Solar business models now and forever
Included in this issue: a bonus picture of a young, frustrated, and sunburned Dustin!
Solar is unique among electricity generation technologies in that it is modular. A single solar panel can be used to power a seismic sensor, where electricity isn’t available. In the same way, an array of thousands of panels can be linked together to power a city of 100,000 homes.
This deployment flexibility brings opportunities in multiple segments using similar technical skill sets. A solar installer trained to put panels on the roof of a home can be easily transitioned to put thousands of ground-mounted panels in a field. What changes as the generating capacity of an array scales up is the supply chain management, permitting, and selling the power. Each of those has different skill sets which has resulted in a market segmentation that looks like: Residential (20kW arrays and lower), Commercial (20-10,000kW arrays), and Utility (10,000kW and higher).
Residential - for guerilla operators
Placing panels on rooftops of homes is all about operational efficiency. You need crews that are always busy, deals that are always profitable, and some kind of differentiating hook to convince homeowners to choose you over the competition that installs a similar technology at a similar price. I talked about Sunrun trying to get this done by focusing on bundling storage with solar installs and moving toward virtual power plants. A solar vendor here in Raleigh has been successful by partnering with the government in a project called Solarize the Triangle that discounts installs as more people purchase.
In the US, this segment is highly competitive and prone to collapse as government incentives, interest rates, or macroeconomic conditions change. To succeed, these companies need to deploy high volume at low margins and it’s difficult to recover when a change like net metering changes the economic value of purchasing an array. Nothing shows how quickly the market can change quite like this chart from Nat Bullard’s annual presentation on decarbonization:
This is the “kind of a shitty business” that Brett Christophers was referring to in an interview with Bloomberg. It’s a difficult and crowded business that only the most hustling entrepreneur succeeds in.
Utility - bring political and grid connections
An independent power provider (IPP) or vertically integrated, monopoly utility may build a huge solar farm to produce consistent power like a power plant does. These are the installations that receive the ire of folks concerned with land use inefficiency as they need hundreds of acres of wide open space. Though these large arrays may be colocated with farms, providing a benefit to farm owners who are looking to supplement their income, they are generally placed far from population centers where the power gets used. Sometimes, arrays are placed at the site of an old coal plant, which is great because transmission infrastructure is already built and land can be repurposed. This helps to make the projects more profitable.
There are two major challenges for building utility-scale arrays in terms of making a profit. The first is that the sun comes up at the same time for everyone in a region. The result is that right when your utility-scale array is lighting up, behind-the-meter arrays reduce demand. Electricity prices fall and your utility-scale array has no one to sell power to in an effect downstream of the duck curve. The second challenge is getting connected to the grid is a prerequisite for getting paid for the investment. The process for getting connected to the grid is almost universally bogged down across the United States with 2,050 GW of capacity awaiting interconnection studies as of August 2023. Updates to regulations on how transmission providers process interconnection requests are coming to help reduce these queues, but these are not entities known for their agility and speed. For example, one of the requirements that was hotly debated was requiring interconnection requests to be batched up in groups instead of being processed one at a time.
In general, a focus on utility-scale solar arrays requires that you have hundreds of millions in capital and deep relationships with utilities to help navigate through the complex web of bureaucracy. Even then, you will most likely need to also deploy storage to make the array profitable as you’ll most likely want to sell your generated electricity at off-peak times to command a higher price. That cuts into the margins of each array substantially.
Commercial - selling to a need
In between residential rooftops and huge solar farms connected directly to the grid are commercial arrays. Commercial rates for electricity are generally lower than residential rates and scale even lower with volumetric discounts. These discounts also come with punitive high rates for using electricity at peak times called demand charges. The rate structure incentivizes consistent electricity usage so that these more energy-intensive customers do not destabilize the grid by drawing extreme amounts of power, particularly in times when the grid is already taxed, such as a hot summer afternoon or a cold winter morning.
The other side of paying more with demand charges are incentives for demand response. Here, the grid operator pays commercial ratepayers to reduce their electricity consumption from the grid below normal to keep things running smoothly.
Between demand charges encouraging peak shaving and demand response providing compensation for the capability to drop electricity consumption for a few hours, commercial is the current sweet spot for deploying solar. The scale requires raising several million dollars in capital to be able to compete, but this also reduces the number of competitors. Interconnection with the grid is optional but can often be fast-tracked because most of the electricity from the array will be self-consumed. Storage becomes an add-on sale rather than a requirement for the project to be feasible.
Unlike residential solar, maintenance is less burdensome because you don’t have thousands of installations to manage. Companies like Summit Ridge Energy, one of the largest commercial solar operators in the US, retain ownership of the arrays while leasing the land or roof they sit on. The capability to self-generate power is also unlocking new opportunities for the businesses they power such as Amazon generating hydrogen to power forklifts and reduce their fuel costs at their warehouses.
Nothing gold can stay
This is the state of the solar installation and operation business right now, but we’ve seen it change over time. In the days of expensive solar panels, it was probably best to make utility-scale installations and commercial wasn’t yet feasible. As panels and batteries in the US continue to get cheaper, we may see a shift to the residential business becoming more of a profitable endeavor. Solar roofing hasn’t taken off, but if there’s a future where this type of roofing is not substantially more expensive than standard shingles, things could shift yet again.
It’s solar’s modularity and scaling capability that makes this such a dynamic industry. It will be exciting to see what comes next.