Navigant Research Blog

California’s Energy Code Update Benefits Some More Than Others

— May 22, 2018

In a move to reduce energy use by more than 50%, the California Energy Commission (CEC) voted on May 9 to support on a series of reforms designed to require that new homes comply with standards of self-sufficiency. This includes requiring solar—a first globally.

Green Vision Is 2020

The new requirement will take effect on January 1, 2020 and will focus on four areas: residential and non-residential ventilation requirements, non-residential lighting requirements, updated thermal envelope standards, and—what interests me most—smart residential photovoltaic systems.

On the last topic, the CEC aims to “promote installing solar PV systems in newly constructed residential buildings. The systems include smart inverters with optional battery storage.”

The solar requirement is well-timed. The ITC step down will have its first decline in 2020, from 30% to 26%, and that will disappear for residential systems in 2022.

CEC Plans Include DER 

The requirements go beyond solar; the CEC also included other DER technologies in the mix. It also aims to “encourage battery storage and heat pump water heaters that shift the energy use of the house from peak periods to off-peak periods.” This aligns well with previous time-of-use electricity pricing regulations in California with mandates for solar installations.

While the solar industry will benefit from this requirement, some parts of the industry will benefit more than others:

  • OEMs: OEMs will be the clear winners from this initiative. California adds between 70,000 and 100,000 new housing units per year—or an extra demand for solar equipment of between 490 MW and 700 MW (assuming 7 kW systems). This effect will be similar for batteries and smart HVAC and heat pumps. Here we have two groups. Those OEMs that have products and brands that can add value to the property will benefit the most, as they will be able to work with real estate developers to create premium housing. Tesla leads this group, but others like SunPower, LG, and First Solar could benefit as well. The other group will have to compete to create low cost solutions to partner with real estate developers that target the poorer segments of the real estate market, or try to build a recognizable brand.
  • Installers: For installers, the new requirement is not a clear victory. While the extra demand is generally welcomed, in this specific market segment the real estate developers will have the upper hand. Therefore, installers will face deals that sacrifice margin for volume to become sub-contractors. In the medium-term, it’s more likely that real estate developers will build their own teams in charge of DER installations.
  • Financiers: Financiers face the same problem as installers. While the extra demand might bring new deals in which the person that buys the house decides to have a mortgage on the house and a separate loan or lease on the DER installations, the most likely outcome is that mortgages will cover the house and the DER equipment.

An Opportunity for a New Type of Residential DER Company

Initially, the outcome after the CEC energy code reforms does not seem to change for companies involved in installation and financing of solar systems in California, like SunRun or Vivint Solar. They do have a skill that real estate developers do not—the ongoing servicing they offer their customers. Companies with strong servicing arms could sacrifice part or all of their margin in the installation in exchange for long-term servicing contracts and potentially the rights to operate the equipment as an aggregator to offer services to the grid.

 

Google Has Reached 100% Renewable Energy, so I’m Issuing a New Challenge

— April 19, 2018

As consumers press companies to be more conscious of their environmental impact and sustainability, corporate procurement of renewable energy has gained momentum around the world. Some 130 companies have signed the RE100 pledge to make their operations run on 100% renewable energy. One of the companies that started this trend was Google.

Google’s First Renewable Steps

In 2010, Google started a journey to replace the electricity it uses with renewable sources by signing its first power purchase agreement (PPA) with a 114 MW wind farm in Iowa.

To ensure that its purchases have a meaningful impact on the environment, Google has followed the concept of additionality, which means that all the electricity it buys is funding new renewable energy projects.

In 2017—2.6 GW over 20 projects and 7 years later—Google announced that it reached its 100% renewables target. This is a massive achievement, especially considering that Google began these plans when grid parity was little more than a dream for wind, and solar energy was a technology that only rich Californians and Germans put on their roofs.

My Challenge to Google

While Google’s achievement should be applauded, I believe it is possible to move that target further afield. It is true that Google is buying all its electricity from renewable sources, but it is unlikely that all the electricity it is using comes from renewable sources. This is because solar and wind, Google’s choices for renewable sources, are both variable, while Google’s electricity demand is not. In other words, there are times and locations when Google must use electricity that comes from traditional sources, while simultaneously the electricity generated from the renewable projects funded via Google’s PPAs is curtailed and lost.

So, here is my challenge to Google (or any company willing to accept it—looking at Apple, Amazon, Microsoft) to move its energy program forward:

  • Work with the 20 projects it has funded to ensure they have onsite storage, which reduces the chance of curtailments and increases impact on the grid. This also means the balancing cost is not passed to other ratepayers.
  • Ensure all energy assets (distributed generation and loads) are part of demand response programs or virtual power plants, which makes the flexibility of these resources open to grid operators.
  • Make sure any new electricity procured is locally generated, and has no impact on the grid (or that the sites at least fulfill bullets 1 and 2 above).
  • Encourage employees to take their own energy consumption choices along the same journey!

Major Companies Should Continue to Set a High Bar

This is not an easy challenge, but it’s also not impossible. It’s probably as difficult as the goal to achieve 100% procurement of renewables seemed in 2010, when Google embarked on this mission. Google addressed these concepts in a white paper released in 2016, but mostly in a future tense. In my opinion, the technologies and regulations to make this possible are already here and are starting to reach scale. Now it is up to Google and other visionary organizations and individuals to make this happen.

 

Sunrun, Vivint Solar: One Step Back, Many Steps Forward

— April 3, 2018

Last year, I spent a lot of time writing about the issues affecting the US solar industry, from the potential threat of import tariffs, to residential market shift away from third-party ownership through leases and the industry’s difficulties lowering customer acquisition costs. Early March 2018, Sunrun and Vivint Solar released their 2017 financial results. Now that the results are in for two of the big three national companies (the other being Tesla’s SolarCity), it is interesting to see how they managed to navigate through this difficult environment. Both had a good day given the threats they were facing, but their stories are different.

A New Strategy for Vivint Solar

At the expense of market share, Vivint Solar chose to focus on the most valuable customers to increase its margin, moving from capital-intensive leases to direct sales. It also has shifted from a pure solar offering to a residential distributed energy resources (DER) solution provider—which includes Mercedes Benz Batteries and home management tools—to increase the average revenue per customer.

This shift in strategy began in the middle of 2016, hence Vivint’s annual installed capacity dropped by 17%, from 222.2 MW in 2016 to 183.8 MW in 2017. Despite this fall, the company managed to almost double its revenue, reaching $268 million in 2017, compared to $135 million in 2016. Some of this growth came thanks to the leases Vivint signed in 2016, so it is more a reflection of its business model; revenue from leases grew 43% to $150 million, but the lion share of the growth came from solar and other product system direct sales, which grew 390%, reaching $117 million. The company’s net income got a significant boost, increasing from $17.9 million in 2016 to $209 million in 2017, a reflection of the shift from leases to direct sales.

Sunrun Jumps to Largest US Residential Solar Installer

Sunrun is also focused on increasing its margin per customer and its strategy included the launch of a full DER solution (solar, battery, and home energy management). However, its strategy is primarily focused on lowering company costs—especially customer acquisition costs—through its collaboration with experienced retailers like Costco and Home Depot and its partnership with Comcast, tapping on its current customers through a referral program.

Sunrun’s strategy paid off. In 2017, Sunrun became the largest residential solar installer in the US, reaching 323 MW of annual installed capacity, an increase of 15% from 2016. The company did this while increasing revenues and reducing its costs, becoming cashflow positive. Revenue increased from $454 million in 2016 to $530 million in 2017, and net income grew from $92 million in 2016 to $124.5 million in 2017.

What Can DER Do for Solar Installers?

The fact that Vivint Solar and Sunrun had a good year in what was a difficult environment shows that solar and DER (in general) have passed the early adopter phase and now brings real value to customers.

This also highlights the value that DER can bring to solar installers if they position themselves to develop correctly in this market. Of course, this is easier to say than do, as shown by the bankruptcy of Sungevity in early 2017 (then the fourth-largest installer in the US) and the struggle of Tesla’s subsidiary SolarCity, which was the largest installer before 2017. However, according to Navigant Research’s Global DER Deployment Forecast Database report, the residential DER segment will grow faster than any other, so a bountiful reward awaits those that succeed.

 

America Movil Enters the Residential Solar Market

— March 20, 2018

On February 26, Mexico-based America Movil, one of the world’s largest telecom companies, announced the launch of a solar product in Mexico, becoming the first leading telecom company to fully embrace distributed energy resources (DER). America Movil currently serves 363.5 million access lines, including 280.6 million mobile subscribers in Latin America and Central and Southeast Europe.

Its fixed-line subsidiary, Telmex, will provide the service to customers who own a roof. Telmex will install the modules and file all its customers’ paperwork. A 3.3 kW system will cost MXN 166,844 (US$8,957 or US$2.7/W) paid in cash or up to MXN 236,000 (US$12,600 or US$3.8/W) when financed. Payments will be made through an existing Telmex invoice.

Telmex will target high consumption residential customers currently paying the regulated domestic high consumption (DAC) tariff, which in February 2018 was US$0.24/kWh. A user pays this tariff if they consume more than 250 kWh per month in temperate regions or up to 2,500 kWh in the hottest areas.

A Need to Diversify

America Movil already offers mobile, fixed-line, broadband, Internet of Things, and television services in Mexico, but its 61% market share is at the limit of what regulators allow. In addition, after regulatory reform in 2014, Mexican mobile competition increased significantly, cutting margins at America Movil’s cash cow. In April 2017, Mexico’s telecoms regulator put America Movil on notice to legally separate its Telmex fixed-line division from its cellular and retail divisions, putting even more pressure on the company’s finances.

DER: A Tool to Capture the Energy Market

With no room to expand in the telecoms sector, America Movil needs new markets where it can leverage its infrastructure and large customer base. Residential solar fits this description perfectly. Telmex must create new solar installation teams, but other infrastructure already exists: sales, retail partners (Carlos Slim, America Movil’s majority shareholder, owns a large Mexican retail empire), finance (Slim also owns a local bank), customer service centres, billing, etc.

Both Telmex and customers will benefit. Solar improves customer stickiness (finance contracts run for up to 6 years), while reducing electricity costs for its customers.

The America Movil Case Is Unique, but Some Drivers Are Global

America Movil’s situation is unique. Few telecoms are permitted a 61% market share, or have an owner that also owns a bank and a retail empire, or are entering a market with one player not used to competing. But other drivers are global. All telecoms have a large customer base and the infrastructure to serve and bill them once DER is installed. Many also operate in regions with regulated electricity tariffs and abundant sunshine.

Other telecoms are already exploring DER. Last year in the US, Sunrun and Comcast partnered to offer Comcast customers Sunrun’s DER services. In Europe, O2 Telefonica has tip-toed into DER through smart home energy devices like smart thermostats, albeit with mixed results.

 

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