Adding solar energy to a building is a no-brainer in terms of reducing energy bills and carbon footprints – so why is the uptake in the commercial sector so low? According to industry experts it’s not simply a matter of uncertainty about the Renewable Energy Target and potential subsidies, there’s complex attitude problem keeping the big end of town from reducing its fossil-fuel derived power dependence.
John Grimes, chief executive of the Solar Council, says federal policy is a major barrier. Removing all certainty about the RET means it is hard for firms to get finance for large installations, he says.
“All the other conditions are good. Australia has great solar resources and it is competitive in terms of pricing.”
Race to the bottom – line, that is
In addition to government policies the big power companies have another weapon up their sleeves to retain their customer base in the commercial sector – a pricing policy that means the more power a customer uses, the less they pay for it.
“The relationship between business income and take up of solar is inverse,” Grimes says.
The trend in the residential solar market, by contrast is that middle and lower socioeconomic households in the urban mortgage belt, or regional and rural Australia, are are more likely to use their limited equity to have solar installed as a form of “cost of living insurance”.
In the commercial market, it’s the caravan parks, community groups, nursing homes, pubs, clubs, public schools, tradesmen and small businesses like newsagents and crash repairers who use the bulk of their energy throughout the day that are embracing solar, Grimes says. Not the blue chip firms.
That’s not only because energy use is a smaller fraction of a big firm’s overall operating costs, but also because they get a much sweeter deal on what they use.
“A big company or big business will be paying a fraction of the charges compared to a small business or household who are paying about 25 to 28 cents a kWh compared to the big firm paying around 6 cents per kWh or less,” Grimes says.
“It’s disgusting. [The power companies] put the most burden on the people who can least afford it.”
But it gets worse
He says there have also been cases where a larger firm has decided to install solar, had a system designed and agreed to make the investment, but when it informs their utility provider, the energy company undercuts the kWh price of the solar and the firm changes its mind on the solar installation.
The old split incentive dilemma
In policy terms commercial solar has been a policy blind spot, compared to support for households.
“One of the big issues also is the split incentive between a building owner and tenant. Being innovative and figuring out how to overcome that is the next big policy challenge.”
Some ideas include income sharing, where an owner can increase rents if a tenant can decrease power bills. Or owners leasing out roof space to solar providers or tenants, which is a very popular model internationally.
Some excellent solutions exist – better tariffs for instance
Grimes says the barriers would also be reduced if state governments came up with a fair export price for private solar installations that takes into account the value of energy delivered at peak load times.
Under current arrangements, solar power fed into the grid that might earn between 5-6 cents a kWh is used by neighbours without solar and generally the neighbours are charged the full retail tariff. which means the power companies make a substantial gain from something they played no part in producing.
It’s a dumb grid
“Currently the whole system is based on a dumb one-way grid, with power generated hundreds of kilometres away from where it is used,” Grimes says. “And if you’re a dumb asset owner, that’s called Kodak.”
He says the future grid will ideally be a smart, bi-directional grid, and the role of power companies and grid owners will focus more on facilitating transactions between those feeding in solar, and those using it.
The current federally-mandated sell-off of the poles and wires is setting us up for missing out on this opportunity however, because the new owners will want to realise payback, not invest more in changing it. Meanwhile, the states are missing out on the opportunity to sell solar power, Grimes says.
“This is the worst possible time to sell [the grid].”
He says that Australia is at the forefront of innovation in terms of technology and business models, and that state governments should look to invest in a targeted way in the industry.
“We’re seeing solutions from local government, such as councils financing [photovoltaic systems] with the financing paid back via rates. And they can provide that finance at lower interest rates than commercial finance,” Grimes says.
He also says a broader view of the property sector that considered energy as well as buildings could lead to new business models such as solar being installed onto public housing to generate an income stream for housing providers.
“We need to be more creative about how we think.”
Smaller firms are where the traction is
Solar industry analyst and consultant Warwick Johnston, managing director of Sun Wiz, says that the smaller systems of up to 100 kWh that get an automatic subsidy are seeing more uptake than systems over 100 kWh where there is uncertainty about the future of rebates. On big systems, the subsidy is paid over time, not up-front, and that’s why the RET uncertainty is stalling uptake.
Fundamentally, that those who are going ahead despite the uncertainty are doing it simply because “it makes sense”, he told The Fifth Estate.
One of the key considerations is a firm’s energy use profile. Due to the extremely low feed in tariffs, if a business produces more power than they consume in any given half an hour, they start going backwards in terms of the financial paybacks.
“Meeting between 20 and 50 per cent of energy needs is the target to aim for to stay within the [expected] return on investment,” Johnston says.
His firm’s most recent report on solar uptake in the commercial sector shows that New South Wales has the greatest share, with more than a combined 50MW of commercial systems sized between 10KW and 100KW installed, and between 15 and 20 systems over 100 KW.
South Australia and Victoria each have a combined 30MW of commercial systems, Queensland has 25 MW and Western Australia has 15 MW.
Johnston says the reason WA lags so far behind is it “has a recalcitrant grid operator” that imposes conditions on grid connection for solar systems that are “archaic and don’t exist anywhere else.”
Storage not achieving payback
In the commercial sphere there is little traction in terms of hybrid systems that include battery storage, except for locations where grid connection is not feasible. Out of close to 100 per cent of customers who ask about batteries, between zero and one per cent will actually decide to purchase a battery system, he says.
“Almost every single customer asks for battery backup but the cost is exorbitant so there is no payback.”
But he says this will change in the next three to four years as the price of storage for solar energy goes down.
“The momentum is building, and then the financials will swing.”
Can PPAs recharge the industry?
The growing availability of power purchase agreements might seem like a model that can provide certainty for solar firms and reduce the upfront capital cost barrier for buyers, but it is no silver bullet, Johnston says.
“PPAs are an opportunity for market differentiation, but it is a significant challenge getting people to sign on. Tenancy is a significant barrier [for many firms].”
He says that PPAs are often a 10-15 year contract, and for many businesses that is a difficult commitment to make, not only because they may not have long-term security of tenure for their premises, but many firms cannot even be certain the business itself will exist in five years time, let alone a decade from now.
Johnston says the Clean Energy Finance Corporation can play a part in assisting with commercial uptake by de-risking elements of financing, and underwriting loans for systems.
Those that get it include motels and wineries
Among the early adopters in leaping the hurdles and undertaking installations are small motels.
“The smaller places have less purchasing power when buying electricity, so they are paying higher tariffs and can see the ROI.”
Wineries and manufacturers are also among the solar-powered, with systems that were financially supported by funding from the previous government for improving the competitiveness of both sectors.
Private schools are also getting their solar on. After initial installations of up to 5KW under the Solar Schools program, many have decided to self-finance more PV.
The biggest commercial market uptake for solar however he says is the local government sector.
“Solar is an easy to make decision on a household level, where energy bills are a major cost of living factor, but at a commercial level [for most large firms] it’s not core business. Electricity is only one or two per cent of all their expenditure so it’s not a priority,” Johnston says.
Why business needs to change its attitude
According to the founder of Smart Commercial Solar, Huon Hoogesteger, it’s not government policy that needs to change to improve uptake, it’s the attitude of businesses.
“I am so amazed solar is considered as a special energy source that needs special assistance,” he says.
In his view, solar is purely a smart financial decision which happens to come with substantial environmental benefits.
“Solar can cut between 30 and 50 per cent of a customer’s energy bill, so businesses will still get a return on investment even without RET subsidies. The product lasts – there is a 30-year life in the product. With the rebate, most companies see between a two and five year break even, without the rebate it might be seven years.”
Hoogesteger points out that a seven-year break even still means 23 years or more of vastly reduced energy bills.
“Rebates give a false sense to customers that without them it doesn’t stack up, it gives a false message. Solar doesn’t need rebates to provide a return.”
A coal-fired power station, by comparison, will cost around $500 million, but the owner certainly does not expect to see payback within five years.
“The thing that needs to change is the business perspective on the ROI of a capital project such as investing in solar as energy source.
“With solar panels you are effectively buying between 30 and 40 years of electricity upfront.”
It’s the equivalent of “banking 40 per cent of the future energy bills.”
Pay as you go model working well
His company provides a pay-as-you-go solar financing model that has seen the business grow by 400 per cent since it started three years ago, with major clients including IKEA, City of Yarra and NSW North West Rail. The aged care sector is also providing it with a lot of business.
The firm installs the system and undertakes the operational and maintenance aspects for the length of the contract – between five and ten years. The customer buys the power at a rate that is priced lower than their current kWh price, and at the end of the contract, they own the system outright.
The firm’s investors meanwhile receive a solid return from the sale of power.
Blue chips not looking at long term
Hoogesteger says that small to medium enterprises see the sense in the model and the opportunity to basically pay it forward for a few decades of cheaper, cleaner power. Big businesses, however, “struggle to rationalise a 30 year product.”
This is despite the reality that for someone like a big property firm, it will increase the value of its property product.
Other barriers in terms of the top end of town are a degree of struggle to get decisions made, because publicly listed firms are focused on the kinds of short-term decisions the stock market wants to see, not long-term ones.
“Large consumers [also] get cheaper power, and when a firm has very low energy prices it is hard to compete,” he says.
An example is data centres – major energy users on low rates for grid power. Hoogesteger says his firm has analysed the payback for major data centres, and it would take about a decade for investing in solar to reach the break-even point.
The sectors where he says there is substantial uptake include pubs and clubs, where the businesses’ power use profile works well in terms of the times solar produces energy. The hotter the day gets, the higher the airconditioning gets turned up – just when the panels are pumping out more power.
“It’s a neat fit,” Hoogesteger says.
The investment model that underwrites the PAYG systems is also providing a mechanism for overcoming the split incentive. One current project is a pub where the tenant wants to lower energy bills, but the owner needs to achieve some return for having solar installed. So the owner becomes the investor underwriting the system, and receives a return from the tenant purchasing power from it.
The investment vehicle, Clear Sky Solar Investments, Hoogesteger says, is basically a divestment vehicle that was set up with assistance from the NSW Office of Environment and Heritage. OEH gave it seed funding as part of the drive to create mechanisms for community investment in solar.
A not-for-profit, it attracts funds from self managed superannuation holders and ethical investors, who are looking for a return but are focused more on what their money is doing than how much of it they make.
Local government really gets it
Local government is also a strong customer base, as the PAYG model overcomes councils’ dislike of capital risks and also O&M risks. Also, Hoogesteger says, they don’t have a lot of money and they are generally being charged a lot for grid power.
Making carparks turn a profit
A new smart carpark product the company is rolling out is also one he says councils can gain benefit from.
“With a carpark, it’s normally just a sunk cost and the council is simply providing amenity. The solar car shade generates a huge amount of energy and provides a covered and shaded area for the cars. Because it can be done as PAYG, the [potential] capital cost becomes an operational one.
“A solar carpark costs only 10 per cent more than a traditional carpark to install, and it can generate between $30,000 and $50,000 a year [in sold power].”
The key is the right site, one where there is an adjacent building with a substantial energy load that can use the power throughout the day.
One of the installations that has been carried out for the private sector is at Macadamia Castle in Northern NSW, where the smart carpark provides shade for 22 car spaces and delivers a substantial part of the electricity needed by the tourist attraction during the day.
The current products are imported, but the firm is in the final stages of designing its own version, which will be a single span 11.5 metre solar car shade. Hoogesteger is hoping the firm will be able to work with Tesla on the rollout of charging stations, with the car shades providing the energy for the Tesla charging points.
The bottom line actually IS the bottom line
The crux of it all is businesses need to recognise the financial value solar delivers.
“We need business to realise this is not some special technology, it’s a financial vehicle that’s good for the environment also. It’s also a disruptive technology, just like the internet was to the library,” Hoogesteger says.