Something you may have missed over the last year or two is the amazing drop in prices of solar PV and battery systems across the world. As someone once said “Just when you thought prices couldn’t go any lower…”, well they did, by a lot, and repeatedly! To give you an idea, here are some examples of solar contracts signed over the last few years:
Lower and lower prices
There are a couple of things you might notice about this table as you go from the top to bottom (past to present): More countries are getting involved, systems are getting bigger (a lot bigger), prices are getting smaller (a lot smaller) and, most importantly, we’re seeing Australian businesses entering the market in 2017 with site-level systems.
To put the Australian industrial site price of 7.7 c/kWh into perspective; If you’re lucky, 7.7 c/kWh is about a quarter of what you’d pay for electricity at home, or half what you’d likely pay as a business during peak times (during the day). If anyone, home or business, has a current electricity bill that starts with a ‘7’ for a kWh of electricity then please, send it in and you’ll receive a free Beam Device! The United Arab Emirates example is probably even less than what you’re paying for some of your mysterious ‘other charges’ on top of your electricity charges.
How on earth are they making money, you might ask? Well, there’s still plenty of money to go around, which suggests prices will keep falling. For example, in the UAE, the installed cost of solar is expected to be under $400 per kW. And throughout the year, that 1 kW of solar will produce around 1,600 kWh. So, at 2.4c over 20 years you get $768. That’s a guaranteed return of over 3% – far less than the cost of capital for a lot of these companies.
So, what’s driving this drop in prices? Technological innovation has a lot to do with it. For solar PV, every year the quality of panels improves, the efficiency increases, the size increases and the cost decreases. It’s like the solar version of Moore’s Law.
But there are two financial innovations that I want to talk about which are arguably having a greatest impact on prices: Power Purchase Agreements (PPA) and Reverse Auctions
Power Purchase Agreements
The defining feature of The Power Purchase Agreement is its simplicity. Instead of finding a supplier and installer of solar PV systems to obtain cheap renewable energy, you simply buy the thing you wanted in the first place: Cheap renewable energy. A PPA is an agreement which is typically between two parties:
- The Customer - who is seeking an amount of electricity, at a fixed price, for a fixed term; and
- The Supplier - who will arrange finance, build, own and operate a renewable energy system with all energy produced going to the customer at the agreed price and over the agreed term.
It’s really no different to the way you currently buy electricity and how we’ve been buying it since it was invented: You sign a contract for an amount of electricity, at a fixed price, for a fixed term.
There are many reasons why PPAs are so successful for businesses, so here’s just a few:
- The customer doesn’t need any capital to invest. A business can get a five-year payback by installing rooftop solar PV, but they have a hurdle rate of 2-year payback. Does this sound familiar? With a PPA the customer is just signing another electricity supply agreement – problem solved!
- The incentives for the supplier are aligned with the customer’s needs. If the installation is delayed, the system doesn’t produce as much as expected or is not maintained, then the system produces less kWh and the supplier receives less money. Is the supplier going to replace the inverter after 10 years if it’s efficiency has dropped? You can bet you’ll hear from them when the time comes!
- Near-free electricity after the contract. After the PPA term, typically 7-15 years, the customer will usually have the option to buy the system for $1. Modern solar PV systems lose less than 1% of their output each year so after 15 years you’ll be buying 85% of a solar PV system for a dollar! Also, most PPAs will have a buy-out schedule so that you can exit the agreement at any time.
There are many vendors in Australia offering solar PPAs to businesses of all sizes. With the plummeting cost of solar and the increasing cost of electricity you’ll be hard pressed to find a PPA that’s not below what your business is currently paying for electricity.
The second important innovation is the reverse auction – like a normal auction but backwards – the lowest price wins! Think of the last time you purchased something from eBay – but in this instance, the process is reversed. So, instead of competing with other buyers to pay the highest price for the seller’s item, the sellers compete amongst themselves for the lowest price to supply you with that item. That’s a reverse auction in a nutshell.
How this works for rooftop solar is: If you’re a business and you want rooftop solar PV and/or batteries, whether this is through a PPA or you will put up the cash, you ask vendors to give you their lowest price. However, you do it in an environment where all the vendors can see who has the lowest price and you give each vendor an opportunity to beat it.
How does a reverse auction compare to current procurement strategies for businesses buying solar PV and batteries? There are two basic levels.
Review quotes. Currently, at a minimum, most businesses will get three quotes before making a decision on implementing solar. But often, this doesn’t lead to implementation, as the business realises the shortcomings of the process before a decision is made. These shortcomings are: Limited vendors, difficulty comparing offers (comparing apples with oranges), wide variation in pricing, non-alignment of contract terms.
Request for Proposals. Most large companies will, and must, run a formal process for procuring large capital items or signing contracts, such as a PPA, over a certain value. This is typically in the form of an RFP, single-round or two-round. This isn’t necessarily a bad way to procure and it’s been done for centuries. The problems with this process for buying complex systems such rooftop solar PV and batteries are:
It’s a lot of time and effort to run one of these, particularly if it’s over two rounds. As a business owner/manager this means you’ll either limit the number of vendors to reduce effort or you’ll be out of pocket to pay someone to run it for you. This time and effort impacts you indirectly, too. Having been on the vendor side for a good portion of my working career I know that vendors will increase offered prices for tenders to account for the time that has gone into preparing compliant proposals. It’s still a subjective process. If Bob’s solar comes in the cheapest but ABC Solar have the best solution, who do you choose? Most of the examples I provided in the table above were procured through a reverse auction process and it is well recognised as the best way to buy renewable energy for utility-scale customers. It’s also the best way for Australian businesses to buy solar PV and batteries, however, the platform has not been there to do it. Until now! Beam Energy Labs have released their Beam Commercial Solar assessment and procurement platform for Australian businesses to assess and procure solar PV and batteries: see http://beamenergy.solar
Reverse Auction. The Beam Commercial Solar reverse auction is an online platform for businesses to assess and procure solar PV and batteries. Putting aside the assessment component (you’ll hear more about this another time), the procurement component is an online and automated platform, reducing customer and vendor effort to drive better outcomes. This is how it solves problems identified in the RFP process:
The Beam Commercial platform includes all licensed vendors in your area that pass Beam’s stringent pre-qualification process. You can choose who you invite, vendors can be weighted and there’s no limit to how many participate in the auction.
Vendors love our platform! Why? They can provide the same information, typically a lot more information, with far less effort compared to an RFP. We ask for everything once and then have it updated annually. The result for you – better pricing from vendors.
An objective process. You decide what is important to you in choosing a winning bid at the start: Vendor experience, product brand, warranty period…. Every aspect of the bid is scored and weighted within our platform including, of course, price. Going back to our example before, if you have given price a 100% weighting then Bob’s Solar will win. If you’ve given price a 70% weighting (recommended) then ABC Solar will win (sorry, Bob).
Solar and batteries are just getting started for businesses in Australia and there is a lot more to PPAs and Reverse Auctions. We could talk about it all day. We appreciate that you’ve come this far so we won’t hold you up any longer. We’re excited about how Beam Commercial Solar will accelerate the transition to cheap + clean energy for Australian businesses and we’d love to work with you to make this happen.