Commercial Solar in a "Land Grab"


Recurrent Logo Recurrent Energy of San Francisco announced today that Morgan Stanley has committed to provide $200 million to Recurrent’s fund that invests in solar projects. The funds will be split into two $100-million dollar chunks over the next two years as Recurrent works to get panels on roofs through its “Solar as Service” model, whereby they sell the power to real estate investment trusts (REITs) via power purchase agreements (PPA).

With so many installers in the market, the race is now on to start signing solar clients. SunPower (SPWR) recently secured $190 million from Morgan Stanley for solar electric power installations. Andrew Beebe, President of Energy Innovations, told us last week at the ThinkGreen Conference that commercial solar is very much in a “land grab” right now. He also speculated that over the coming years some of these installers will “come off the tracks,” unable to make it through the lean years of this burgeoning industry.

While individual commercial solar installations can be big, overall transactions costs can seriously cut into profits. Margins on commercial solar are tough as the “green premium” that exists in the residential market isn’t as important as sheer economics. Akeena Solar CEO Barry Cinnamon expects that while profit margins for residential solar run somewhere between an estimated 15 and 30 percent, commercial solar will settle between 5 and 15 percent. Commercial solar installations usually run between 300 kilowatts and 2 megawatts, he said.

These lean margins will be a factor in quickly driving inefficient installers out of the market. Installers will need to add value for their customers while figuring out what commercial solar business model the market can support.

Recurrent CEO Arno Harris was on hand last week at the ThinkGreen conference, where he stressed the importance of getting transaction costs down: “We really have to get, as an industry, to a portfolio model where one transaction will get us to many rooftops at a time,” he said. Getting away from owner-occupant customers could allow for bigger projects on leased properties. An absentee property owner does not have much motivation to pay high upfront installation fees if the economic benefit then goes to the tenant. Recurrent is hoping to use PPAs not only to break into the REIT market, but to get around the high upfront costs.

But costs aside, the immediate challenge for installers of commercial solar is getting clients. As Beebe noted: “Those who own the customer win.”



While it is reasonable to suggest that selling a solar installation to a commercial customer has a 10% margin give or take, that isn’t the business that Recurrent Energy is in. Recurrent Energy continues to own the solar they place on a roof. Thus, their economics are those of a utility. They invest capital at $3 per watt, and then earn a yearly return on that investment.

Near San Francisco, a watt will generate a bit more than 1.5KWh a year. At $0.14 per kwh, which seems to be roughly what PG&E would charge, you are getting a return of 7% a year on the investment. If you can capture the time-of-use benefits, you can earn more. If electric rates increase over time, you earn more.

Jason Morris

It is really interesting to watch this unfold, since there are a number of companies that have been in the solar installation market for more than a decade. They grew organically by servicing a pretty limited market. Now government incentives and venture/private equity investment has turned it into a dog fight. What will be the major differentiator? Funding? Quality of service? Marketing/reach?

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