Barry Cinnamon wanted to illustrate how a small residential solar installer could profit while selling $2.00-per-watt solar. But he couldn't make the numbers work at $2.00.
So, his presentation became “What Happens When Home Solar Costs are $2.50 per Watt?” when he spoke at the IEEE PV chapter in Palo Alto, Calif. last week. Cinnamon has worked in the solar-installer long tail most of his solar professional life.
Not long ago, the residential installer industry was dominated by small shops, many of which had converted existing business like home improvement or roofing to focus on the emerging field. But the advent of new financing options allowed for massive VC-funded installer growth.
SolarCity, the nation's residential solar leader, installed more than a quarter of all U.S. residential PV in 2013. The companies filling the No. 2 through No. 6 spots in the rankings grew from 15 percent to 20 percent in the period 2012-2013.
As Andrew Beebe of Obvious Ventures just wrote, “We are now about to witness a reversal of this consolidation and enter…'the revenge of the long tail,'” adding, “This long-tail group is precisely what we need to create a more resilient, dynamic and customer-centric industry.”
Here are the highlights from Cinnamon's presentation.
“A strong installer in a small market”
“I found that the most profitability you can achieve as a residential installer is just being a strong installer in a small market. So those are the two things I do. Spice Solar is a technology company; we sell to other installers all over the country. Cinnamon Solar is just your little local residential installer.”
Citing GTM Research figures, he said: “We're looking at some pretty rapid growth, in excess of 6 gigawatts a year of residential installations by 2020.” Then he added, “These predictions were rock-solid valid — until November 8th.”
“What's happening in the installation business is that the module costs are coming down a lot, the overhead's coming down a little, but the labor costs haven't changed that much. I've looked back at labor data that I had from 10 years ago and it's still about the same per watt. The racking costs have come down a little bit; they haven't changed a lot. So what happens is, the installer margins are getting squeezed because the top-level price is coming down, but a lot of these costs just don't change.”
According to Cinnamon, “Realistically, in 2016, the average residential installation costs are about $3.50 per watt. Now, if you look at the financial statements from some of the publicly traded companies and you're a financial genius, you might be able to figure that out, but it's very hard to determine what that is. But I can tell you, you look at data from GTM, you look at data from NREL, it's about $3.50 [per watt].”
He added, “At Cinnamon Solar, we're doing more and more maintenance because, first of all, inverters that companies like mine put in 10 years ago and 15 years ago, they're failing, they need to get replaced. People want to remove their arrays and fix their roof and put the array back on; the modules are still fine.”
“But it is a good business, because every single one of those customers for whom we do maintenance becomes a referral for us, and referrals are kind of the key to being a profitable installer. Five years from now, the installers that are in business are going to be doing an increasing percentage of their business on maintenance, and you'll kind of see what happens to other mature industries that are analogous with solar, like HVAC.”
[Maintenance in red]
Inverters in the long tail
Cinnamon pegs his inverter cost at $0.45 a watt from a blend of his vendors. “My company installs mostly SolarEdge right now, SMA string inverters, and once in a while Enphase microinverters. When I look at my fully loaded freight costs including monitoring, an SMA inverter is around $0.37 a watt, a SolarEdge inverter is about $0.47 a watt, and — this number surprised me — the Enphase inverter is $0.67 a watt. Now, the prices you hear may be lower because of special incentives and rebates; I'm not going to get into all the kickbacks — market development funds that are out there bring those costs down a lot, but the inverters are still kind of pricey.”
“And there's tremendous potential for companies like Huawei to come out with really cheap inverters,” said Cinnamon, adding, “They make good stuff, but is it going to work with the monitoring and the battery systems and have all the capabilities that we want?”
“When I look at the average cost of quality racking with grounding and array skirts and everything you need — splices, good hooks or clips — it's about $0.21 a watt. Other parts, components of electrical boxes, wiring, conduit, nuts, screws, tools — that's up to $0.12 a watt.”
The real cost benefit of module efficiency
“As the efficiency of the module goes up, if the module price doesn't change, then you see significant savings to the customer. A rough rule of thumb is for every 5-watt increase in the module output, if you go from a 300 to a 305 watt module, if the module price doesn't change, the customer can get a system that costs $0.04 per watt less. So, there are some significant savings, and that works kind of in the band of 250 to 350 watts. Higher efficiency really reduces cost, but the caveat is that higher efficiency really reduces the cost to the customer only if the cost of the module doesn't go up commensurately.”
Acquiring customers in the long tail
“When I look at my average labor costs for doing a residential installation, even seven or eight years ago, it was still $0.50 a watt. You could call up an installer and say, “Hey, I've got a bunch of solar panels, I got my permit, I got everything to go, can you just send a crew over to put it in, and they'll say, '$0.50 a watt.'”
“For 10 years, I've been specifically trying to reduce the customer acquisition cost for my residential installation companies. What I found when I grew Akeena from four guys and two trucks to offices all over the country — the bigger I got, the higher my customer acquisition costs got. I thought it would be scalable; it's not. Overhead on that basis is not either. When you look at customer acquisition costs, there are huge differences between customer acquisition costs at the big public companies that are driving top-line revenue, some of those costs are going to be $0.75 to $1.00 a watt.”
“I think what's going to happen with the customer acquisition costs is that they're going to start coming down, not because we found a better way to find customers, not because of technology and web funnel sites and direct mail. It's going to change because the business model in the solar industry is going to evolve more toward local installers who, by necessity and inherently, have lower customer acquisition costs.”
Engineering, permitting, software and monitoring
Cinnamon sets engineering and permitting costs at about $0.09 a watt.
“I used to have a room full of engineers and project managers, and their entire job was to take the sketch from the salesperson, who would usually go up on a ladder with graph paper and sketch it out and then turn it into a drawing, and then try to get approval from the customer that it's OK, then get the building permit. And the cost per job, when I looked at my overhead for all those people and how many permits they actually got, it was astounding. It was like, way over $1,000, sometimes $1,500, sometimes $2,000, because these permits would take time, they go back and forth, take turns.”
Cinnamon said he saw a lot of good come out of the DOE SunShot program, particularly in the field of software that helps installers with design and permitting. He noted that a company he worked with, Greenlancer, had a web-based form that allowed an installer to “submit a picture of where the solar is going to go on the roof, it's usually a satellite photo, there'd be a sketch of where the modules are. You put some parameters about the job, the modules, the racking, the inverters, the customer's name, boom, boom, boom. In two days, they send back a permit, less than $250, almost always perfect. If there's a change, they make it for free. So there are some areas in the solar business, residential and commercial, where outsourcing is absolutely terrific, and this is one of them.”
“In my experience going back to 2001, the most common cause of a customer service call, without a doubt, talk to any installer, is a problem with the monitor. The system is still working. The inverters are still working. That green light is on on the SMA inverter. All the Enphase inverters [are working]. But the monitoring is not working. Enphase just wasn't able to really solve that monitoring problem as well as SolarEdge was. I think the reason is Enphase used powerline communication over an AC line — it's noisy. And then they'd use the home's internet connection to transmit the data. SolarEdge took a different approach. They communicate to the optimizers on the back of every module though the DC wire so there's [less] noise.”
5 cents per kilowatt-hour
“So in 2021, let's just assume that it's $2.50 a watt, as long as we put the system in before the end of the year, so you're looking at 5 cents a kilowatt-hour.”
The question now becomes, “Where can you have a profitable business model when the selling price of the system is $2.50 a watt and electricity is 5 cents?”
“If you look at the HVAC business, it's kind of the same. If you talk to an HVAC company and say, 'I want to put air conditioning in my house,' you're looking at a cost of about $10,000 to $15,000 for the equipment, the duct work, the permitting and everything else. It's kind of the same with solar. And, that HVAC work is also maybe $5,000 worth of compressors, controllers, air handler, duct work and the rest of the $10,000 is labor. So, I think the solar business is going to start looking a lot like the HVAC business. The other way it is going to start looking like the HVAC business is there is going to be a lot of maintenance involved.”
“I look at storage as the antidote to the metering caps, the time-of-use rates, and demand charges. Battery storage with solar is going to preserve the customer economics — that is what we all expect is going to happen as the battery storage systems get more affordable, and most importantly, when they get fully integrated with [reliable] hardware and software.”
“I think about what I would like to get in a few years. It would be a box in my garage that I could plug my EV into that also has an inverter on it so I can talk to the grid. And that inverter connected to batteries in the garage plus solar panels on the roof. The car batteries and solar panels are all DC, so I'd only need to go to AC when it goes off the grid or in my house.
“The small, efficient installers will crowd out the very big installers and there is a lot of potential for the strong regional installer.” He added, “A 6,000-kilowatt system is going to cost about $10,000. Slap it on the credit card. […] These low numbers are what is freaking out the utilities.”
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