The North American solar sector's overarching goal is to make solar energy a practical, affordable, alternative energy source for commercial and residential applications. To achieve this, prices for balance of system (BOS) components, including solar racking, will need to continue the downward trend we have witnessed over recent years.
While this sounds like bad news for a relatively young industry, we can attribute price trends to normal market evolution. In a government- and policy-driven sector, the things that were attractive to customers just five years ago no longer stand, and solar is making the shift from being a premium product to becoming a commodity. Major cost declines have come from inverter and structural BOS pricing as commoditization continues to compress margins.
In 2013, the U.S. Department of Energy's National Renewable Energy Laboratory (NREL) issued a report outlining BOS targets by 2020 of $0.65/W for residential systems and $0.44/W for commercial systems. Racking is an important BOS component, and it is the responsibility of these companies to work toward creating optimum products at an optimum price point.
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Today, racking prices are at $0.18/W (roof) and $0.14/W (ground), down from $0.32/W (roof) and $0.25/W (ground) in 2012. As the market continues to stabilize, we can expect to see BOS costs decrease even further, bringing us closer to the NREL targets.
As solar racking and mounting companies work toward lower pricing – and as profit margins become tighter – companies are adapting to the new, more competitive market environment in various ways. Some are focusing on innovation or research and development (R&D) to reduce costs and get closer to creating the optimum product, while at the other end of the spectrum, there are companies cutting corners to protect the bottom line.
There are customers for both types of companies as well. Some are still concerned primarily with cost, but this is no longer necessarily the default driver. Increasingly sophisticated owners and financiers value engineering, design, validation logistics, downstream support and warranties. Solar racking is not simply about the price of steel, it is a vital component of any solar installation.
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Another component of the industry's maturation is higher volume orders that offset lower margins. In our view, only a handful of companies have set up their operations with a long-term vision and will be able to handle the new capacities. Those that are not geared to handle higher volumes will naturally be forced out of the industry.
Competitive calibration
Competitive environments drive innovation, and this is no different with solar racking companies. Companies that want to survive must differentiate, reduce costs, increase efficiency and, most importantly, provide a high-quality product that will satisfy customers and attract repeat business. Racking companies are looking for ways to stay relevant in a rapidly evolving market, and we have seen many new products come online, even in the last 12 months, as a result of price pressures.
We believe the key to success lies in refining engineering processes: designing systems that meet a high standard without being over-designed. It has always been easier for racking companies to over-design than optimize their products, and we are seeing more analysis going into the R&D side of production in order to meet the demands of cost-conscious engineering, procurement and construction (EPC) firms. The top-selling products on the market have been cleverly designed to reduce installed costs. They no longer have excess features, and they have been manufactured using carefully selected materials.
A December 2013 study by the Rocky Mountain Institute and Georgia Tech Research Institute compared U.S. and German racking and mounting installed costs – the U.S. was at $0.16 /W compared with German figures of just $0.04/W. The study identified 12 opportunities for cost-reduction and concluded that U.S. installers could reduce installation labor costs by 64% if they removed all non-value-added activity from the process.
We view price pressure as a positive for racking companies and for the industry as a whole. It provides an opportunity to diversify – perhaps to compete on products and services rather than just being a component manufacturer – and an opportunity to innovate, putting R&D dollars into improved materials and designs.
The negative for the industry is the shortcuts taken by those companies more interested in improving profit margins than in maintaining a reputation for quality. In our years in solar racking, we have seen some questionable practices, including cutting corners in design, engineering and materials, as well as testing. Common shortcuts include the use of ambiguous coatings – or no coatings – on materials, not considering the corrosive effects of soil on racking posts in the ground, the use of screws without a nut which compromises the integrity of joints, and offering products that have not been tested to Underwriters Laboratories (UL) standards and cannot truly be backed by the warranty that accompanies them.
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In terms of testing, UL 2703 has been good for the industry, but it is not an absolute standard. It is a choice, and it is up to racking companies to drive the performance and integrity of their own systems. Having a true code in place would level the playing field by weeding out the companies that don't address important safety and performance factors, such as wind and snow load testing, corrosion testing, and fire resistance.
Project bankability
Warranties aside, developer and EPC concerns center on a project's bankability. Industry leaders have rigorous vetting processes that look at all facets of a racking company's operations, from engineering, design and manufacturing capabilities through to financial stability, business processes and customer service standards. Vetting often involves multiple visits to our sites and our manufacturing facilities and gives developers a level of comfort that they are working with a company that can stand behind its products and warranties. This due diligence can take months and is indicative of the substantial investments being made by developers.
Bankability is critical in attracting project financing. When developers have difficulties in securing project funding, the resulting delays impact all providers along the supply chain and drive up costs. Today, projects are attracting a lot, if not most, of their funding through third-party residential and commercial solar funds – more than $1.3 billion in third-party funds was raised in the first two quarters of this year. These are sizeable investments being made in solar, and every aspect of a project contributes to bankability.
Diversification as well as consolidation of services can also play a big part in bankability. A streamlined racking approach reduces risk for customers and produces a more efficient and economically viable business model. We are increasingly seeing companies providing a multi-disciplinary approach to projects – handling the engineering, manufacturing and installation – to strip out the layers and reduce loss and inefficiency associated with the multiple service providers involved in any one project.
As prices for solar racking systems continue to decrease, this market evolution will result in a more mature industry, an increased reliance on high-quality, cost-efficient products and a gradual weeding-out of companies looking to make quick profits. As the industry evolves, racking companies are also receiving higher volume orders. Those who do not have the capacity to deliver these increased volumes will be superseded by companies capable of meeting the industry's changing needs.
EPCs are now expecting warranties in the 25-year range for quality racking products, and companies will need to adapt, innovate and differentiate in order to remain competitive. Refining engineering processes, cutting installation costs and reducing excess ‘add-ons’ in racking products is critical to contributing to the broader goal of making affordable solar energy a reality.
Aaron Faust is a co-founder of Applied Energy Technologies, a racking and mounting systems manufacturer based in Maumee, Ohio.
Terence C. Seikel is president and CEO of Defiance Partners LLC, a private investment firm based in Sterling Heights, Mich.
