The $1 per watt solar illusion

Companies selling under $1 per watt seem to have a magic formula, but they are more likely to be on a fast track to failure.

Can you get a solar system at under the magical $1 per watt? You betcha. But I am increasingly of the view that systems priced at these levels are either built with smoke and mirrors or there is a magic formula that a very select number of companies have managed to find.

If you shop around you can find a surprising number of offers from a wide variety of companies at $1 per watt or even less. A consumer wrote to me yesterday about one such offer and my advice was blunt; don’t do it.

I listed a bunch of reasons, but in the simplest of terms my view is that any solar company selling at this level is extraordinarily unlikely to survive in the medium term (if not short term), making it a bad long term investment.

Now to be clear, low-cost solar at this price (or better) is clearly a wonderful thing for the growth of our industry; it's been talked about as the “tipping point” for PV parity for decades. So I want to see it as much as anyone else and we need to get there. However, pricing systems at this level before we are truly able to do so in a financially sustainable way has only two possible outcomes in my humble opinion; bankruptcy or customers getting junk products and services.

If there are any solar magicians out there who would like to share their secret formula with me for how to do it well at this price, I’m all ears. I looked (again) at a bunch of data points to see where things are up to and to see if I could unlock secret formula myself, and this is what we found...

Up until late last year, the Clean Energy Regulator used to publish data on “out of pocket expense” – OOPE  – the net PV price after STCs and fully installed. It was an awesomely powerful data set because it was’t a hypothetical price, but a sold and installed price; real money.

Typically, the CER’s OOPE had hovered around $2 per watt, which was just a little higher than average pricing that was seen in the market, highlighting the difference between what we see advertised versus what people actually end up paying. Since their last publication, foreign exchange rates have gone the wrong way and PV prices have increased.

Solar Choice also regularly publish sample data from offers that they receive from their network of installers. Their latest data was published in March and historically correlates with CER data very well so its a powerful data sample, too, although the difference is it is quoted, rather than installed, price. Their data shows a clear increase since late last year; evidence that the majority of system offers have risen since the final OOPE release and confirming the trend we believe has happened.

So what on earth is going on?

I re-ran some numbers (as I tend to do) based on a survey of installation companies on system price that we collected late last year. No matter how hard I tried, I couldn’t arrive at a net price under $1 per watt net, even using the very lowest component prices that we got as samples. So I reduced them by all by 10 per cent, despite the fact that prices have actually increased and I still couldn’t get there. This assumes that the lowest quality (and cheapest) products are used, installers are paid a pittance and gross margins are less than 10 per cent. Still couldn’t get there.

Then, I thought, maybe I’m out of touch, maybe my data is wrong. So I called the largest wholesaler in the country and asked them if it was possible. “Not a friggen chance, Nige,” was the reply. “We are increasingly contacted by customers saying you have to do something; we are getting beaten by price and you are the biggest buyer so, c’mon, do something”. Their response was that it makes no sense because their margins are so low already.

To add to the research mix, totally by chance, I was lucky enough to meet with a researcher from the Rocky Mountains Institute this week. The RMI was founded in 1982 by Amory Lovins who is a legend in sustainability and established the RMI as a dedicated research, publication, consulting and lecturing institute in the general field of sustainability, with a special focus on profitable innovations for energy and resource efficiency. It was Lovins who first inspired me to consider energy when he was a guest speaker at an event I attended 24 years ago.

In recent times, RMI have been looking at the 'soft costs' of solar; the non-equipment related costs, with the aim of helping reduce solar system costs in the US where they are a much more significant component of system price. We had a great chat about how different the cost build-up is in Australia and they are presently touring the country trying to learn how Australian solar companies can do solar so much cheaper then US companies. Interestingly, my take away was that US solar companies are much more focused on profit than many Australian solar companies!

So costs are up, sales are down. The data we have says it’s not possible. Why is it happening?

There are three possible reasons.

The first is that companies selling under $1 per watt have a magic formula, which the remaining 99 per cent of the market hasn’t figured out yet.

Perhaps they can buy everything cheaper than everyone else by buying on the spot market for clearance stock, trade STCs at a higher price and their overheads are incredibly low. Maybe their cost of customer acquisition, administration and compliance costs are staggeringly well refined. It’s possible but highly unlikely and at a minimum, as precarious as a house of cards.

The second possibility is that they are happy to run at a loss to get volume. Businesses do that from time to time and it’s a legitimate strategy if it has an end-game or can be subsidised by other revenues and margins through diversity.

It’s the big worm approach; low prices attract customers, then you up-sell like mad, praying you won’t actually have to deliver at that low price. The problem is, low prices establish a customer expectation which can drag the whole market down into a price war.

But frankly, I don’t buy this strategy. We are in a market with declining volumes and declining prices. In a year, you’ll sell the same volume for 5 per cent less revenue if things keep heading the same way. If you sell with no profit today in 12 months, assuming the same effort to sell, your margin dollars will be less per sale. It’s not rocket science.

The third possibility, and one I fear, is that too many solar businesses don’t understand their real costs and think they will make a small profit at ultra-low prices, because they don’t understand what it takes to really do the business properly. Proof? The survey we conducted late last year sought to break out costs in detail and a common response was “Wow, I have no idea what (for example) my customer acquisition cost is, I should look at that!”

The most prevalent example of this is in commercial systems where I see prices just get lower and lower and lower under the false assumption that scale equals lower cost. All things being equal, it's true, but anyone who has spent months courting company directors, producing endless iterations of CAD drawings, presenting option after option, paying engineers and realising that grid connection approvals will cost of thousands of dollars knows it blows out quickly.

Complexity sucks up scale benefits faster than an angry death-eater.

So, here’s my thinking.

1) Companies who promote at $1 per watt or less need to up-sell like hungry dogs or they will go bust. Competitive pressure is making up-selling harder

2) Companies who sell at $1 per watt and don’t up-sell will dig a hole that they can’t get out of and go bust and or, the house of cards will tumble one day (remember Unleash and Clear?) and then they’ll go bust or the warranty and quality issues will send them bust.

3) Companies who recognise that margin dollars need to increase as revenues and volumes decline will struggle, sell less but make more margin dollars and probably survive. If you are clever and have a new angle, you might even prosper and take market share.

While things are clearly not easy, the opportunity today is for our market to innovate, to add value, to increase revenue and, more importantly, to increase margin dollars. There are many ways to do it with products, services and value.

One thing is for sure, anyone can buy a bucket of fat worms, but it’s a short term and simple approach that without exception has failed miserably in this industry to date. I am boggled that companies continue to line up at the worm store along with other desperate souls then throw their lines in the water together.

My grandfather taught me decades ago that fishing somewhere else, with a different bit of bait makes a whole lot more sense.

Nigel Morris is director of Solar Business Services.

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