California solar installers experienced a disastrous 2023 as soon as the NEM 3 rate changes took effect. The California Solar and Storage Association reports about an 80 percent drop in rooftop solar projects since April 2023. To make matters worse, the California Public Utilities Commission (CPUC) closed out 2023 by approving further changes that impact the payback on battery exports. The CPUC also ended the self-consumption of solar for most virtual net metering projects.
- 1:04 – Summing up latest NEM 3 rule changes
- 2:18 – Scale of 1-10: How worried should solar installers be?
- 7:08 – Given the new California market, how can installers maintain profitability?
- 11:43 – What else can I diversify, and not totally rely on solar sales?
- 14:15 – Overview of Virtual NEM program changes: “This looks wrong”
Watch the full 17-min chat above. Part of the transcript is below ….
Crowell: Before we offer suggestions for how to survive and date I say thrive in this new California solar market, which is what we do here at Power Forward!, I first want you to sum up those year-end changes. How exactly is it different from what we already kind of assumed was the reality under NEM 3?
Dunlap: “I think it’s important to first separate the data analytics we’re getting, which you cited in your opening, about the drop in installed projects, which is very noticeable. Really, all of those are tied to the original roll out of the April 16 (2023) NEM 3 and the impact there.
“What you’re also referring to is the most recent — just within the last few weeks — changes around specifically the separation of delivery and generation charges and the virtual net metering — whether self-consumption is allowed under those. Those are the two open-ended items within the original NEM 3 that needed clarification by the end of the year, and so we’ve gotten that clarification. First initial analysis is these are bad; these are detrimental to an already suppressed solar market.”
Crowell: Taking all of that into account, in our last chat, I asked you ‘on a scale of 1 to 10 how worried I should be as a California solar installer.’ You said maybe about a 4 or 5. So, I’m wondering if you are sticking with that, and why or why not.
Dunlap: “In light of this news, I think the way that I was thinking about it was really putting a lot of trust and faith in the California market and the installers’ resiliency. Now that we’re seeing some of the lost job reports, and the magnitude of the drop off in the projects, maybe that was a little conservative.
“But I think that there is still, in my mind, opportunity to think about the value of selling solar differently. Changing mindset is probably one of the most difficult things to do as a business as well as an individual. If we just take a look back at the broader context of what the California market was under NEM 2, it was really lucrative. It was very easy to oversell. It was easy to convince people on a very short economic ROI. That actually maybe wasn’t the idealized system. It was actually oversized. There was this huge retail rate revenue stream, if you will, for that system that justified going solar.
“It isn’t the only reason to go solar.
“But it caused basically the proliferation of installers and job installations and the size of systems, and all these other things. But there are a lot of other markets, Hawaii and Arizona most notably, that haven’t had that opportunity for eight or 10 years now.
I think the toughest part is the transition that we’re in now. It’s that going from what was very easy to sell 50 jobs a week or 100 jobs a week, to now I have to change how I’m selling. I’m going to get less on the conversion rate of my sales calls, and I might not be able to just lean on the economic-only argument.
“Related to the separation of delivery and generation charges, I want to point out that the reduction of the economic benefit of that battery generated and exported power, it is a meaningful economic percent change, but it doesn’t prevent you from still having a viable system.
“So again, if we tie the reason we’re doing solar and backup battery storage to only economics, it seems like that’s a detriment. But if we say we’re doing it because we’re giving the homeowner autonomy and energy security, then it’s kind of moot. Then maybe ultimately, and this is what Brad Heavner (policy director for CALSSA) and some others looking at the economics of it: maybe the CPU will start to see that we’ve actually created a situation where now they’re not going to get the benefit of that exported power during the times they most want it because it’s too limited. Their complex matrix didn’t actually solve the problems it was meant to solve.
That’s valuable, and I think in the long run we can expose that and say ‘now this homeowner is going to export whenever it makes sense for them.’ Maybe they don’t make as much money on the export, but they balance their self-consumption and their net export over the course of each month and over the year so they end up at a neutral net zero, which is optimized and that’s appropriate for an autonomous home that’s generating and consuming its own power.”
Crowell: I do think some of the problems people have with the changes of the battery export piece of this that happened in the last couple weeks [of 2023] was they felt like maybe there was — I don’t know if I want to use the term ‘bait and switch’ — but installers were selling systems based off of some assumptions to customers, like, ‘hey once this is all finalized, this is what you’re going to be getting back as an ROI on your system.’ Then, that was kind of swapped out at the last second.
And now it’s like we’ve made some sales that now actually aren’t true, and that’s an immediate problem that people had. Maybe going forward it won’t seem like as big of a detriment if you work under this new framework, but there were a lot of problems with this last second, ‘hey, here’s what we’re doing instead’ type of thing.
Dunlap: “Absolutely, and that’s always painful. There’s no good argument for it. It’s an incomplete set of assumptions or set of policies and rules under which we were playing, and it feels like a bait and switch, and it’s really unfortunate. We wish that wasn’t the case, but at the same time, what is the path forward through that? It’s change your expectations Change what you’re selling.”
Crowell: Given the lower demand and the tougher economic argument, let’s dig into that just a little bit more in terms of helping solar installers maintain profitability with that solar and storage installation business model now that they are in a new world. It’s a new mindset, but they have to make fundamental changes to their business. Is there just anything else fundamentally to offer as examples of a way forward with just that solar and storage installation business?
Dunlap: “I think that there’s a lot of innovation and opportunity that can come from it that I can’t even predict right now. But part of the reason for my optimism is believing that the California solar market is resilient. They’re going to figure this out.
“I think starting with a mindset shift: How can you differentiate your offering rather than ‘I’m just going to offer you the exact same quote that you got five other times but at a lower price.’ How can I actually differentiate. And, in terms of the homeowner’s goals or needs, it’s really one of two things. Most people make significant purchases based on either an elimination of pain or a move toward comfort and security.
“If installers can think about how are they going to differentiate their business, they’re going to either take away homeowner pain, which could be the high utility bill, or it could be the fear of power outages — something like that – or, a move toward comfort, which could just be energy security or by producing my own power I’m taking a stand on sustainability and climate.
“Those are messages that have always been out there and always been part of the solar proposal or the value proposition, but we kind of lost sight of them behind the economics, because that was so simple to make. In a down market, where do you want to be? There is less opportunity; there’s a smaller addressable market.
“How can you still be relevant and bring value to that market? And if your answer is ‘I can’t because I don’t know how to change my business model that was dependent on a massive amount of top-end funnel inputs,’ then you need to look at a new market, probably.
“But if you’re willing to say ‘I can downsize my business, and I can do half to a third as many projects, but I can incorporate more revenue and less soft costs into those, I might actually generate more profit dollars at the end of the month or end of the year and still run a healthy profitable business.’
“Some of the more mature installers that have been around 15, 20 years are really seeing a change in their business model from how it was when they started. I’m aware of a few companies that — I would hazard to say — something like 80% of their business is now referrals or repeat business from people that bought a system from them 10 to 12 years ago and now have moved into a new home and are putting solar on their new home. That’s very different from having to go out and carpet bomb developments and get every single new customer.
“I think lastly, a word of caution: In a down market, with less volume of projects … if I’m struggling to make as much money and think if I buy cheaper product, which is widely available on the PV side … if you follow that economic argument a little bit further, and you say you’re no longer charging the same amount, and you’re reducing what you’re charging to the homeowner to reflect the lower equipment cost — you’re actually generating fewer profit dollars for your business. You’re asking your company to run on a reduced revenue and a reduced profit model.
“… It’s actually healthier to have a higher price point for your business and robust margins. If you’re just buying cheaper equipment, and you’re marking it up the same way you always have, you’re going to end up reducing the amount of money running through your business.”
What else can I do to diversify, and not totally rely on solar sales? Pick up the rest of the conversation right there:
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