Weekly Update

The booming rooftop solar industry

Remember a few years ago when Solyndra went under, solar manufacturers in Europe were tanking and complaints about China dumping their excess panels on the U.S. market were the shape of the news. What a difference a few years make.

Now the conversation is squarely focused on real business competitive questions, namely how to lower supply chain and operational costs amid a booming market where the company that lowers costs the quickest wins.

SolarCity is dominating the rooftop market. And when it turned in its most recent quarter, which saw both revenue and losses grow as the company invests heavily to lock up the market, we got a pretty good picture of the cost breakdown for the company.

Ucilia Wang writes:

SolarCity’s chief operating officer, Tanguy Serra, gave a breakdown of three major areas of cost — installation, sales and administration/overhead — during an earnings call with analysts on Thursday.

The total cost that combined all three areas reached $3.03 per watt during the second quarter, with installation accounting for $2.29 per watt.

The sales costs were $0.48 per watt during the second quarter while the overhead was $0.26 per watt. Serra didn’t give a comparison to previous costs for these three areas except that the installation cost was $3.16 per watt when the company went public.

What’s interesting to me about those figures is that sales costs still remain high at almost 16 percent of costs. SolarCity is working on lowering that and acquired Paramount Solar last August for $120 million.  The idea was to bring on a virtual sales organization to try and lower those costs. There may well be an incremental benefit of bringing in house that type of sales and marketing arm.

And that lowering of costs is important in squaring off against privately held competitors, Vivint and Verengo (Reuters has reported that Vivint filed confidentially to go public). But in terms of competition with utility scale solar, the funny thing is that utility solar should have much lower sales costs because it doesn’t have to deal with marketing to consumers yet rooftop solar remains competitive and is getting ever more competitive.

Utility solar should theoretically offer more price competitive solar if it could actually sell a differentiated product to interested consumers. Like if a utility customer you could easily get solar power guaranteed at a specific rate. Environmentally conscious businesses are increasingly becoming a utility customer that may want to know where it’s power is sourced.

But the reality is that utility electricity rates remain higher than rooftop solar in most markets that SolarCity is targeting, places like Hawaii, Arizona, California and Nevada where sunshine is abundant and retail electricity rates are relatively high. The reasons for utility rates being high are many but have to do with everything from unions to infrastructure costs related to managing distribution and transmission.

And even if sales/marketing costs remain stubbornly high, SolarCity is doing what it can to lower installation costs. It acquired solar panel startup Silevo and is planning a solar panel factory in New York to further drive the margins of solar panel makers out of the value chain. The high solar conversion rates of Silevo were also likely attractive to SolarCity as it tries to differentiate itself in the rooftop market.

Going forward, SolarCity in modeling over 500 megawatts of installed solar next year and almost a gigawatt in 2015. The rooftop solar market is booming, having grown 60 percent last year, and traditional energy players like NRG Energy have taken notice, eager to enter the market.  Utilities entering the rooftop market hasn’t been ruled out either, as some innovative utilities consider that it may be better to join them than to fight them.

Still, from where I sit, SolarCity is still way out ahead. Utilities and energy companies may have access to capital and engineering expertise, but SolarCity still has a significant head start and is getting increasingly efficient at using acquisitions to focus on driving down costs. That makes for a difficult competitor.