The booming US residential solar PV market, already at ~2GW per year levels, has seen continuously declining hardware cost for years now. However US residential solar installed costs are a whopping 100% higher than Germany or Australia, for the same hardware! This is largely due to US soft costs being significantly higher than Germany and twice higher than Australia – as shown on Figure 1 below, a recent study done by the Rocky Mountain Institute. Differences across these markets, for installation labor or permitting costs are certainly a contributing factor, but are small. The key differences lie in two areas: financing costs and customer acquisition costs.
Source: Rocky Mountain Institute (2015)
High financing costs
Often ~$0.50/W in the US are linked to the third-party models prevalent in the US, that funded more than 70% of all residential deals. On such a ‘zero-down’ lease or PPA model, a financial third-party monetizes the tax benefits and incentives – such a model was necessary as the US has never had a strong incentive for solar at any Federal or State level (other than a tax credit, now slated to expire in December 2016). So without such third-party financing, residential solar would have never taken-off. In comparison, both Germany and Australia had a rich feed-in-tariff model to jump-start the market until they were lowered. So German or Australian PV consumers needed low-interest bank loans, where available as the only financing (more than 90% of residential deals in these markets are cash purchases).
Once could argue that the heavy use of third-party lease/PPA model itself has been a contributor to the relatively slow decline of total costs for US residential projects. The US solar end-customer is happy with a ‘zero-down’ savings on their energy bill, and so no other party (neither the integrator or the financier) has an economic incentive to do better or lower costs more rapidly!
Solar customer acquisition costs
At ~$0.50 per watt for US customers, or ~$0.30/W for Australian customers and only at ~$0.05/W for German customers, customer acquisition costs are the other major factor leading to stubbornly higher costs in the US residential solar market. One could cite many reasons for this; US consumer ‘apathy’ to energy costs in general is one. Both Germany and Australia have much higher residential electric rates than the average US consumer – so the economic incentive for solar is lower in a way. However I would like to take the opportunity to highlight two factors that are more fundamental in my opinion.
First, it is the financing process again that drives customer acquisition costs, due to an expensive sales process. Selling complex long-term financing products is not a skill-set for the average electrical installer. Germany’s rich national feed-in-tariff – funded by tax–payers - made customer acquisition a non-issue (a two-page form to claim the tariff benefit, easy to sign-up for all). So the neighborhood electrical shop delivers residential solar, with much of it going to villages and farmers. Unlike Germany, the US needed a whole new cadre of ‘solar integrators’ with specialized sales teams that can convey complex financing benefits to consumer. The sales focus also has been in widespread urban areas and ‘credit-worthy’ customers, with large roof-tops, taking solar selling to the same league as insurance and private-wealth sales. So the financing sales process has certainly added to high customer acquisition costs (i.e., an expensive sales process).
But there is much more fundamental driver of high customer acquisition costs: the role of the US utility in driving the economic incentive for solar. US utility rates and policies vary from state-to-state with no real federal ‘energy policy’. With over 3000 utilities and related grid operators, the US utility infrastructure is far more complex than that in Germany with its 20 utilities, in comparison.
The results are clear: The German grid is largely powered by renewables during peak hours of the day and carbon emissions have dropped in the past ten years.
In Germany, the rapid growth of solar, mandated by the feed-in-tariff, caused the entire energy utility sector to ‘respond’ actively to the renewable opportunity. Although residential electricity prices have nearly doubled in the last decade (to fund renewables), wholesale electricity prices in Germany have dropped 70% at the same time. Renewable energy has priority access to the grid and gets dispatched first, due to its much lower short-term marginal production costs than traditional plants. To ensure grid stability, electric grid operators have had to pay electric utilities to provide flexible power resulting in investments to convert coal-fired power plants.
Weak operating margins for utilities have been been supported by grid-balancing fees. So there has been a massive utility response – in partnership with the people and the Federal government - to bring on solar. This has been a difficult and expensive process for the utilities that have taken a major hit financially and operationally. But the results are clear: the German grid is largely powered by renewables at peak hours of the day, and carbon emissions have dropped in the last ten years. As a hallmark of all such effort, one of the largest German utilities, E.ON, has in 2015 decided to rename itself E.ON Renewables globally and divest of all its (loss making) fossil fuel business.
In contrast, most US utilities have made a much more gradual shift toward renewables, through a regime of measured incentives, gated net metering, as well as stringent permitting and interconnection rules. The California utilities have certainly set the example in promoting quick adoption at the grid-level, but are largely an exception. The majority of US utilities are still evaluating how to respond to the solar opportunity, some viewing it as a threat (especially the ones relying too much on fossil-based generating assets). Many US utilities play a double-face – while the regulated arm sells expensive retail electricity, the unregulated arm is actively developing solar and wind projects.
The utility could now own the key
The average US energy consumer trusts their local utility in making its energy decisions – whether it’s a local energy efficiency program or a solar program. And both regulated and unregulated utilities are now beginning to wake up to this opportunity. Progressive unregulated utilities like NRG are already leading massive operations to sell solar services to its customers. More recently Arizona Public Services (APS) is an example of a regulated utility that has started such a solar program, in partnership with local installers and contractors. Can such utilities achieve customer acquisition costs closer to the German levels? I strongly believe so, with the right tools, training and delivery programs, they certainly can. Time will tell as to which utilities are more aggressive in leading the way, versus following suit to local independent power producers who take over their customer-base.
Written by Deep Chakraborty, CEO of Enact Systems Inc.