Following our story about True Value Solar last week, it got us thinking about what this means for the second largest player in solar retailing, Origin Energy.
I’ve known and watched Origin since it first stepped into solar around a decade ago and did some digging around in an attempt to understand just where its solar division stands.
Here’s what we found out.
Origin refers to itself as “an integrated energy company” and was formed in 2000 through the demerger of Boral’s energy and construction divisions. Origin has operations across the energy supply chain; from gas exploration and production to power generation and energy retailing.
Over the last decade, is has acquired a number of electricity retailers around the country, positioning itself as Australia’s largest electricity retailer with around 4.4 million customers. The company has a range of interests in generation and gas transmission projects too, including GenTrader agreements, CSG production, geothermal and wind farms, laying claim to around 13 per cent of Australia’s electricity generation.
Origin’s entry into solar energy started around 2002 when it began offering solar systems through its retail division. In line with the strong trend of the day for ‘green’ to be a core brand value, Origin used retail solar offerings and Greenpower to develop a strong reputation in that space, partnering on the development of a 200kW PV system on Melbourne’s Queen Victoria markets and launching the (now closed) pilot production factory making Sliver cells in Adelaide.
Origin’s solar and renewables presence grew substantially over the ensuing years, culminating in its rise to dominance in solar market volumes in 2010, when it reached the number one position in Australia – delivering around 34 MW.
However, since then, things seem to have been on the wane. Market share has dropped and Origin seems to be slipping down the charts. Shareholder presentations barely mention solar anymore, advertising has been wound back and green seems to have vanished from the corporate strategy.
Recent presentations seem to be intensely focussed on the gas opportunity.
So what’s going on?
According to Origin’s website, the overall business had a bit of a tough time with underlying profit for the half year (December 2012) decreasing by 26 per cent, or $127 million, to $362 million.
Origin is, of course, a behemoth of a company with massive interests across a variety of sectors and with a long-term horizon, so a slight dip in profit is nothing to get too alarmed about.
What really interests me, however, is how the solar business fits into all of this.
One thing that Origin confirmed is that PV is impacting on its retail electricity sales saying: “Across the NEM, the continuing penetration of solar PV and other factors causing consumers to use less electricity has resulted in a small reduction in average residential usage per customer.”
It has also completely thrown in the towel on its former solar gem, the (Sliver cell) saying “Given the ongoing deterioration of the global solar market, Origin has decided to discontinue all intellectual property development pathways for Transform Solar, its 50:50 incorporated joint venture with Micron Technology Inc.”
Notwithstanding this, and despite a slight drop in market share and lower sales, Origin’s statements say that, “despite reduced installations of rooftop solar photovoltaic systems, the growth in margin per solar PV panel increased gross profit by 61 per cent or $11 million.”
And: “Revenue for the non-commodity businesses declined by 25 per cent or $34 million to $102 million, reflecting fewer installations of rooftop solar PV systems compared with the prior half year. Policy changes, including changes to the Renewable Energy Certificate multiplier and feed-in tariff schemes across all states, had a significant impact on demand during the half year, with installations reducing by 2,934 to 7,672 compared to the prior half year.”
How ironic that Origin is now blaming the reduction in the RET for business reductions when it came out suggesting it needed changing themselves. According to The Australian, Origin said it wanted a review of the RET scheme, saying: “It is needed because of the evidence that regulators and the industry are unable to forecast with accuracy the impact the Small-scale Renewable Energy Scheme is having on installation activity and costs that should be paid by customers.”
Hang on; as the second largest STC creator in Australia and armed with all those geniuses, Origin is the industry, at least to a large extent.
At an average system size of 3kW, its half-year result makes for around 23 MW of sales so far, which puts them on track for a result lower than its 2011 volume, which we estimate was around 56 MW.
However, it has been streamlining its operations it seems, noting that, “despite the decline in revenue during the half year, non-commodity gross profit (where solar fits) increased by 61 per cent from $18 million to $29 million. This was due to a larger proportion of higher margin solar products, as well as falling hardware costs and improved operational efficiencies.”
Origin is also pushing on with other related products saying that,‟other product offerings such as solar hot water, serviced bulk hot water systems and heat pumps are performing well and continue to complement the core Natural Gas and Electricity businesses”.
So, more watts per sale, lower product cost, less staff, a wider range and sticking to the premium end of the market perhaps?
Certainly Origin’s above the line marketing spend seems to have reduced, but anyone getting a regular electricity bill will tell you that its under the line marketing has not stopped. One of the key assets that utilities own is a database of customers who are getting an envelope four times a year anyway, so they arguably have the lowest cost route to potential solar customers in the market.
Origin is planning more staff cuts and doesn’t expect the electricity market to stabilise until 2014 so it would seem that its solar business could be a nice little cash cow.
The invisible strategy
So, just what Origin Energy is planning with its solar offer remains a bit of a mystery. It’s making great profit but sounds resource constrained and nervous about pumping marketing dollars in to build sales.
It has a growing need for RECs but had argued for cuts in the target and is generating less in house with diminished solar sales while at the same time, complaining that its main workhorse (retail electricity sales) is cobbled – partially by its own sales of solar products.
Origin’s influence on the solar industry is substantial, not only in volumes bought and sold, but also because it has so many electricity customers; its influence on retail price is substantial and hence understanding their strategy is vital for the rest of the solar the industry.
Personally, I can’t wait to see how this pans out because Origin clearly has the ability and track record to innovate and if TVS continues to be distracted, it has something of an opportunity. Successfully reconciling this internal conflict could place Origin at the global cutting edge of the electricity industry if they are genuinely motivated and if they can work out how to profitably transition their business from megawatts to negawatts.
Nigel Morris is the Director of Solar Business Services.
This article was originally published by SolarBusinessServices. Republished with permission.