The increasing importance of non-hardware costs

Part five of an interview with Energy Matters co-founder and CEO Jeremy Rich.

Tristan Edis: On this issue, even though government has been cutting support programmes over the last few years, at the same time module prices have been coming down at an equal or faster rate that’s kept the market going.  How long do you think this can go?

Jeremy Rich: As I said earlier it’s really coming down to the labour costs now and your productivity.  We’ve now got to a point where if the panel price comes down   ten cents per watt that’s a huge cost reduction, it’s like a twenty per cent reduction.  And that would be  from an already  hurting loss-making position for these manufacturers. 

And even if that happened,  it’s still only ten cents.  Well, so what?  On a one kilowatt system you’re looking at a hundred bucks, on a five kilowatt system five hundred bucks, it’s not that significant anymore. 

TE: I suppose it means it’s tougher for you guys to some extent that if government were to pull more support , get rid of all support, then that might be six hundred dollars per kW that you’ve just lost

 JR: If the subsidies go, the prices will go up. There’s  obviously going to be a contraction in the market this year.  So companies are going to the wall and then you lose IP and skills that have taken a long time to develop.

TE: So,   how are we going to get  costs  down further? 

JR: You see in Germany the costs of install are a lot lower than here.  They probably pay a higher price for the equipment, so why are they cheaper?  It’s because of the administration. 

The grid connection approval process here is far more cumbersome, but in Germany it takes far less time.  The STC paperwork,  could somehow be streamlined.  Customer acquisition costs could drop because at present  there is a lot of confusion due to all the chopping and the changing over time by the governments.

So all those things add-up to a higher cost of install in Australia to what it is in Germany. 

I would also say that there’s economies of scale where more volumes enable you to bring your costs down.  Obviously margins can afford to be less with more volume too.

TE: Is there some way that we could do installation where the equipment itself becomes easier and faster to install?

JR: Well, I think that’s what everyone’s looking at.  For example micro inverters might lead to quicker install times.  But there’s a trade-off - micro inverters means  more inverters on your roof and there are more issues that potentially could go wrong there.  But install costs will come down.  So I think there’ll be technology breakthroughs in that regard. 

You know, the reason we’ve designed and manufactured our own framing system is because we feel it’s the best to install fast.  That’s what drove us to do it.  So, that reduces install times.  That saves costs there. 

Internal processes to process paperwork and do applications, you can compress those things and do it better.  We like to use Near Maps here to assess houses from satellites.  That can save time and money reducing the need to send people out to do physical site inspections  for smaller household systems.

TE: It sounds to me like really IT is a key component of driving down costs in this industry outside of equipment costs?

JR: Yeah, like any business. But you know you can have the best processes in the world, but if you haven’t got the best people, it can fall apart -  that’s standard across any business.  Then you’ve got to have the best processes and systems and then you’ve got to have the best customer experience, so you’re getting really good word of mouth referrals and really happy customers and having no callbacks and no extra after sales costs.

TE: That’s something I’ve noticed with Energy Matters is you don’t seem to do much advertising  relative to others.

JR: We’re quite focused on the whole concept of customer acquisition costs and we want to have the lowest…

TE: Is that just word of mouth or better use of the Web or something else?

JR: We like to use the Internet and word of mouth.  Give good customer experiences and get word of mouth referrals and keep your customer acquisition costs low.  That’s  all part of decreasing the install costs, because those costs have to be made up somewhere, don’t they? 

If you spend ten million on advertising to get your customers, well the customers are paying for that in some way, so we don’t do that.  So, you know, it’s many, many things to bring down your costs and that’s where the focus needs to be.  I mean I think the equipment costs, yeah, will come down a bit, but it’s also those other costs.

Other segments of the interview:

-- The beginnings of Energy Matters

-- The importance of quality

-- The importance of scale, diversified markets and a strong balance sheet

-- The changing nature of the market and the rise to quality