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A curious trend&#;s been washing through U.S. solar recently: vertical integration, the process of companies owning more and more of their own supply chains. Sunrun, a developer and financier, recently purchased the residential division of REC Solar, a major installer. SunPower moved into selling and financing solar systems, rather than just manufacturing modules. RGS Energy recently announced it will begin providing leasing in-house rather than through outside groups. And SolarCity, the country&#;s biggest solar developer, financier, and installer, just went so far as to buy a module manufacturer (Silevo).
But while some companies still practice vertical integration for supply-chain control (for example, Walmart owns and operates its own trucking fleet), many are moving away from the practice, instead opting for horizontal integration (i.e., buying your competitors).
Why the move away from vertical integration? For one, companies often divest the lowest-margin parts of their business (such as solar modules, which are at this point a global commodity with low margins). Often it is cheaper to pay a specialized company for a resource than try to run an expensive &#;side business&#; providing the necessary inputs for a final product. Apple, for example, does not make its own microchips; it buys them from a microchip manufacturer.
Yet, we now have four vertically integrated solar companies in the U.S.&#;SolarCity, Vivint Solar, Sunrun/REC Solar, and RGS Energy. They claim it will help them keep costs down, but a look at other industries (e.g., Rockefeller&#;s Standard Oil monopoly) suggests the opposite is often true. So, why then is the solar industry becoming more vertical integrated through a spate of recent acquisitions? The answer can help provide insights into why U.S. solar has such stubbornly high prices relative to countries like Germany and Australia.
Companies once focused purely on one aspect of the market are now involved in project development, financing, and installation. Some manufacture their own mounting systems, modules, or electrical equipment. Across the solar board, vertically integrated companies show some of the strongest growth and the largest market share. SolarCity and Vivint, the two largest installation companies, controlled 34 percent of the market in and were mostly vertically integrated. Here&#;s why:
1. Vertical integration offers benefits to joint installers/financiers
The federal investment tax credit (ITC) on solar systems goes to the financier, and is based on the appraised value of the project. This provides a strong incentive for a company to handle its own financing and its own installations. It gets to control the appraised value of the project as an installer, and receive the tax benefits from that appraisal as the financier.
2. Vertical integration creates a cost &#;black box&#;
How much does a solar module cost to buy? The average cost on the market now is $0.85/W. But how much does it cost a vertically integrated solar company to manufacture and supply itself with a solar module? It&#;s hard to know, and that&#;s the point. The same goes for the costs of customer acquisition, or finance overhead, or Installation. When a company controls all aspects of solar PV installations, the costs are no longer transparent, and the price can become a &#;black box&#; into which no one from the outside can peer in. This allows a company to keep a mystery how much of its prices are based on costs and how much are based on margins. Plenty of companies protect the inner workings of their businesses and profitmaking, so it&#;s hard to fault solar for going that route, though the industry could use more transparency to unlock cost reduction opportunities that&#;ll make solar more affordable for broader swaths of the market.
3. Vertical integration defends against market power
Since financing has become the most popular way to install solar (58 percent growth of solar financing every year since , and accounting for 80&#;90 percent of new solar installs in states such as Colorado and Arizona), financial groups got to set their own terms and high rates of return. Solar installers might struggle as equipment prices and competition drove margins down, but financiers could expect a guaranteed rate of return. Installers moved into financing in order to control that high-profit aspect of the business and avoid being stuck solely in the volatile installations market. Simultaneously, project developers and financiers began moving into installation in order to exercise better control over appraisals and system pricing.
4. Vertical integration reduces market competition
The solar installation market is still very large with a lot of small players. The barriers to entry are low; any electrical contractor can get the parts and equipment to make installations. By vertically integrating, large companies can become their own suppliers and control access to equipment and financing. Large companies can attract more customers through better and easier financing, and raise the barrier to entry for small competitors. While running multiple operations within the company adds to overhead, it also lets them squeeze out the smaller competitors and ensure a bigger share of the market in the long term.
5. Vertical integration defends against opportunism
New installation technologies and techniques are difficult to patent and relatively easy to reverse engineer. Any company able to create a new system to reduce costs would be rapidly followed by the other solar installers/companies. By vertically integrating the supply chain, these companies can control access to top-tier equipment for longer periods. Rapidly expanding a new technology&#;s use&#;and the cost/system benefits it brings&#;allows a vertically integrated company to quickly secure market share before its competitors can develop rival equipment.
Vertical integration clearly has appeal. Companies like to talk about its benefits in reducing prices, but it also helps companies preserve margin by making costs unclear. If Verengo Solar gets sold, as is rumored, then the top installers in the U.S. will all be vertically integrated or moving in that direction. As the solar installation market becomes increasingly competitive, solar installers must figure out ways to avoid margin stacking and control soft costs at every level if they are to continue to expand cost parity in the face of expiring incentives.
SolarCity&#;s VP, Tanguy Serra, stated that &#;you need to be vertically integrated&#; to compete at the scale and costs of the U.S. solar market. Vertical integration can offer great benefits. Corporations can control and de-risk a supply chain. Consumers can be offered better financing options. Widespread information gathering can lead to improved products and services. However, vertical integration has pitfalls. Companies can sequester or stifle new technologies to maintain market dominance. It can also allow companies to shift cost reductions into increased margins, rather than savings to consumers. As the solar industry continues to grow and integrate, it will become clearer which direction it will take.
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This all could change in , when the 30 percent investment tax credit (ITC) on solar installations expires. At that point, the major initial benefit to financiers will be gone. Solar installation companies require constant cash to construct. The ITC provided a benefit with its 30 percent credit putting cash almost immediately back in the hands of installers. Without this benefit, solar companies may have trouble attracting financing investors and maintaining their financier status. The future of the ITC may decide the future of vertical integration in solar.
In addition, solar companies are being investigated for how they appraise systems, and whether their appraisal is really the &#;fair market value.&#; If appraisals have to be handled separately, the reason diminishes for financiers to be involved in the installation/appraisal market.
As the solar installation market develops in the future and tax benefits change, it is possible vertical integration will no longer be profitable. For now, controlling development, finance, and installation continues to be the winning trend. The nascent structure of the market and the tax benefits around it will eventually change, and at that point the solar industry may go the direction of many before it and begin disintegrating into many smaller specialized companies.
Images courtesy of spirit of america / Shutterstock.com
There are many benefits of installing solar panels in commercial buildings. From significantly decreasing operating costs to becoming more sustainable, a PV installation on commercial buildings is an advantage that no business should miss out on. In this article, we go through the key benefits and cost savings for businesses that come with solar power &#; if this sparks your interest, then read on!
So, what advantages and cost savings come for businesses with solar power? Take a look at the list below!
The profitability of solar panels is well known, but it becomes even more important in commercial buildings where energy consumption is at an extremely high level. It&#;s one of the main operational costs that businesses need to face. By installing solar panels, you can cut down these costs significantly.
This is extremely important right now since the costs of electricity are rising at a blistering pace. Solar panels let you generate most of the energy you use instead of acquiring it from the grid. Additionally, if you combine them with an energy warehouse, you can even produce energy after work hours and use it later to power your business. This way, with just a few investments in solar power, you can achieve powerful cost savings for your business.
Blackouts and power outages are becoming much more common, and they pose quite a risk for your business. This can lead to your operations being stopped while your employees are still on the clock or even to the destruction of certain products that require specific conditions (e.g. low temperatures), which you cannot achieve without electricity.
Investing in commercial solar panels lets you avoid these problems &#; you have your own independent source of electricity. If you go one step further and invest in an energy warehouse as well, you can ensure that your business will be fully operational even during the longest outages. This won&#;t only help you save on the cost of possible consequences of blackouts but also outperform your competitors during such periods.
According to data from Statista, about 44% of consumers worldwide are more likely to purchase products from companies that are committed to sustainability. One key benefit of commercial solar panels is that you can capitalize on this trend.
Apart from the regular cost savings, installing solar panels in your offices, shops, or factories enables you to show your customers that you truly care about the environment. This way, you can build your brand image as a sustainable company, one dedicated to the modern problems that humanity faces. As a result, you can drive more sales and attract customers, which is especially important since the costs of customer acquisition have been skyrocketing recently.
Embracing sustainability can also increase your employees&#; satisfaction. After all, many of them, especially Gen Z, care for our planet a lot and often take eco-friendliness into consideration when making their career moves. So, installing solar panels will attract both more customers and more quality employees to your company.
As a business owner, you sometimes need to make strategic moves. Whether it&#;s moving your shop elsewhere or finding a new office, it&#;s important that your current assets can be sold for an attractive price. This is where PV installations come in handy.
The key benefit of solar panels is that they increase the value of commercial buildings. This means that you can cut down the costs of electricity and get a return on your investment when selling this property. Therefore, installing a solar roof is financially worth it at several levels.
Solar power comes with numerous advantages and cost savings for businesses. Reducing the daily operating costs, preventing blackouts and outages from impacting the business, turning the company more sustainable, and increasing the property value are just the key benefits. Still, there are many smaller ones that come with PV installations. Therefore, businesses need to start investing in solar energy, as it&#;s the key to higher revenue!
You may also read: The Advantages of Early Solar Roof Planning
Contact us to discuss your requirements of Solar Integrated Solution Provider. Our experienced sales team can help you identify the options that best suit your needs.