Contract innovation in the solar industry

Innovative products are not necessarily followed by broad adoption. There needs be a business model behind it.

Lynee Kiesling over at Knowledge Problem has a post on the solar industry, which is interesting throughout. She cites a New York Times article which helps to explain part of the mystery of innovation:

The reason that the residential solar industry has begun to buck this general trend is because, instead of appealing to our heartstrings, it has begun to appeal to our checkbooks. The innovation that made this possible — selling solar services instead of solar panels — was pioneered in the commercial market by Jigar Shah. Though Shah was trained as a mechanical engineer, his most important bit of engineering was financial: in 2003, he started a company called SunEdison, which offered something called a solar-power purchase agreement (P.P.A.) to commercial customers.

Instead of having to pay all of the money for a solar installation up front and then having to carry that payment as a debt on their balance sheets, which no publicly traded company wants to do, companies like Whole Foods and Staples contracted with SunEdison to have solar panels put up at no initial cost. SunEdison then charged the companies for the amount of energy that the panels produced at a fixed rate for a period of 20 years — a rate that was less than what the companies were already paying the utilities, and that would ultimately save them even more money as energy prices inevitably rose over time. The bold stroke was that they were selling the power, not the hardware.

And there you go. Deregulate the whole thicket of laws surrounding electricity, put residential customers on a payment plan and solar becomes a much more attractive investment. Financial innovation and credit markets can be disruptive, if you let it.

First published Aug 31, 2012