The Federal Investment Tax Credit (ITC) is set to expire at the end of 2016 – and if it does, many residential solar installers might face trouble. Shayle Kann, Senior VP of GTM Research, referred to the expiration of the Investment Tax Credit as “the cliff” which will force the solar industry back to its 2014 installation levels, even though only growth is predicted from here on out.
On top of this, many local solar rebates are declining or sunsetting altogether, leaving the ITC as one of the last remaining solar incentives. Net energy metering (NEM)–another kind of incentive–is also under fire in many utility jurisdictions as witnessed in a number of high-profile battles since 2011.
Installers need to watch carefully how NEM 2.0 cases and utility rate cases are shaping up in the utility territories where they operate. Changes to NEM, proposals for fixed charges and minimum bills, and rate cases threaten the customer savings models we have depended upon until now. In most areas, NEM offers retail rate compensation for any solar electricity sold back to the grid.
Many proposals to change NEM will result in solar customers being offered wholesale rate or lower compensation for the solar they sell back to the grid. Aside from being more complicated to model project financials, this will impact customer savings significantly. Rate cases will also challenge customer savings. Proposals including residential demand charges, time-of-use rates, fixed charges and minimum bills will all have impacts on modeling customer savings and are being explored in some combination depending on your jurisdiction.
What Can Be Done?
For residential installers, the complex threats via NEM 2.0 and utility rate changes compound on top of the potential loss of the ITC into a powerfully uncertain environment. Find out from your state SEIA chapter on how you can get involved being a face for the solar industry in local campaigns that target key members of Congress who can support the extension of the ITC or by participating in conversations at NEM and rate cases.
Installers who successfully close the gap of 30% of project cost for direct ownership or 20% for third-party ownership may gain advantage over their peers who are playing the “wait and see” game. That’s almost $5,000 per project that installers need to reduce. However, this “gap” is likely more like 40-50% when overhead “all-in” is factored. That’s a lot of ground to cover.
Installers need to understand where they play the strongest in the project fulfillment cycle. Is it sales, design, installation, customer experience? Small, pure play solar installers who do everything from lead generation to long-term customer support may not find themselves in an advantageous position given the trend toward increasing costs of customer acquisition, as seen with the Q3 2015 earnings announcements from SolarCity about rising customer acquisition costs.
The residential market is gravitating toward an ecosystem model, where sophisticated marketing and sales organizations deliver lower cost-of-acquisition customers to an array of service providers connected together via software platforms and strategic partnerships. The entire solar value chain from manufacturing to distribution to installation to the end customer will begin to operate in a more integrated and interoperable fashion as the industry continues to mature. How will you fit in to that structure?
Solar installers need to look at how organizational design, business process and software tools or platforms can help them compete given the changes that are coming. The first place many installers will need to start is freeing up the time of the business owner to allow them more freedom to work on the business as opposed to in the business. That means delegating responsibility to other staff members and putting guidelines and policies in place for everything from sales margins to design standards to project or customer escalations. This important step alone will pave the way for the real strategic thinking needed to chart the course.
Software will continue to play a key role in streamlining and automating increasingly complex processes. Software tools already help streamline the proposal process and will continue to as the financial modeling becomes more complex. Many sales and proposal platforms are already starting to add more complex modeling that accounts for different sell-back compensation for NEM 2.0, demand charges, and more. Ask your proposal tool provider how they are accounting for these changes in their development roadmap. If they aren’t, you might want to consider how strong of a partner they will be to your business.
Most importantly start preparing now. No matter what changes–whether the ITC, NEM, rate cases, the rise of storage, the smart home, electric vehicle adoption–where solar falls in the solution landscape is sure to change. Get ready.