SolUnesco presented at the New York InfoCast Energy Project Finance conference December 10th. Our presentation the Economics of Renewable Energy Business Models focused on the trends impacting margins along the value chain. If you have earned a living in solar for more than a few years, you have seen innovation, unsustainable margins and then dramatic margin compression. I don’t think anyone is surprised given low barriers to entry and generally commodity like products and services.
The presentation (click here) makes the case for
- Market dynamics changing but in predictable ways
- Margins compressing
- Pricing still very opaque in many market segments
- Customers gaining leverage
- Utilities attacking economics and regaining control of their networks
The business question is always where and how to create value. We suggest the fundamental answer is that solar will continue to follow predictable paths given the industry fundamentals. We recommend focusing on niches where one can invest in creating long-term value and stickiness with customers. We argue value will be created in assisting solar developers and the retail businesses with reducing transaction time and competitive cost advantages through reduced soft costs. Finally, these market segments will see consolidation because scale creates cost differentiation – solar will continue to drive down full life-cycle levelized costs compared to fossil fuel powered generation.
A related point is that the future of the retail business models for solar and that incorporate solar is far from certain. Traditional retailers such as Direct Energy appear to be aggressively integrating renewable energy into their product offering. The regulated electric utilities have jumped into this market and several have aggressively pursued adding renewable energy and particularly solar to their offerings. Finally, the pure play solar companies such as Solar City and Vivant have rapidly amassed a customer base that may allow for horizontal diversification. The difference between the highly predictable solar margins when compared to the highly volatile cost structure associated with grid supplied energy creates an interesting strategic quandary for the pure play solar retail companies. One key question will be how to fend off the traditional energy retail companies? Consolidation and partnering will likely play a role.
|Risks & Returns
|Utility Asset Ownership
|Above market risk return
|PPA with utility or energy consumer
|Credit risk of long-term offtake
|Certainty depends on model
|Depends on model
|Best case annuity
|Retailer including renewable
|Renewable smooths revenues
|Depends on offering & churn
|Depends on offering & churn
|Credit risks, churn, load profile
Despite the argument for scale, we continue to expect that the low barriers to entry will allow for mom and pop shops throughout the value chain. Companies caught between the Mom & Pops and large scale will likely find that their overheads are not sustainable. If you are a small shop with low overhead, beware of the shiny objects over the horizon.