Last week I caught up with Jeremy Rich, chief executive of Energy Matters, one of the top 20 solar photovoltaic renewable energy certificate creators in the country and a major solar retailer. The company also has an associated sister firm, Apollo Energy, that is a wholesaler of solar components such as PV modules, inverters and framing.
In 2011, Energy Matters was recognised by Deloitte Technology as one of the top 50 fastest growing technology companies in Australia, coming second in their category after having experienced 379 per cent revenue growth over the period 2009 to 2011.
The company was established by a still relatively young group of starry-eyed guys (Rich is under 35), convinced that the future of energy lay in solar. They decided in 2005 to rise to the challenge that "nobody can sell solar panels online".
In spite of relatively limited resources and limited experience, they’ve managed to grow rapidly in the face of competition from more established and experienced solar companies, as well as from the well resourced 'big three' electricity retailers – all without resorting to Crazy John-style advertisements that almost try to scare you into buying a solar system by screaming ‘carbon tax’ as loud and as repetitively as possible.
Out of our discussion emerged a narrative which informed my piece on three reasons why the solar PV party is over. This year, essentially we’ll also see a major shakeout in the Australian solar PV sector, as sales drop off from their government incentive-driven highs. During this shakeout we’ll end up with the following key factors determining success:
With declining sales, competition will become more intense and margins will come under increasing pressure. High volumes will mean that even with low margins there’s enough profit to sustain the business. Also, scale can mean better buying power and economies of scale across a range of elements, such as investments in IT systems and software that help streamline and automate business processes.
The market is becoming more sophisticated and discerning, moving away from consumers just buying on the basis of 'crazy prices'-based advertising. Now that there is a large base of people with solar installed in their properties, prospective customers can learn from their friends as to what is good quality and what is cheap and nasty.
In addition, the cost of rectification due to poor quality systems will hurt badly when the margin on each job is very fine. Plus the difference in cost between bad and good quality equipment is now becoming pretty small, so cutting corners on modules and inverters makes less sense.
3. Financial strength and market diversity
With shrinking sales, there will be segments of the market that will become highly marginal. We saw this with the withdrawal of the feed-in tariff in New South Wales when sales in that state dropped off a cliff.
In order to survive companies need diversity in revenue, such as exposure to multiple states. They’ll also need enough cash in the bank to ride out the storm this year until hopefully margins improve when competitors fall by the wayside.
4. The increasing importance of non-hardware costs
Modules have reached such low prices that they're no longer a major factor in end prices for customers. Instead, retailers must find ways to streamline and automate paperwork, keep customer acquisition costs low and reduce the time involved in installing and connecting PV systems. Good IT systems and well-designed business processes will be extremely important.