Article by Megan Birney, Director of Strategic Affairs, Wiser Capital
We have known for decades the importance and benefits of solar power, evident by its rapid adoption. A new solar project was installed every two minutes in 2015. GTM Research forecasts that the U.S. solar PV market as a whole will grow 19% over 2014. These numbers seem impressive, but solar still accounts for less than 0.5% of the total electricity generation in the U.S. So how do we take the market from its infancy to wide-spread adoption?
To start answering this question, we must divide the solar market into two factions: the rated and unrated markets. Rated solar, encompassing any project where the purchaser of electricity has a public debt rating from agencies like Moody’s or Standard & Poor’s, is booming. This is because banks and other lending agencies providing capital for solar projects believe they will be repaid based on the borrower’s public debt rating. Examples include companies like Amazon, Apple and Google, which have invested hundreds of millions of dollars in solar to offset electricity at their offices and data centers.
The unrated market, on the other hand, involves individuals, organizations and businesses that are too small or unknown for a public debt rating. Their assets largely remain a mystery to lending organizations, so capital to finance projects is slow to arrive. Examples include local businesses, school districts, homeowners and even municipalities.
Sociologist E.M. Rogers’ Diffusion of Innovation Theory notes five distinct consumer segments that determine if a product or service is to become a phenomenon.
The rated solar market currently falls into the Early Adopters category. According to Rogers, Early Adopters “represent opinion leaders … They are already aware of the need to change so are very comfortable adopting new ideas.” This describes companies like Amazon, Apple and Google.
Unfortunately, the unrated market is only at the start of the curve in the Innovators stage. It hasn’t seen as much development because there hasn’t been an efficient way to assess risk without a public debt rating. But this market has a broad range of potential solar facilities that are prime for market explosion. Innovators, according to Rogers, “are venturesome and interested in new ideas. These people are very willing to take risks, and are often the first to develop new ideas.”
So who are the Innovators? Innovators are the first nonprofits in a community that switch from their traditional utility electricity to a solar power purchase agreement, the solar installation companies that market to home owner associations and private schools, and investors that work to understand the unique aspects and immense potential in the almost 30 million small businesses nationwide. The unrated solar industry still needs more Innovators.
Gauging solar’s ease of adoption
Rogers’ theory goes on to discuss five factors that influence adoption of an innovation:
Relative advantage: The degree to which an innovation is seen as better than the idea, program or product it replaces
Compatibility: How consistent the innovation is with the values, experiences and needs of the potential adopters
Complexity: How difficult the innovation is to understand and use
Triability: The extent to which the innovation can be tested or experimented with before a commitment to adopt is made
Observability: The extent to which the innovation provides tangible results
As the solar industry begins to move all market players further into the bell curve, keeping these factors in mind could mean the difference between a fast switch and market stagnation. Luckily, solar electricity has strong showing in three of the five categories. A refrigerator or air conditioner doesn’t know the difference between an electron from a solar panel and one from a natural gas-fired power plant, but a consumer’s balance sheet and conscious does. This means solar has a relative advantage over traditional fossil-based fuels. Additionally, solar is highly compatible with our existing infrastructure. We don’t need new fuel stations or appliances to accept the solar electricity. Lastly, solar is “observable”—the electricity produced has a direct dollar equivalent in terms of electricity savings or return on investment. You can’t see the electrons, but you can see the impact.
Unfortunately, solar can seem complex to consumers and investors. For those who don’t understand the difference between a kW and a kWh, buying solar and comparing it to an existing electricity bill can be daunting. Even investors who have participated in the rated solar market have a difficult time with the unrated solar market without a third party to measure risks. Tariff flipping, grid interconnection, lack of standardization and transaction costs all add to the complexity. And in its traditional form, solar is almost impossible to “try” before you buy.
Cementing the solar market in 2016
To spur adoption, the solar industry needs to focus on complexity and triability while using observability. Complexity can be tackled through standardization and marketing. All segments have benefited from contract standardization and the work of Solar Access to Public Capital (SAPC), though there is room for continued improvements. For the unrated market, standardization in risk assessment is imperative. Tools like the Wiser Solar Asset Rating (WSAR) score allow investors to better access the risk and reward of projects. Through an automated process, WSAR calculates the bankability of a solar project and assigns a score (similar to a FICO score). This process can help investors become comfortable investing in a newer type of asset.
As mentioned, triability is a tough factor for solar, but a study from Yale and New York University in 2012 showed that solar is contagious. The study found that a 10% increase in the number of people with solar in a zip code increases adoption by 54%. While it might not be as effective as trying a product before buying it, seeing solar in action boosts adoption. Additionally, the evolution of community solar, where a solar array is centrally located and individuals or businesses can buy-in, can lead to further adoption by those who are unwilling to purchase a system outright.
These two issues can partly be solved by observability. The Early Majority need to “see evidence” and the Late Majority wait until it “has been tried by the majority.” Therefore it is of utmost importance to communicate the successes of solar. Investors want to see that money is safe, secure and supplying the return expected. Purchasers of solar electricity need to see the systems delivering savings and electricity generation, as predicted. By showing successful solar across the initial adopter categories, the later categories will be more willing to adopt solar and move the industry into the majority.
Patrick Khosravani says
Steven, great article. Hey one way we, as an industry, can begin tackling the “observability” challenge is by installing an energy consumption and production monitoring system on every project. Once people see what there house or business is using versus what they’re harvesting with solar – all displayed there on a simple graph – they instantly “get it”. Even more, almost always I see them getting excited about cutting energy usage, you know to get capture more savings. But, that can’t be the end of it, so every monitoring system should be remotely accessible online (through an installers website or an aggregator) by folks you are interested in what solar can do. Literally, by watching the graph you are kinda trying it out…could it be…”triability” solved.
Steven Bushong says
Thanks, Patrick, but all credit for the article should go to Megan at Wiser Capital. I like your ideas, though!