Project Funding, Supply Chains and LCOE: A Lot in Common

While some projects find their way to completion, others languish at an advanced stage; this puts increased pressure on the supply chain, while also boosting administrative fees and increasing the LCOE of solar in general.

The most immediate issue is that getting a project to that advanced stage requires a lot of work, and substantial expenditures. When funding falls through, project developers, engineering firms, law firms and accountants have to find ways to distribute these costs into projects that actually can be completed.

This means that every completed project is burdened to some degree by those uncompleted projects. While this is true in any business, it’s a special problem in solar, where the projects tend to be fewer in number and larger in size, with substantial professional work required up front and a relatively high risk of being stalled. A more subtle result of this situation is that the solar industry has less ability to drive down prices because of increased risk in the supply chain.

Uncertain timelines create an awkward situation for suppliers of modules, inverters, electronics, and other solar equipment. The global electronics manufacturing sector, seeking to manage its own risk-reward levels, has evolved in recent years towards tighter capacity and leaner inventories. Moreover, there is currently considerable pressure on global supplies for many components, especially those utilized across many market segments. As a result, lead times for component sourcing are getting longer.

In this situation of limited supply and multiple sources of demand, market dynamics come into play that favor players with a more-predictable demand profile. Let’s say a supplier has manufacturing capacity of a million parts per month. Who would they rather have as a customer — the solar company that places a rush order for a million parts and then goes dark, or the mobile electronics company that places a recurring order for 100,000 pieces per month?

Then, imagine that the manufacturer has nine customers, each ordering 100,000 pieces per month. That’s a nice situation for capacity utilization, but what happens when the order comes in for a million pieces? Unless the new demand will be steady, there’s not a big incentive to add capacity.

So what we’re seeing is competition for resources among market segments. It seems logical that market sectors that provide more-predictable demand cycles will have an easier time securing components — and negotiating favorable prices — than an erratic sector. For these reasons, development of a more-predictable demand curve is important for cost reductions in solar equipment.

Larger companies in the space have addressed this problem with vertical integration, giving themselves control over project funding, and therefore everything down stream. However this does not really provide for a dynamic marketplace where innovators can make a difference. For the U.S. solar market to be able to develop, keep pace with global innovation, and bring solar’s LCOE in line with market needs, we need to find more efficient and more reliable methods for funding solar projects.

Michael Lamb is VP, Business Development at eIQ Energy, email mlamb@eiqenergy.com