Solar Trends: California Energy Commission

Over the years I’ve watched with keen interest the published information from the California Energy Commission’s (CEC) “less than 30 kW [kilowatt] Emerging Renewables Program.” It is a leading indicator of our industry’s impact, especially for small systems purchased by homeowners.

The CEC administers what is certainly the premier program in the U.S. The team at the CEC takes great care and effort keeping track of the data for solar installations they approve. They log photovoltaic (PV) and inverter manufacturer; the specific equipment sold; seller and installer; system size in watts; price, dates, installation location, utility; and other valuable information. Its last set of data reports installations applied for though August 2, 2006 — and is the basis of this study. After careful review of more than 25,000 approved installations, some clear trends emerged. Sales are accelerating and system sizes are getting larger, but the price installers charge — and the price consumers are paying — is on the rise. The rebate declines set in California Solar Initiative incentive schedule, and the higher-than-desired PV module prices, challenge our industry’s objectives of creating a sustainable, profitable business and reaching grid parity. Price increases may impact consumer demand. They will also impact the profitability of the developing installation industry, which the industry relies on to make the sales and deliver almost all the products we manufacture. I have used standard mathematical tools to create the lines and trend lines. Working with such a large population of data and for the Web, I had to simplify the presentation. Each line and trend line accurately represents the information presented, however my analysis technique will soften the trends somewhat, that is to say make the trends more conservative. Summary Views of the Program Results The tabulated data in Table 1 shows some program results by year. The sales results are impressive, especially in 2005 and 2006, considering PV supply constraints, upward price pressures and declining rebates. I was a little surprised to see how much the average system size was increasing, especially when both the average install price per watt and average consumer price per watt are increasing. Chart 1 Chart 1, the cumulative picture of watts installed, blue line, installed price charged, consumer price paid and rebates paid shows that we’re accelerating rapidly. The growing gap between the installed price line, green, and the rebates paid line, orange, implies that we’re making headway toward creating a sustainable industry. Chart 2 Chart 2 addresses more specifically the trends of systems size, installed price and consumer price. The red line shows that the installers, with help from the manufacturers, drove the price down about $1.00 per watt from the middle of 2003 to the middle of 2005. Since then the installed price per watt has flattened, and on analysis in 2006, has trended up discernibly. This is not surprising with the cost of PV up as much as 30% over historical lows. With the significant majority of the install cost in materials, and a minority in labor, overhead and profit, we should be expecting installed price per watt to go up for the foreseeable future. Consumers, the blue line, seem willing at the moment, to pay more of the system cost after CEC rebate. Adding Federal incentives, some consumer system prices may actually still be heading down. For the next year or longer I think increased material costs and a declining CEC rebate will combine to push real, consumers prices up after all rebates and tax credits. The data shows that consumers will currently buy systems when their cost is in the $5.50 to $6.50 watt range. The yellow line, system size in watts, is heading up strongly. When looking at the raw data you can see at least several likely answers. First, newer, larger grid tie inverters give installers and consumers bigger, simpler system building blocks. Second, there is a fairly rapid increase in the number of systems over 20 kW, many likely being delivered to businesses. Chart 3 If systems are going to get bigger, I wondered how much the price per watt changed as the system size goes up. Chart 3 (above) shows, that at the moment, the answer appears to be not much. In fact, another analysis I did shows that after about 15 kW, price per watt starts to go up again. Most of the installed price per watt is material so it is difficult to reduce the price regardless of the size. On small systems, installers have fewer watts to cover overhead and make profit, so the installed price per watt is significantly higher. We’re all hoping for lower pricing. My guess is that we’ll have to wait until silicon contracts are renegotiated, PV supplies improve, and competition develops again among the PV manufacturers to see a meaningful downward price trend. Chart 4 Chart 4 shows that to date over 109 megawatts (MW) have been approved, black line. The green and orange forecasts both have high mathematical probability, but remember this is the solar industry. We could be looking at 600 to 900 MW of additional small installs over the next decade in just the current utility service areas. If the rebate from the new program averages $1.50 per watt over this time, on the order of $1 billion of funding will be required to meet demand for small systems in this program area alone. Manufacturers worldwide are racing to bring solutions online to meet projected demand, as Chart 4 (above) suggests might happen in California. Billions of dollars of capital are being brought to bear to solve silicon supply issues, encourage new technology, increase product capacity, etc. Government incentives and subsidies, sometimes maligned, this time are having a positive impact on the environment, industry and jobs. The California solar program has already helped many companies, large and small, decide to enter our industry, invest and expand. Table 2 shows the results for PV and inverter manufacturers. In this group there are now about 25 active companies supplying the market, up from a handful three years ago. There are many more on the way. At the other end of the channel, are installers. For this group, finding investors and raising capital is not so easy. It seems to me that way too little capital is flowing to this critical part of the solar business. More than 850 sellers and installers have participated in the CEC program since its inception. Many have gone in and out of business, some simply because they could not get sufficient PV or financing. So far this year about 375 seller/installers have had work approved. Some consolidation, mergers and acquisitions are taking place, but most installers are, and will remain, independent business people. The ranking report, Table 3 shows the top 25 sellers/installers with some detail. More interesting to me is that about 83 MW, or 75% of watts approved through August 2, 2006, has or will be installed by the Top 100 companies. Due to many factors, the average install price varies more than $2.50 per watt, about 33 %, in the top 25. Clearly there is plenty of time and opportunity to enter the solar electric business as an installer. Knowing some of the installers, knowing historical PV and inverter pricing and having the manufacturer equipment data from the CEC for each installation allows some estimates to be made about installer costs and profitability. After review, it is questionable whether installers as a group have figured how to create a profitable, sustainable business model. Chart 5 Chart 5 appears to show some consistency in selling price grouped around $9 per watt. On analysis this is the most random data I ran into. Functionally the CEC program requires that installers work on a fixed price basis with their customers. Many installers don’t yet have consistent material costs; don’t fully know their install and overhead costs; react to local market competition; use various pricing models; are early in their business plans; are trying different sales, marketing plans, and customer finance plans, etc. To make things more interesting, installed price per watt does not necessarily indicate the profit of an installer. Chart 6 Chart 6 shows most of the programs install in blue as a trend line. I chose two large installers, Installer 1 in orange and Installer 2 in green, from my study to illustrate a point — that installed price per watt can have little to do with making a profit. Both installers are supplied with well priced PV and inverters. Both do high quality work. Installer 1 charges more than the industry average and is unprofitable. Installer 2 charges less than average, has good installation efficiencies and fairly low overhead and is profitable. Both are under-capitalized. When I look at the program results so far, use my experience, and add in others’ views of coming business conditions, I think the industry, particularly installers, will have difficulty making significant profit in the short- and mid-term. It seems essential to me, and a major objective of the California program, to build a strong installation industry. Installers suggest that approximately one in ten consumers presented solar electric systems today decide to purchase; and that payback is the customer’s overriding consideration. The data shows that consumers will pay $5.50 to $6.50 per watt. After reviewing the California Solar Initiative system incentive schedules it seems unlikely to me that the industry can reduce real costs quickly enough to absorb each downward $/watt rebate change, and still make a significant profit. This could signal further increases in real consumer pricing and impact demand. I believe that modifying the steps in the new incentive program based on results going forward would be wise. Finally, after looking at the data in many ways, this selection seemed like a good choice for many readers. I have intentionally kept my comments brief but I hope that the information as presented, will be meaningful to you when you apply your experience. The CEC data, when studied and combined with other industry knowledge, can give a good many clues on how to build a successful solar business and our industry. Glenn Harris, of SunPower Consulting LLC, helps potential entrants, startups and established companies achieve success in the U.S. solar electric industry. Business areas include; market entry issues and solutions; planning and development; real-world financial modeling; product selection, qualification and procurement; key contact introductions; and the commercial impacts of government programs. After receiving his B.S. from Rochester Institute of Technology in 1980 where he focused on imaging sciences, Harris has spent his career pursuing his interests in new light sensitive materials, equipment and processes. He has worked for and with consulted with multinationals, founded his own companies and has been published in trade journals and on the Web.
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