesomely powerful data set because it was’t a hypothetical price, but a sold and installed price; real money.

Typically, the CER’s OOPE had hovered around $2/W, which was just a little higher than average pricing that was seen in the market, highlighting teh difference between what we see advertised versus what people actually end up paying. Since their last publication, foreign exchange rates have gone the wrong way and PV prices have increased.

Solar Choice also regularly publish sample data from offers that they receive from their network of installers. Their latest data was published in March and historically correlates with CER data very well so its a powerful data sample too, although the difference is it is quoted rather than installed price. Their data shows a clear increase since late last year; evidence that the majority of system offers have risen since the final OOPE release and confirming the trend we believe has happened.

So what on earth is going on?

I re-ran some numbers (as I tend to do) based on a survey of installation companies on system price that we collected late last year. No matter how hard I tried, I couldn’t arrive at a net price under $1/W net, even using the very lowest component prices that we got as samples. So I reduced them by all by 10%, despite the fact that prices have actually increased and I still couldn’t get there. This assumes that the lowest quality (and cheapest) products are used, installers are paid a pittance and gross margins are less than 10%. Still couldn’t get there.

Then I thought, maybe I’m out of touch, maybe my data is wrong, so I called the largest wholesaler in the country and asked them if it was possible. “Not a friggen chance, Nige” was the reply. “We are increasingly contacted by customers saying you have to do something; we are getting beaten by price and you are the biggest buyer, so c’mon, do something”. Their response was that it makes no sense because their margins are so low already.

To add to the research mix, totally by chance, I was lucky enough to meet with a researcher from the Rocky Mountains Institute this week. The RMI was founded in 1982 by Amory Lovins who is a legend in sustainability and established the RMI as a dedicated research, publication, consulting, and lecturing institute in the general field of sustainability, with a special focus on profitable innovations for energy and resource efficiency. It was Lovin’s who first inspired me to consider energy when he was a guest speaker at an event I attended 24 years ago.

In recent times, RMI have been looking at the “soft costs” of solar; the non equipment related costs, with the aim of helping reduce solar system costs in the US where they are a much more significant component of system price. We had a great chat about how different the cost build up is in Australia and they are presently touring the country trying to learn how Australian solar companies can do solar so much cheaper then US companies. Interestingly, my take away was that US solar companies are much more focused on profit than many Australian solar companies!

So, costs are up. Sales are down. The data we have says it’s not possible. Why is it happening?

There are three possible reasons.

The first is that companies selling under $1/w have a magic formula, which the remaining 99% of the market hasn’t figured out yet.

Perhaps they can buy everything cheaper than everyone else by buying on the spot market for clearance stock, trade STCs at a higher price and their overheads are incredibly low. Maybe their cost of customer acquisition, administration and compliance costs are staggeringly well refined. It’s possible but highly unlikely and at a minimum, as precarious as a house of cards.

The second possibility is that they are happy to run at a loss to get volume. Businesses do that from time to time and it’s a legitimate strategy if it has an end game or can be subsidised by other revenues and margins through diversity.

It’s the big worm approach; low prices attract customers, then you up-sell like mad, praying you won’t actually have to deliver at that low price. The problem is, low prices establish a customer expectation which can drag the whole market down into a price war.

But frankly, I don’t buy this strategy . We are in a market with declining volumes and declining prices. In a year, you’ll sell the same volume for 5% less revenue if things keep heading the same way. If you sell with no profit today, in 12 months, assuming the same effort to sell, you margin dollars will be less per sale. It’s not rocket science.

The third possibility, and one I fear, is that too many solar businesses don’t understand their real costs and think they will make a small profit at ultra-low prices, because they don’t understand what it takes to really do the business properly. Proof? The survey we conducted late last year sought to break out costs in detail and a common response was “Wow, I have no idea what (for example) my customer acquisition cost is, I should look at that!”

The most prevalent example of this is in commercial systems where I see prices just get lower and lower and lower under the false assumption that scale equals lower cost. All things being equal, its true, but anyone who has spent months courting company directors, producing endless iterations of CAD drawings, presenting option after option, paying engineers and realising that grid connection approvals will cost tens of thousands of dollars knows it blows out quickly.

Complexity sucks up scale benefits faster than an angry death-eater.

So, here’s my thinking.

1) Companies who promote at $1W or less need to up-sell like hungry dogs or they will go bust. Competitive pressure is making up-selling harder

2) Companies who sell at $1W and don’t up-sell will dig a hole that they can’t get out of and go bust and or, the house of cards will tumble one day (remember Unleash and Clear?) and then they’ll go bust or, the warranty and quality issues will send them bust.

3) Companies, who recognise that margin dollars need to increase as revenues and volumes decline will struggle, sell less but make more margin dollars and probably survive. If you are clever and have a new angle, you might even prosper and take market share.

Whilst things are clearly not easy, the opportunity today is for our market to innovate, to add value, to increase revenue and more importantly, to increase margin dollars. There are many ways to do it with products, services, and value.

One thing is for sure, any-one can buy a bucket of fat worms, but it’s a short term and simple approach that without exception, has failed miserably in this industry to date. I am boggled that companies continue to line up at the worm store along with other desperate souls then throw their lines in the water together.

My grandfather taught me decades ago that fishing somewhere else, with a different bit of bait makes a whole lot more sense.

Post expires at 4:54pm on Friday March 27th, 2015

About the author

Nigel Morris
Nigel Morris

Nigel is the Director of SolarBusinessServices. After almost 20 years working for other companies SbS Director Nigel Morris, established the company in 2009 with a view to providing other organisations with the benefits of his wide experience in the renewable energy industry.

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9 Comments

  1. March 30, 2014

    I’ve been offered $1 a watt on 5kW from Truvalue solar. I think their business plan is to try and force customers to pay an annual service fee in order to maintain warranty currency. This of course is in conflict with ACCC/Consumer and competition law as a reasonable person would expect 15 years+ out of a solar system without needing any maintenance. So I think if enough customers pay them (I think it is $300) an annual service fee that’s where they’ll earn their clip.

  2. March 30, 2014

    Brilliant article. I was as perplexed as you were as to how the high turn over low cost companies can continue survive. But the answer is that they can not. The confidence inspiring full page adds of today will become the liquidators sale adds of tomorrow. Quality service, quality install, quality product will triumph in the end! Brett

  3. Nigel Morris
    March 30, 2014

    Thank’s for your comments guys.

    Annuities for system maintenance are a fascinating topic in them self.

    Interestingly, as financed sales expand ongoing revenues with lower upfront costs could actually solve problems for consumers and solar companies. However, the future security of the supporting company and quality of components becomes essential in that case. Monitoring, data flows and good contracts are vital.

  4. March 31, 2014

    With a couple of notable exceptions, there are generally two types of solar companies. Good Ones and Cheap Ones. With costs of installing always increasing due to labour, insurance and other overheads, I wonder if $1/watt will ever be a true reality

  5. April 01, 2014

    Nigel! Thanks for this awesome, insightful piece. Sounds like you might have cracked the code re: why Australian solar system prices are so low. I wonder if the RMI guys left the country more perplexed than they were then they arrived.

  6. April 02, 2014

    Dear Nigel,

    Constructive educational article. Well done again.

    Regards

    Richard

  7. April 02, 2014

    Hi Nigel,

    Well after 30 years doing Solar and being shown by guys like your self how to get the recipe right we do wonder down here in the Land Of The Long White Cloud how these operators can offer these low prices also who is going to service the problems if/when Manufactures are no longer around. Here in NZ we have a Consumer Guarantees Act that suggests the seller is responsible to the End User when products fail, from my observations if the products are not up to the job 25 years is a long time to carry the can.

  8. April 16, 2014

    The solar choice surveys only show a very slight rise for 1.5kw and 2 kw systems. 3,4, 5 and 10kw systems all showed a clear and ongoing fall in costs with the average cost of a 5kw system now $1.70. Saying that the solar choice surveys shows a clear trend to increased prices overall is cherry picking at best and openly misleading at worst considering the opening paragraph of their latest report.
    “Between February and March, average 1.5kW and 2kW solar PV system prices continued their steady rise in all cities included in the PV Price Index except for Adelaide, while pricing for 3kW, 4kW, 5kW and 10kW prices remained steady or fell across the board.”

    Is $1 per watt sustainable or realistic right now? Absolutely not, is the overall trend towards a slow but steady fall towards that level for rooftop solar continuing? Absolutely.

    • Nigel Morris
      April 17, 2014

      Hi Rob

      Good feedback thanks. Bear in mind that average solar system sizes are falling slightly due to lack of export tariffs.

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