While the electricity industry is undergoing a ferocious revolution, the solar industry is demonstrating it has the tenacity to not only fight hard for what it deserves, but to outsmart and outwit as well.
We noted the increasing number of barriers and competitive behaviour in a recent story but Australian solar companies and dancing right around the issue; like nimble young high school kids around a stinky old headmaster at the year end formal.
Enter the PPA
No fewer than 20 companies are now offering solar PPAs in Australia – up from a big fat zero only 12 months ago. It's starting to feel like a Jackie Chan movie they are moving so fast. Power Purchase Agreements simply capture the value of solar energy production over, say, seven-15 years, add finance and hi-yah!, solar at $0.25 per kWh (or so) is yours.
PPAs have been happening around the world for decades, but it's taken a while for the ducks to line up in Australia and the Australian Energy Regulator’s retailer exemption experiment seems to have been the final piece of the puzzle. This was a subtle and yet profound move by the AER and I will be intrigued to see how it pans out over time. On the one hand, financed pay as you go deals for all sorts of other products are covered by consumer law, so one wonders why PV even needs this sort of interference. On the other, we are increasingly material and part of the energy industry, so adding an efficient and non-obstructive layer of regulation might help keep things on the straight and narrow.
More than 20 clever companies have developed fascinating offers that have been a long time coming to Australia. From where I sit, PPAs provide the chance to expand the market and streamline the entire sales pitch for solar (i.e. 'I’ll sell you solar power at a kWh rate'). It’s just a nice, simple story and fits perfectly with our new role as part of the energy industry.
Having said this, I don’t think PPAs are necessarily for everyone. They are complex to construct and risk manage, although that will get easier with time. They are very long-term annuity streams rather than wads of cash at the point of sale, requiring different business models. And while finance is an immensely powerful tool it does, of course, add some transaction cost.
Clearly, the number and type of PPAs on offer are going to grow and knowing that somewhere between 5-10 per cent of the market has been using (petty crude and expensive) finance in Australia, there is a lot of room for expansion. The bottom line is, you can now get a solar PPA and competition is heating up. As a solar installer, it's time to take a good hard look at whether you need one in your portfolio of offers.
We are also starting to see the pressure of lower sales volumes compared to recent years and this is where PPAs can make a difference, by cracking open new markets which couldn’t be accessed before (something US markets figured out some time ago). Finance continues to become an intrinsic part of our industry (as this fascinating article from the UK highlights).
Consolidation and evolution
Meanwhile, there is a fair bit of shuffling and consolidation going on in the industry.
Industry veteran Solco have announced to the ASX that they are in the final stages of negotiation to sell their wholesale business, signalling a departure from their roots and an all new direction.
NuEnergy, which also has a long lineage in the industry, are back after a long hiatus – and a dabble in energy retailing with Click (which has not proceeded) – and are now focused on commercial and wholesale solar product sales once again.
CBD Energy are still kicking, too, it seems despite delisting from the ASX market earlier this year. It announced a decent project win in Australia under its Westinghouse brand, the first big announcement for the brand that they picked up last year (although we note that the original Westinghouse product offer seems to have vanished). Their investor pack is worth a read.
One of the services we regularly conduct for some of our clients is insolvency searches and although some companies are innovating and growing others are finding things very tough, if insolvency records are anything to go by. More than 30 solar companies have announced liquidation or insolvency in the last eight weeks alone and two Melbourne solar companies got a recent slap on the wrist and consumer warnings (Sunburst Solar and Solareco).
Then, of course, there is the ticking time bomb of solar trade tariffs and the current investigation into dumping being undertaken by the Australian Anti-Dumping Commission. The big news in this investigation is that not only are PV manufacturers being targeted, but importers of product too. The investigation is underway now and cooperation and full disclosure is the best tactic, if other experiences are any example. Generally, companies who cooperate and respond quickly are subject to lower tariffs, should the need for them be established.
I am all for a fair and even playing field, let me make this clear, but if the price of PV modules increases by 20-40 per cent as was the case in some other countries our industry will be in a hell of state.
Never a dull moment.
Nigel Morris is director of Solar Business Services.