Innovation and Sea Change in the Residential Solar Market

The collapse of the capital markets doesn’t seem to sway solar entrepreneurs from innovating and remaining hopeful of the future. Many European companies share the same sentiments as their American counterparts in the role that U.S. will play in the future solar market.

Like a tide turning, there’s a big shift happening in the solar market that many people aren’t really seeing because they’re busy chasing after financing and market-share like never before. The power behind the sea of change comes from the fact that that there is now more manufacturing capacity for producing PV modules than there is demand. For the first time, big module manufacturers are fumbling to put a new focus on the end customer and how to get solar solutions to them.

Entrepreneurs from the high tech industry are partnering up with solar veterans to introduce new ways to reach the end consumers. One great example is 1BOG — a for-profit social marketing solar aggregator. 1BOG negotiates a favorable price with system integrators to drive down residential solar pricing. Another great example is SunRun who pioneered the residential power purchase agreement business model. For the first time, companies are addressing the true hurdle for the average consumer to go solar. As solar becomes mainstream, solar companies will need to put more focus on the consumer as opposed to the technology.

This is a classic industry cycle — for a market in its infancy, the technology gets the glory. As the market grows and matures, the technology becomes secondary and slowly becomes a commodity. This is when branding and solid consumer insights will help a company sustain its position in the market.

SunPower is leading the branding game with their strong focus on making solar a lifestyle choice. The recession is causing some industry analysts to question the dollar value of brand equity. First Solar, on the other hand opted for a different strategy to capture market share in the consumer market. It acquires a stake in SolarCity — a downstream system integrator who invests heavily in branding.

The solar industry can certainly learn from other industries on how to scale the business profitably and reducing the cost of sales. However, if 2008 is any indication, many downstream companies lacked the patience and strategic foresight to customize and implement best practices from other industries. For example, several system integration companies tried to apply best practices brought over by executives from the software industries without taking into consideration that these best practices needed to be modified to fit into the solar industry’s business model. Therefore many companies failed to implement those best practices and decided to abandon these initiatives altogether due to pressure from investors and the stock market.

Nevertheless, the downstream companies will be forced to innovate as the market matures. The current cost per solar sale (total marketing dollars spent divided by the total number of sales) is between US $1100 and $2500 for a national solar player. With a slim margin of 10 ~ 21%, the national players will not be able to scale and sustain for the long term. The cost of engineering is between $400 and $600 for a residential home. Again this is not sustainable for the long term.  More traditional industries such as the construction or engineering industry are spending half those amounts on sales.

In addition to that, the cost of sales is anywhere between 5 and 9% of revenue and the construction cost is anywhere between 6 and 11% of revenue. With cost structures such as these, it is very hard for downstream players to scale and sustain their business.

Some industry analysts argue that the only way for downstream players to scale is to be acquired by a large manufacturer to absorb the costs associated with selling to end consumers. However this is not true.

Innovative companies such as Sungevity are trying to reduce the cost of sales by selling solar through the internet. This is similar to the travel industry where internet aggregators such as Expedia and Travelocity drove down the cost of sales significantly. Solarcity on the other hand, is trying to drive down cost by driving sales through their call centers. Ultimately, companies will be forced to innovate and to drive down cost of sales and that is a good thing for the end consumer.