Commercial and industrial solar installs through the roof as business wakes up to the sun
Business is about profit. If costs jump, a business owner will ask customers to pay more. That’s how business works. If every participant in a particular industry pays about the same for electricity say, then all customers will be asked to pay more as energy prices rise. Yes, competition for market share among business rivals will see some willing to forego a slither in margins, but not in the long term if anyone can help it.
Then along came solar energy and everything changed. The clean energy revolution has delivered a powerful new tool to managers, who can now fit generation plants to their properties and watch happily as their electricity bills fall.
In the fast-changing and cutthroat world of business, buying your own power plant can be a quick way of pushing up profits.
Australians have caught on quick to the potential of rooftop solar at home, with 7GW of capacity so far installed across more than 2 million residences, and large-scale energy users are slowly starting to commit.
Last year was a record for registrations of new systems in the commercial and industrial range, with about 200MW of systems between 10-100kW installed, a 45% step up year-on-year, according to data from SunWiz.
Residential uptake by overall capacity may be well ahead of commercial and industrial, but when your load profile makes solar such an obvious energy choice it stands to reason that more and more business owners will give the nod to renewables – especially as energy prices keep whipsawing all over the place and our leaders in Canberra carry on like pork chops.
It took a while, but business is finally waking up to the sun.
“It’s massive,” says Todae Solar CEO Danin Kahn. “We’ve got a good solid decade [ahead] of businesses deploying this – it’s a very exciting market.”
The best thing is, there is no threat from wild swings in political policy to an investment in clean and cheap electricity – barring a government deciding it wanted to make renewable energy more expensive by taxing it.“We’re at the point now for commercial and industrial users where policy is almost irrelevant,” Kahn says.
Photon Energy general manager Robert Ibrahim says business managers are becoming more accepting of the benefits behind-the-meter solar can provide organisations not only for profitability but also for reducing carbon footprint. “It’s a by-product of keeping the costs down – if they can reduce their energy consumption, save money and reduce carbon it’s a win-win,” Ibrahim says.
As solar slowly gets traction in the commercial and industrial sector he says inquiries are coming from “anybody with a roof space, from small manufacturing to retail to large manufacturing, warehousing – it’s every industry across the board, anybody who has real estate.”
Things can also get complicated when it comes to negotiating grid connections, which is where a system owner’s hopes for generous generation capacity may meet the harsh light of day in the form of a tight export limit. Ibrahim gets to see both sides of the bargain. “It’s not easy. [The networks] have to protect their infrastructure and we’re trying to maximise the return for our customers,” he says. In some cases, constraints will be set on the amount of energy that can be exported, which may lead to a system being redesigned to optimise how output is integrated into an owner’s building.
The goal is always to maximise use of solar energy generated on-site, but the sun still shines on weekends and holidays so networks that service industrial areas will feel the strain as more businesses generate their own energy and export en masse. The other option is to reduce output.
Some large companies that have tested the water with solar over the years are approving large rollouts, says Kahn at Todae. One of his clients has approved an energy strategy that will see systems installed on 110 sites across Australia. “There has been quite a number of larger corporates that have gone a lot harder on [solar],” he says.
Some clients that have the luxury of empty real estate are maximising output by installing ground-mounted systems with tracking. A ground-mounted single-axis tracking system will achieve higher yield during the morning and afternoon as panels are slowly rotated to face the sun.
“Rather than being a bell-shaped [generation] it’s more like a block shape,” Kahn says. “It fills the shoulders of the profile out and flattens the load, which makes it more attractive to the energy consumer. They’re probably getting an extra 10-15% out of the panels by using tracking.”
At GEM Energy CEO Jack Hooper has seen a pick-up in inquiries from agribusiness owners with loads in the 100-300kW range for ground-mounted systems, both fixed and with single-axis tracking.
Do you pay or PPA?
Solar energy makes instant sense if you have a rooftop and high power bills, but opinions differ on the best way to buy a system. Power purchase agreements (PPAs) are catching on among managers who like the predictability of a fixed price (indexed at an agreed rate) and a fixed term.
Clients may like the idea that a PPA is off the balance sheet and appears to include very limited risk, Hooper says, but “they are paying a substantial premium for their solar system through a PPA [for perceived lower risk]”. He estimates some systems bought via a PPA will cost twice as much as if they were bought outright or leased. He says GEM Energy has drawn up 10-year financing options for solar systems where the cost of energy works out to being 30-40% cheaper than with a PPA.
At Todae, Kahn is more upbeat about PPAs.
“A PPA provides three things: cost reduction, guaranteed supply and level of certainty, and sustainability benefits and marketing benefits,” he says.
He gives an example of the 3.2MW system Todae installed for Primo Foods in Brisbane. “They didn’t fork out a dollar for that solar [system],” he says. “All they’re doing is buying electricity from it at a lower rate at what they’re currently buying from the grid.” In return, the company can claim to be powered by solar. “There’s a good benefit there to them, with no direct cost associated with it.”
Let’s get technical
Clients who have done their background homework on the possibilities of solar and the associated technologies will be less vulnerable to wonky salespeople who will cut any corners they can to push the price down. That’s good news for the quality end of the commercial and industrial solar industry, as shadowy operators are left at the sidelines, but it also brings a higher level of complexity to negotiations.
“Responding to a tender now is significantly more complicated than it might have been two or three years ago,” says Kahn at Todae. “The level of knowledge has absolutely increased.”
As more businesses twig to solar as clean way to cut energy costs they are attracting ever more installers to service the sector – and a steady increase in suppliers has begun to affect profits.
“Margins are decreasing,” says Kahn. “There’s no doubt about that.” He says Todae targets projects typically above 1MW, where the barrier to new entrants is high. “Not everyone has the capability to deliver a [multiple-megawatt] project. You need a lot of resources, and we’ve invested ahead of the curve. We’re taking a view that market is going to continue to grow.”
It’s never prudent to place too much faith in subsidies in any industry, as benefits can evaporate with a swing of the political pendulum. In Australia the clean energy debate is more like a car park brawl these days, but owners of solar systems big and small have banked on subsidies to get their investments over the line. The large-scale generation certificate (LGC) market applies to generation from systems larger than 100kW and is due to expire in 2030, but the spot price began a steep decline last year, falling 48% in the 12 months to mid-January 2019.
Owners of systems installed only a couple of years ago who had banked on LGC prices around $85/MWh will be feeling sore, and anyone budgeting for a new system had better understand the volatility in the spot price for LGCs.
Hooper at GEM Energy says the slump in LGC prices “caught everyone blind-sided”. He expects the trend to continue. “Post 2020 the prices are expected to be around $15/MWh,” he says.
A drop in LGC prices is no surprise to Todae, Kahn says. “We always knew that post-2020 the price was going to drop away to almost nothing.”
A significant drop in LGCs can have a large impact on the business case, says Kahn. “We are seeing some business managers basically write that off to zero, where they won’t sign off projects if it requires a specific return on LGCs.”
Meanwhile, clients who had hedged for LGC volatility have nothing to worry about.
The battery stand-off
Every last self-generated electron could be used on-site, of course, if energy could be cheaply stored for later use. Business owners, like the rest of us, have heard all about the potential of batteries thanks to Elon Musk’s well-reported Tesla technology used at the Hornsdale Power Reserve, but it seems batteries are still a long way from going mainstream. Ibrahim estimates an 8-10-year payback for storage, although he says some projects have come in lower depending on the client’s energy costs and load pattern. “A lot of the times we find if we can change the way they use their power it can help them more than battery storage,” he says. “It’s not one-model-fits-all.”
When it comes to capturing surplus solar energy for future use, storage is an obvious solution that is still hard to sell. In 2018, 31 commercial battery systems totalling 37MWh of storage were commissioned, according to SunWiz using data from Australian Energy Storage adjusted for other announced projects.
Kahn estimates a payback period range of 7-12 years, making it a tough decision for many business managers. Todae has integrated 200kWh of storage for a client in the age care sector, he says. “There are organisations out there that do want to do it.”
GEM Energy’s Hooper estimates payback periods on storage between 6-8 years, depending on tariffs and which energy network the customer is connected to.
“Storage really is a clean slate,” Hooper says. “You have to go in there and explain what the benefits and opportunities of battery storage are for that particular customer.”
A boom in use of batteries among Australian business owners is still well over the horizon, he says. “It’s a very, very small market for batteries at the moment.” Still, he hints that he’s had some success convincing managers that if they look at the possibilities slightly differently they may find that, for example, a 200kW system with a 400kWh battery might work better for them than the 99kW solar-only proposals of other installers.
“Clients will often sit down and say, well, OK, we haven’t looked at that before – that sounds interesting,” Hooper says. “It’s really up to you to go to the client and make a recommendation. Quite often we’ve made a recommendation and the client has taken the initiative to go down that road. They might have environmental goals or sustainability goals.”
If the customer’s energy usage suits storage, Hooper says the cost savings can be dramatic.
“We’ve got some customers where we’ve installed battery storage whose power bills have gone from close to $300,000 to $25,000,” he says. “Seriously.”
When a battery is optimised to charge and discharge to take maximum advantage of changes in tariffs throughout the day, Hooper says it’s common to see power bills cut by 80-90%. “Our systems are always outperforming our estimates,” says Hooper, who estimates GEM will install about 6MWh of storage in 2019.
Clients whose systems have to export energy, say on weekends or holidays, may be in a position to negotiate a feed-in tariff. Retailers are slowly becoming more flexible, Hooper says. Yes, many will offer a price and pretty much say take-it-or-leave-it, but others may look at the wholesale market and use that as a benchmark against which an offer is made and some have even offered one-for-one tariffs on energy, Hooper says, where a retailer buys and sells exported electricity at the same price – to make no profit on it at all. “It’s a good deal,” he says. “It’s not for me to argue with.”
About 40 Queensland schools that are clients of GEM Energy have such one-for-one feed-in tariff arrangements with retailers for exported electricity, he says. Still, the cost savings from exports are minimal against the sheer impact of the offset of consumption and the tariff optimisation opportunities that make a battery add up.
Even if business owners are ready to accept the warranties and technology the mainstream battery-makers have to sell, the price tags are still hard to compute. Hooper says costs will need to fall by 30-50% for the technology to achieve wide-scale uptake. “I just can’t see that happening in the next few years,” he says. “We’ve actually seen price increases in [commercial] batteries over the past six months.”
Prices of imported batteries are also at mercy of a falling Australian dollar.
“Where we’re seeing a solid future is with larger organisations,” says Hooper, who expresses dismay about wild discounting among installers of systems under 100kW who are happy to get by on a gross margin of 5%.
Larger companies have an understanding of what it takes to deliver large projects, he says, and they’re happy to pay for it. “For a large organisation, price makes up a very small factor of what they perceive as value. It’s a far better market to be in than the race-to-the-bottom that is commercial solar for everything 100kW and under.”
It’s tough in the sunshine state
Solar in Queensland has been booming. But Hooper says it’s a different story for commercial and industrial, where returns in Queensland are much lower than in the southern states because of the tariff structure.
“The kilowatt-hour volume charges on the network tariffs [in Queensland] are only 1.5c/kWh, and we’re seeing 8-9c/kWh for peak retail charges. So you’re offsetting 10c/kWh, whereas in the southern states large businesses are still spending 20c/kWh through retail charges, network charges and demand charges and so on,” Hooper says. “The economics of solar in the southern states is so much better than it is in Queensland.”
Over recent years as wholesale electricity prices in the state spiked, installation business grew with it. These days it’s a much tougher game, especially when LGC prices are factored in.
“When you have a real understanding of what it costs to deliver a project, it’s hard to make the economics stack up,” he says. “Whereas in the southern states we put together a proposal for the same system at the same price and its returns are close to double what we get in Queensland.”