New Business Models, Part 2: Traditional Utility Sector

New Business Models, Part 2: Traditional Utility Sector


Welcome everyone to the International Solar
Alliance Expert Training Course. This
particular unit is focusing on the rise of new business models in the solar sector. We’ve
seen in recent years significant changes in the solar market in particular driven by these
new business models that are now making it easier for people who don’t yet have solar
on their rooftop or near their home or business
to go solar. And these business models are
having a pretty fundamental impact on the way solar is being purchased and scaled up
in a number of key jurisdictions around the world. So we’re going to try to provide an
overview of these business models in the first part of this lecture series. The second part
is going to focus more specifically as we’ll see in a moment on the impacts that these
business models are having on the traditional utility business model itself. So first a few words about this training series. This is supported jointly by the
International Solar Alliance in collaboration with the Clean Energy Solutions Center. The
International Solar Alliance is a grouping of countries around the world that it was
founded after the Paris Agreement to really scale up solar power with a focus on the
sunny, the sunniest countries in the world sort of around the, essentially around the
center of the equator and the equatorial countries
and north and south of the equator. The Clean
Energy Solution Center is one of the leading platforms providing technical assistance for
countries around the world with a particular focus on policymakers and regulatory
agencies in trying to scale up investment in clean energy. So I’ll provide a few – I’ll say a few
words about the overall structure of the training course. You’ve probably seen this briefly from the
introduction as well as from some of the other training materials but just briefly,
this training course has eight different modules ranging from policies for distributed
and large-scale PV down to socioeconomic aspects, market integration, as well as even
off grid solar and solar heating and cooling. There’s also a segment on technical aspects
of solar power. So this is really – the goal is
to provide a comprehensive overview of major issues, cutting edge trends and
developments in the solar sector. And as I said at the outset, this particular
module focused specifically on new business models. Part one is on the business models
themselves and part two will look at how these new business models are actually
impacting the traditional utility sector. A few quick words about myself. I’m director of E3 analytics and I have
over 12 years of experience working in the clean energy sector. I’ve worked with over 40 different
governments around the world from the Asia Pacific region, island states to a wide range
of countries throughout Africa and Central America and am currently teaching a
renewables MBA program course here in Berlin. In some ways a lot of the, there’s a
growing interest in capacity building and learning around solar development and
renewable energy development. And this new training initiative from the
Clean Energy Solution Center and the International Solar
Alliance is a fantastic platform to provide some of that knowledge and learning from markets
around the world to a broader audience. So a quick overview of the presentation. Here first we’ll look at the learning objectives,
will look at the business models themselves and then I’ll wrap up with a few concluding
remarks. The – it’s important to note also that
you should pay closely attention throughout the webinar because there will
be a series of multiple-choice questions at the
end that will require you to actually think back on the content and the material covered
in order to get the right answer. So that will come after the webinar is completed. So first, what are the goals? What are the learning objectives? First, we’ll look at a little
bit of the historical context for the emergence of new business models in the power
sector. We’ll look at the rise of these business
models and how they work. We’ll look at
how they’re helping reduce the barriers to going to solar. And we’ll look also at the
advantages and challenges that some of these new business models are facing. So without
further ado, let’s dive in. The historical model on which the utility
business is based goes back over a century to
the beginning of the 20th century. And it’s based essentially on large centralized
power plants providing power to captive end users. For most of the 20th century customers were
effectively connected to one monopoly utility and had no option to switch providers and
very little ability to engage in self-generation. So a household in say the 1960s in the US
or Europe wouldn’t have had an easy option available if they didn’t like what their
utility was providing them in terms of service or
in terms of cost. All of this has changed as
we’ll see in a few moments with the rise of distributed technologies like solar power. And
particularly with the rise of affordable solar power where solar is now increasingly
becoming the least cost option for new electricity supply in many countries around the
world. And solar is also very highly scalable so
it can be developed on individual households. It
can be developed from tiny PICO solar units common throughout sub-Saharan Africa that
range from 20 to 30 watts up to 200 watts to large household systems that can range
up to 10 kilowatts or more and onward from there
to utility scale, larger scale ground mounted solar power. But in the beginning throughout the 20th century
with the rise of electrification around the world there were
comparatively few independent power producers after the 1930s. Utilities were largely nationalized. Electricity became in many
cases a state-owned business and a monopoly business where one entity owned the
generation, transmission and distribution infrastructure and took care of customer service
and the retail end of the business. Now what we’ve seen in recent years and
particularly in the 1990s and 2000s is that this
has started to change. And market regulation has started to enable
and even in many cases encourage more actors to participate, compete
and invest in the electricity sector. So
before in many ways in the past, electricity sector was a very – it was a sector dominated
by a few very large corporations and entities. Now we’re seeing the rise of a much more
distributed, much more competitive, much more diverse sector. And in many ways solar
power is leading the way on that partly because of the fact that it’s a very distributed
technology and also partly because of the fact that it’s becoming so cost effective
compared to other forms of power generation. Now it’s important not to forget that this
has not always been the case. Solar used to be
one of if not the most expensive source of power generation. And it’s only really in the
last five to ten years that we’ve seen solar starting to become cost competitive with
traditional sort of utility scale generation like coal plants, nuclear plants and natural
gas plants. So in many ways the historical context is
that the rise of these new business models is a direct consequence of this prior
period of opening up and what we sometimes called liberalization in the electricity market. And different countries around the world
are at different levels of liberalization. And it would – whether if you look at countries
like Brazil or Ghana, South Africa, the Philippines, Thailand, the different countries
around the world all have different levels of
liberalization in terms of how open the electricity market is, how much competition there
is. And that has a very direct impact as we’ll
see on the rise of these new business models in the solar sector. In some cases, it remains the case that these
business models can’t take root because the regulations explicitly
forbid it. And in that sense, the evolution of
these business models is very closely linked to the regulatory environment in which they
exist. So I’ve been using the phrase a lot, a business
model. But let’s think a little bit more
critically about this for a moment. What is a business model? What do I mean? What do
we mean when we say a business model? So in a nutshell a business model defines
how a particular business creates, delivers and
harnesses value for its customers. That’s really at
the most basic level what a business model is. And why do new business models emerge? Well, in the power sector, there are two major
drivers. One of them as I pointed out is
technological change. The second is changes in actual electricity
market regulations themselves. Changes in electricity market regulations
make it possible as we saw a few moments ago for new actors to emerge and that
has helped enable the rise of these new models. So we see that new businesses are capitalizing
on niches that are opened up by a rapidly changing technological and regulatory
landscape. But there are some other factors that are
important and that have played a major role in
the emergence of these new business models particularly in markets like the US and to
a lesser degree in Australia is changes in tax
policy. Taxes have played a major role in
enabling the new business models that we’ll see in a moment to really emerge in the
United States. And there’s a number of reasons for this. Further important component
here is changes in consumer behavior. Before the electricity sector was largely
one that you could connect up essentially and forget
and not really worry where your power comes from, who is producing it and really
for many users even how much it costs was only a secondary consideration. This has started to change as more competition
has entered into the market and also as retail prices for many customer classes have
gone up very rapidly. So as retail prices go
up you have people starting to look at their options. How can I reduce my power bill? How can I do things differently. And that’s been another important catalyst. The third
component that’s worth highlighting here is the role of financial innovation, particular
new financial products and services that make it easier for customers to invest in solar. And we’ll see how that has helped in many
ways unlock the solar market and it’s helped fuel the rise of these new business models. Now as I mentioned a few moments ago, the
solar PV market is growing exponentially. There are some very rapid changes taking place
and in the last few years in particular the pace of change has accelerated even faster. Much of this growth has been driven by large
scale solar PV projects. So we’re talking over 50 megawatts. But there’s a significant
amount of growth happening specifically at the distributed end of the spectrum, at the
customer end, at the rooftop end of the market. And as we’ll see in this presentation
which is really what we’re focusing on here is this more distributed end of the market. In some ways the large-scale ground mounted
utility scale solar market is healthy and, in
many countries, thriving. It’s not the case universally that the distributed
solar power market is thriving in every country. So what we’re going to focus on is how this
new, these new business models are helping unlock
the distributed, the customer end of the solar market to unlock more potential out
of rooftops and businesses who can now more easily and more cheaply than ever before invest
in solar power. So as you can see here, this is a recent chart
from an IRENA report looking at solar PV costs. You can see here on the far-left total installed
costs have come down dramatically even just in the last seven years and similarly
cell efficiencies have gone up and continue to rise. And the overall levelized cost of solar power
has also experienced dramatic declines. So this is really the technological transformation
that we’re talking about. This
is what’s made it possible for households, for small businesses around the world to start
investing in solar to reduce their utility costs. Globally, you can see that the solar market
is still very – the potential for growth and
continued growth and expansion in solar is massive. Some of the largest markets in the
world are currently China and India. Japan is also booming. Germany remains a stable
and growing, though more slowly growing, still growing solar market. And you can see
on the far left the United States. But much of the world has just, is just beginning
to tap into the abundant potential of cost effective
solar. And in many ways, one could argue
that this is really – we are just at the beginning of seeing a massive transformation
in the overall electricity system driven by the emergence
of increasingly cost effective solar. And you can see here throughout South American,
throughout Central America, throughout Africa and much of Asia the potential
is absolutely tremendous. This graph shows quickly the growth in solar
PV consumption. You can see here that the
Asia Pacific region has effectively overtaken Europe and now if you’re looking at 2018
numbers and data, the amount of PV installed and the amount of PV being injected into
the grid – there’s solar PV being injected into the grid in the Asia Pacific region is
larger than the rest of the world combined. So the Asia Pacific region is really emerging
as the center of gravity of the global solar market. Now let’s take a closer look at what we
mean by these new business models in the solar sector. As I pointed out a few moments ago, new business
models almost always evolve in lock step, in other words in tandem with
a shifting regulatory landscape. It’s the niches
that are opened up by new regulation that often make it possible for new businesses
to take root. And you can see that new business models either
emerge in places where there’s little or new regulation at all. And one example of that is the rise of pay
as you go solar in Africa and in other parts of the
world or after such regulations opening up the
market have been introduced. And there you could site the US, Australia,
the UK, much of Europe as examples. Now there are four main business models that
we’re going to focus on in this presentation. Most of what we’re seeing around the world
in terms of the – let’s call it the evolution of new business models. The four main models that we’re seeing are
listed here. The first that we’re going to look at is
leasing models. The second is third party
PPA models. The third we’re going to look at is prepaid
solar or sometimes just simply called cash sales. This is basically the oldest business model
in the book and community solar which is where individuals can group
together and develop larger solar projects as a
community, often in a location that’s not their own house or their own business. Now while there are a few companies that dominate
the headlines in the solar sector, particularly in these new business models,
there’s a range of actors that are now developing and emerging in this space in the
utility sector as a whole. So the solar, the
new solar companies that we’re seeing in this sector are only one part of a much broader
ecosystem. And these different businesses that are starting
to emerge, there’s a number of different forms we’ll look at more closely
in part two of this training series but I’ve listed
a few here. Aggregators, merchant-based models, virtual
utility models or virtual power plant models, then providers of smart platforms
like peer to peer training which we’re starting to see in jurisdictions like Australia
and to a lesser degree in the UK. Now the
four options we’re going to focus here are specifically the options or the business models
emerging in the solar sector. So we’re not going to look at all of the
other variations. Now many of the companies in this space also
offer customers more than one financing option. So it’s difficult to speak in universal
terms about one particular business model versus another because many of these companies
are overlapping in terms of the business models and products and services they’re
offering. So it’s important to keep in mind the
landscape is evolving rapidly. And there are no clear-cut categories. But we’re going to
look at the four major categories we’ve laid out and try to better understand what
all the fuss is about and why this new market segment
is so exciting and is in many ways why it holds such potential for jurisdictions around
the world. Now a quick snapshot here. I apologize if this is a little bit blurry. You will see the chart
provided here available on the citations under the RMI report and can get a clearer
version there. It provides a nice overview of the key functions
of the solar business model. You can see which parts of the activities
utilities are responsible for, which parts the solar company are responsible for and
which parts the customer can and in some cases is responsible for, can be and is responsible
for. So really at the end of the day a
core function of these new businesses is to provide a bridge, a bridge between the theory
of going solar – so a household or a business saying hmm I wonder what that would be
like to invest in my own solar system to provide my own power? And bridging that
theoretical conversation and the actual practice of investing and developing your own
solar project. And because of the complexity of this sector
and because of how rapidly it’s changing and because of all the tax and regulatory
and permitting related steps and hurdles that a
particular household or business has to go through, companies have emerged that start
to take over those responsibilities and say we
will make it easy for you. We will take care of
your permitting. We will take care of your overall administrative
processes and fees and we’ll simplify the process so that you can
go solar on your own terms without needing to
worry about all of the particular details of the administrative or permitting process
for instance. So one of the major advantages is simply to
make it easier for customers to invest in solar. So let’s look more closely at each of these
four business models in turn focusing first on
leasing models. So leasing models effectively involve a third-party
developer installing and maintaining a solar system on or near
someone’s house or business. Most leasing
models are based on a zero-cost model. In other words, they go to the customer and
say you do not have to pay us anything up front. We will take care of everything. You just
sign a contract and you pay us a monthly payment. The customer in this case effectively
signs a rental agreement and agrees to pay a fixed monthly rent in exchange for the
ability to consume power generated by the solar system and in exchange for the ability
to have solar on their rooftop. The lease payment is often structured to be
cheaper than the utility, than the customer’s utility payment. So it’s already possible for a new business
model in this sector in many countries to provide a contract that beats
the utility on price. That means solar on your
rooftop can be cheaper than what you’re buying from the utility. And that’s what’s really
catalyzing this market and that’s the opportunity that is opened up by technological
change and it’s made these new business models in many cases possible. In most cases
this arrangement is designed to make use of policies such as net metering. Customers can
choose a wide range of financing options and they can lock in solar power at zero down
payment or with little down payment. Now the solar company in exchange typically
monitors, maintains and insures this system over the course of the contract. So again, the idea is to make it as easy as
possible for the household or business. In exchange the customer receives up to 20
years of predictable monthly cash flows. In turn, the company often qualifies for a
range of tax benefits. One of the reasons that these new business
models have emerged first and most prominently in the United States is that in
the US there are a range of tax benefits specifically that enable companies to develop
these systems, take essentially monetize those tax benefits and scale up their business
in the process. And it’s because of the uniqueness, the
unique elements of the tax regulations that have
actually made these new business models make economic sense in the US before they
made economic sense for example in other markets like in Europe or Japan for that
matter. Often both individuals and companies benefit
in a range of different ways. And
we could get into some of the advantages – we will get into some of the advantages. The
idea at the end of the day behind these new business models is again to provide some
kind of a win win for both the customer and for the business. There are however a number of differences
and I’ve just highlighted these here for quick
reference. For example, the installations can either
be subcontracted or done by the company itself. The financing can either be provided by the
company or can be done by a subsidiary like a bank that they cooperate
with. Some companies also offer things like
energy optimization software. They allow you to monitor in real time with
your iPad or your iPhone or your mobile device directly
the real time performance of your solar system, of your storage unit if you have storage. So different companies differ in the level
of sophistication they offer. Another component is whether the energy cost
savings or even the PV system performance are guaranteed
or not. That’s another key element of the
contract design. And finally, there’s a host of issues around
the end of term. So what
happens after 20 years? Who does the system belong to and what’s
the buy out? What are
the buy out conditions? Now a quick overview of the advantages and
challenges. Now I won’t go into all of these
in great detail. I’ll leave them there because it would take
too much time to go through each and every point. But the slides are available and you can go
through these in more detail and really think through the different
advantages and disadvantages or challenges that these business models present. One of the main criticisms just to – we’ve
been focusing a lot on the positive aspects but
there has to be – many of you are probably thinking what’s the catch. I can sign up solar on my roof, no down payment,
cheaper than my utility bill. Why isn’t everybody doing this? And there are a few points worth
making. One of the most common criticisms is that
customers that go solar via these new business models are actually left with too little of
the benefits of going solar. In other words, if
they did solar themselves – if they hired their own installer and built their own system,
financed their own system, they would get more of the benefits. So they say you’re
giving up – customers are giving up too much of the profit of going solar by outsourcing
the work to these companies. Now the companies say in their, in return,
well, we’re making it easy for people. And for most people thinking about solar power
as much as it interests energy geeks like all of us, isn’t
really their core specialization. And most people
have other things they would like to focus on. So one of the main benefits of these
business models is they allow again the process to be easy and simplified for the
customer often at no up-front cost. There’s been some issues in certain markets
with low or poor quality service, customer service or substandard installations. There’s also some important exposure to
regulatory changes. What happens if the government changes the
net metering rules? What happens
is policy over taxation changes? Different things like that. So it’s not a risk-free
proposition. There is no free lunch as economists often
say. And hopefully this table of
advantages and disadvantages helps you better appreciate what some of the tradeoffs here
are. Now let’s dive into the third party PPA
models. A PPA is a power purchase agreement
and the third party PPA models are essentially similar to solar leasing except that the
difference is the owner of the system sells power directly to the customer under a PPA
style arrangement. So it’s basically a fixed price per kilowatt
hour rather than a classic rental agreement. So a rental agreement may have a range of
other provisions in it and it may not even be based on a kilowatt hour. In many cases it’s not based on kilowatt
hour consumption at all. It’s simply – as described it’s essentially
a rental agreement. You rent
the solar system even though it’s on your own rooftop. A PPA style arrangement
provides a fixed rate per kilowatt hour for every kilowatt hour that you consume from
that system. And the rest is then marketed or injected
into the grid by the company and the company gets whatever price they can get
from the utility in that service area. So instead of a fixed monthly fee the customer
receives a bill from the solar company based on the kilowatt hours they consumed
from the solar array. And that consumption
may represent all or only a portion of their total consumption. Similar to the rental
agreement however the PPA is often structured to be cheaper than what the utility is
offering. So it’s the retail rate minus some percent. And often that’s really the driver of
the business model. This is also something that’s being done
by a growing number of government agencies and institutes as well
as international agencies like the GIZ in other
countries where they can sign solar essentially with a company and reduce their overall
power rates. So even government buildings could technically
sign a for example a PPA agreement with a private company at a rate that’s
cheaper than what the utility is offering them and
effectively pay taxpayers money. So it’s at the core of the business model
it’s really the economics that are driving it. This is no longer a market that’s driven
in most cases by subsidies or by handouts. It’s really driven fundamentally by economics. Customers can retain their grid connection
or they can disconnect fully by adding storage. In most cases these are systems that retain
grid connection. The household or business
continues to maintain a relationship with the utility. They just consume part of their own
power from their own rooftop solar system under a PPA type arrangement. Similar to the
leasing the company typically monitors, maintains and insures the system although
different companies differ on the terms. And another critical point is that the PPA
rate is often indexed. In other words, it goes up over time. And that’s another key feature that a number
of customers have been and continue to be critical of because the solar system is once
it’s built it’s in there and it doesn’t face fuel
costs. Why should the PPA rate continue to go up
over time just because retail prices are going up. So there’s a host of questions around that
that I would say legitimate questions that customers continue to have and ultimately
the goal is to try to find a way where the win win is positive. In other words, there’s enough savings for
the customer while still leaving enough profit for the company to make
the investment as a whole worthwhile and to make the business model as a whole profitable. Now a critical point here in contrast to the
leasing models is that there is an actual sale of
power. And where there’s an actual sale of power
from a third party, this often requires a change in legislation or a change in regulation
that allows these third-party companies to actually sell power to end users. In many cases in many markets, retail sales
are still heavily regulated. And it’s not possible for some third party
just to step in and start selling power to customers. So there are regulations that often protect
these new business models from all of the requirements of being
a public utility while enabling them to sell power on a limited basis to end users. So there’s a host of considerations and
in every market that is interested in developing or
encouraging investment in these business models it’s really critical to get these regulatory
and legal aspects clarified so that the business models can actually move forward. Again,
some advantages and criticisms or disadvantages – many of the similar advantages as a
leasing model fundamentally some slight differences in contract design and differences in
the pros and cons from the user standpoint. But many of the same issues characterize both
business models. Now let’s move onto cash sales. Under this approach, the customer as the name
implies effectively uses their own disposable income
or an individually secured bank loan to purchase their own solar PV system. In this case the customers responsible for
selecting their own installer. They’re responsible for maintaining the
system often. They have to go
through the paperwork, the permits, the regulatory documents, all of it in order to move
forward. So the onus is really on the end user. Now in most cases this is connected – this
is not for like off grid customers that are really just looking to go energy independent. This is for customers who are connected to
the grid and who are able to engage in either net metering, in some kind of feed in tariff
policy or a net fit policy. And I’ll describe
each of these here briefly just to provide you with an idea. There is a separate training module in this
training series focusing specifically on these different policies and we’ll get into much
more detail there. But I’ll provide a quick
overview here. Under net metering, customers effectively
consume their own self- generated electricity and they can export
the net access generation to the grid. For that,
they receive a credit on their bill. There’s no cash payment for the electricity. It’s just a
bill credit. And in the next month they can use up that
excess injection into the grid and use it to cancel part of their bill in the
following months. Under a feed in tariff customers
effectively receive a fixed payment for every kilowatt hour produced. There’s typically
no self-consumption. In other words, these are 100 percent crude
export focused projects. And finally, under a net fit it’s kind of
a hybrid of both. Customers can consumer their
own electricity and they received a fixed payment but only for the net excess generation. So in this case there is a cash transfer. There is a purchase of excess electricity
so it’s different from net metering. But it’s also different from a feed in tariff
in that it’s only for the net excess generation, not for all of
the supply from the solar system. A cash sales approach enables the customer
effectively to derive the maximum benefit from going solar as all savings and environmental
benefits like renewable energy certificates for example belong to the system
owner. However, one main challenge is that
it’s difficult for customers without much financial capacity to invest in their own
system. And this means it’s also limited to customers
either with their own land or their own rooftop which by definition shuts out much
of the population. And that’s where our
fourth model on community solar is trying to provide a solution particularly to that
challenge around land and rooftop access. So some advantages. Customers can select their own installer based
on the best price available in the market at the time. They can own their own system as well as any
tax benefits or certificates involved and they
keep all of the benefits and own essentially the
system throughout the contract term, throughout the project’s life. However, as we saw a
moment ago it’s especially difficult for low income households to go to do cash sales,
to invest in solar with their own disposable
income because often they just don’t have –
most households do not have the disposable income to go with solar in this way. So that’s
again why these new business models that we saw in the first two components namely
leasing and PPA, third party PPA models have played such a critical role because they’ve
helped make it possible even for low income households to still go solar. Now the fourth one, community solar. The main advantage or the main benefit, the
main driver behind going community solar is for
people who do not or owners or companies who don’t have enough roof space or any
roof space to invest in their own solar. And
they may be able to secure a better price, a better deal by investing in a project offsite
and potentially a larger project than one they
can put on the roof alone. Typically, there’s two
options. They can own a share of the total production,
like a percentage share of that monthly production from the system and use
that to offset their utility bill. That’s kind of
like a net metering, an advanced net metering relationship. Or second, they can subscribe
to or lease a portion of the project’s output for a set price. Two slightly different
approaches, both of which are used, both of which continue to be used. It really comes
down to how the contractual arrangements are structured between the many members of
the community and the solar project development company or ownership vehicle. So there are four broad types of community
solar. One of them is utility led. This is
where the utility effectively owns and develops a project and then offers to the rate
payers the ability to invest in that project on a voluntary basis. The second one is a
special purpose vehicle model. This is where a separate legal entity is established
to finance the system and individuals from the
community can contribute into that special purpose vehicle to help finance the overall
system. Often the system will use leverage so
they will use a bank loan or some kind of loan to help finance the system, in addition
to the contribution, the equity contribution
of community members. The third approach is an on-bill credit model
where participants effectively get a credit on
their monthly bill based on a share of the project. And that’s again this net metering
variation. And the fourth model is a nonprofit model
where donors contribute effectively to finance a community installation often
for a charitable organization or other. Could be
a university or a school. These are the four most common community solar
models currently seen. The main driver – so you say people often
ask well, why would you not just go community, go solar on your own. One of the main challenges that a community
solar project addresses is it makes it possible
for people without a suitable roof or who don’t
own their own roof to also participate. So an analysis about a decade ago by researchers
at NREL found that only 22 to 27 percent of residential rooftops in the US are actually
suitable for developing a solar PV system and that shuts out much of the market. So if we
want to unlock that market, we want to open up the potential we need to find solutions
and one of the main solutions is to allow community solar. So some advantages and disadvantages. One of the main advantages is the customers
can lock in stable electricity prices by participating
in a community solar project. They also
benefit from economies of scale. Instead of building a five-kilowatt system
on your own rooftop, communities can invest in a multi-megawatt
scale project and develop a project for cheaper overall cost per kilowatt. And that means cheaper power, cheaper solar
for everyone in the community. In many cases also the paperwork and permitting
and all that is taken care of by the community or by the
project developer so that simplifies things for
everyone. There are however some challenges. The logistics and the community engagement
required to make a community solar project happen can be difficult. There’s obviously
tax and regulatory issues and in some cases, larger projects may face higher
environmental barriers than individual rooftop systems. So the larger the system then you
start getting into environmental permits and that can also take more time. A few concluding remarks. Now that we’ve seen the four core business
models covered here. Business models, regulatory frameworks and
financing tools are all inextricably connected and all of them have to evolve together. In many cases as we saw, these new
business models only emerged because the regulations changed and they allowed these
developments to take place, they allowed in many cases these new business models to
actually take root in the market. And it’s critical to understand the development
of the solar, what’s sometimes referred to as the
solar ecosystem. It really requires a holistic
more ecosystem level perspective to understand how to really scale up the distributed
solar PV market because there are so many different factors that are important to consider
in creating an environment that’s suitable to the scale up of solar. New business models are making it much easier
than it ever has been to invest and go solar. This is a really key development and it’s
a very important and, in many ways, very positive development for solar power as a
whole. By providing zero down payment or
little down payment, streamlined procedures and easy no hassle process new business
models are making it easier for people who otherwise wouldn’t go through the trouble
of going solar to actually go solar. And this is really a critical part of further
catalyzing the growth of the market. As we saw at the outset there are the ground
mounted utility scale solar market is healthy and in most countries is robust. But it’s not the case in all countries or
in all jurisdictions that the distributed or rooftop solar market
is also robust. In many cases in the Middle
East throughout Africa and in many parts of Asia the rooftop market is barely starting. And that indicates that the potential for
growth in this market segment is huge. We’ll get
to this a little bit in a moment and I want to take that point a little bit further. However, the growth in certain business models
it’s important to note has also slowed in some of the key markets in recent years. So I mentioned where these markets have started
– or where these new business models have emerged and really grown and developed. The key market has been an in many cases remains
the United States but we’re also seeing quite a bit of activity in Australia
and in markets like the UK as well as here in
Germany. But in key markets like the US, the market
for third party PPA models and solar leasing companies has slowed down. And that’s an important point to make before
wrapping up this presentation and this overview of these new business models. So why is that? I’ve highlighted here four key factors. On the one hand solar power is
becoming more affordable which makes it easier for people to purchase a system on their
own. Before investing in your own rooftop solar
system may have cost you upwards of $30,000.00 for a large sort of North American
style household. Now with the cost of
solar coming down it’s possible to invest in the same size system for $5,000.00 –
$6,000.00 or less and that’s make it possible for a much larger spectrum of the population
to go solar. And without the help or without needing the
help of a third-party company because the amount is now one that more people
can afford on their own. The second is that with these PPA and leasing
models, in many cases the solar company and its investors get most of the tax benefits
and incentives, not the end user. So there’s
been concern around the end user not getting enough of the benefit. So some people are
starting to cool on the overall hype in third party solar business models. That’s another
major factor. The third is that awareness is actually growing
due to articles and contributions and a number of features in
major publications that customers can actually save more money by buying their own systems
themselves with cash or with a loan. So
we’re seeing more people actually deciding to finance their own systems without relying
on a third-party intermediary. And fourth major factor is that some owners
are facing difficulties in selling their house when they have a solar system on it that’s
locked into a leasing arrangement. The new
owner may not want the solar lease and they may have difficulties transferring that easily
and that can create some friction for people who want to sell their home. So that’s
another factor that is contributing to people not signing up in as large of numbers as
before. This chart here from Bloomberg and GTM Research
shows this rise and decline in solar leasing as a percentage of the total rooftop
solar market. You can see that around 2014
things peaked. Over 70 percent of the market, of the rooftop
market was driven by solar leasing sales. And now that share has dipped below 50 percent
and continues to slide. So
we’re seeing a significant shift. However, there’s still tremendous potential
for new business models like leasing and solar PPAs particularly in emerging economies. And there are a number of reasons for
this and this is really where I want to end. I was recently in the Philippines and was
able to see these third party PPA models unfold
within the Philippines regulatory environment and it’s now viable. It’s now attractive. A growing number of companies are starting
to do this. The same is happening in Vietnam. We’re starting to see some companies doing
the same in South Africa as well as in parts of Latin America. So these new business
models are starting to spread beyond their traditional markets into developing or
emerging economies. And there are a number of reasons why this
should be seen as a very promising development and why this challenge
that these new business models are there to serve or to solve rather are particularly
important to solve in emerging counties. For one, most households on average have less
disposable income than customers in the US or Australia or UK. So as a result, the willingness to go solar
even though solar prices have come down – and let’s say you can
get a household system for $2,000.00 to $4,000.00 fully installed. That still remains a considerable barrier
for many households in developing countries. So the ability to still go zero percent down
payment on a system like that is still quite attractive and could
really help unlock significant rooftop solar potential in major markets, major cities,
major urban and suburban areas throughout the
developing world. Whether it’s in Abuja, in Nigeria, Nairobi,
in Kenya or cities like Bangkok in Thailand there is tremendous potential
for unlocking more distributed solar both on households and on businesses using
these kinds of business models even if they have peaked in major markets like in the US
as we saw a moment ago. Another key reason why these emerging markets
are particularly promising is that it’s often difficult for small households to obtain
bank loans to finance solar. The banks often
don’t understand solar, don’t have time and don’t allocate resources to or sufficient
resources to actually finance these kinds of projects. So that’s another really key barrier
that can be solved by these new business models. Cost reductions are also making it
possible for solar to undercut utility rates even in emerging markets where often retail
electricity prices are quite a bit lower, not always, but quite a bit lower on average
than rates say in Europe. So that’s another factor is now it’s possible
even there to undercut retail prices. And there may be fewer tax incentives in place
which may make it even more attractive to go with a business model
that can offer to you on a retail price minus x
basis where you get a cheaper rate and you can just lock up, lock in solar right away. And the final point is that there’s a fairly,
remains a fairly low level of awareness of the
potential of solar in many emerging countries and this points to significant potential for
growth and further development there where there, again, there is so much untapped
potential and also where the level of awareness stands to grow. Some main regulatory risks that these businesses
face. There are four major structural
changes here that can significantly impact the market. One of them is the introduction of
fixed charges or other levies on solar customers. We’ve seen this happen in some
jurisdictions and it can help – it can contribute to cooling the market very rapidly. Changes in net metering or other self-consumption
regulations, changes in tax laws obviously and changes in electricity market
design or regulation. All of these can have a
significant role and they remain important risks that any investor, any developer, any
household who is interested in going solar via a business model like this, that they
should be mindful of. The key final point is that governments who
are keen to support the emergence of these new business models need to focus on providing
a supportive enabling environment. This
goes back to the point I made at the outset around the importance of thinking of this
as an ecosystem, looking at the legal framework,
at the tax framework, at the electricity market rules and trying to provide a holistic policy
and regulatory environment that enables people to go solar. And I think the more, the cheaper solar gets
– and it can costs continue to come down, the more potential there is
to unlock this tremendous market opportunity via these new business models. So as I pointed out at the outset this was
part one of a two part series and the next component or the next lecture in the series
will take a closer look at how these business models in the solar sector in particular are
impacting the traditional utility sector. Thank
you very much for your time and I look forward to seeing you around next time.

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