RESCo Energy Inc.

In part three, I am covering the issues around integrators as part of the solar market. Here the challenges centre on experience and credit. Integrators form an important part of the industry bringing together the design, equipment, permitting, installation and commissioning. There are three types of integrators positioning for the Ontario market:
1. New Local
2. Existing Local
3. New International

The New Local Integrators are working rapidly to build credibility and experience. However, without the Feed-In Tariff program the bulk of the new local integrators are still working in the theoretical. This shows up in both the overly simplified or overly complicated approach to design and the lack of critical financial modelling. This is tough for any new market as it creates confusion and fails to set appropriate expectations on either the technical or the financial risk. New integrators also lack the financial track record to apply for credit or leverage supply chains.

The Existing Local Integrators are few and far between. Unfortunately for the market some have had to retrench, leave the market or have been severely financially burdened. However, if healthy these integrators bring the project experience and the market specific knowledge necessary to design and build with strong risk mitigation. These companies have overheads and are heavily invested with many in dire need of the FIT program to realize their business plans. However, they have the ability use their existing relationships, credit histories and knowledge to respond rapidly to an evolving market.

The New International Integrators are those that megawatts of project experience in other markets like the US, Spain, Italy, Germany and France. These integrators bring balance sheets, experience, and buying power. The challenge for a new market however, is that they don’t have the local market knowledge. This creates a large risk. Building design concepts vary both north, south, east and west of Ontario. In fact the way buildings are conceptualized structurally is fundamentally different in Canada than in Europe, and the snow loading issues are not faced by most US integrators that have had the luxury of dealing in the lower states.

It will be important for all of these players to exist. The challenge will be to ensure that the market recognizes the limitations in each category and that each is able to resolve its weaknesses gracefully.

In the second part of this series I want to address the challenges around sourcing photovoltaic panels. The key challenges are related to the size of the market and the currency exchange.

A small to non-existent market constrains the choice of panels, the inability for distributors to carry inventory and longer delivery times for large orders. Lack of choice is seen by the panels that are available to the Canadian market versus other major markets. Newer panels are not launched quickly in Canada and often only after existing inventories are depleted. The ability for distributor to carry inventory is also constrained because their business relies on the ability to leverage buying power, but this can force them to hold panels that are no longer state-of-the-art, or otherwise buy on demand from other markets like the US. Naturally this creates uncertainty in delivery schedules.

The other major concern is the exchange rate between Canada and the rest of the world, but especially the US. Due to the constraints mentioned above, most panels are purchased on demand making them susceptible to the spot price of the currency as distributors are unlikely to be able to make purchases based on optimized exchange rates due to the lack of demand and throughput of their inventory. This results in variable pricing or the pricing of an foreign exchange risk.

A fast growing market alleviates both of these major concerns. However, it is critical that the role of the distributor be supported as their buying power should cover their margins to customers and the expertise they bring to the industry in terms of compatible technologies, technical support, training and equipment finance terms is a key part of building a long term market.

I am going to mini-series this for a few blogs as it is a critical part of the fledgling market that is Ontario. As a market we have been serviced by very few companies that have the ability to complete commercial-grade installations. This requires professionalism, experience and knowledge. RESCo recently completed an interesting exercise for a 150kW project. The idea was to help build the industry by tendering a portion of the work and allowing multiple installation companies to win parts of the work. This ensured that no one company was over taxed, and that multiple companies could lay claim to their involvment in the largest rooftop solar project in Canada.

We carved out the panel and racking portion only. All the structural and electrical was tendered to established trades in those fields. We asked firms to prequalify with us, and to our surprise we found very few that were capable of working on commerical buildings with the appropriate insurance, WSIB, and experience to ensure a quality installation. Over 15 firms were not qualified, and only 4 made the cut. A few declined politely based on existing workload.

As a labour force this sector has been underserviced. It is important that all groups work together to ensure that this part of the capacity building accelerates and that sufficient margins are allowed to ensure they can grow.

In the last two months since this exercise, we have seen the development of labour conglomerates and cross training that has given us access to many more installation-ready labour forces. RESCo is also actively engaged with training organizations to create hands-on experience for their graduates. Together with our installation partners and these new labour pools we are now confident that we can support the 10+ fold growth anticipated in 2010.

Though not originally intended to help compensate for the effect of the global meltdown, the Green Energy Act has become a key economic driver in Ontario. Unlike many stimulus dollars that are not yet released, this program serves to bring private dollars into the market place rather than public ones. The program creates an investment climate and by doing so has created an industry ready to explode with the actual launch of the Feed-In Tariff (FIT) program.

For months now, companies have been preparing, financiers have been doing due diligence, and building owners have been crunching numbers. Though it is unlikely much will get installed this winter (costs, safety, etc) a great deal of design, permitting and financing will. This lead time will give companies time to budget, train, hire, and prepare for what proves to be a very busy 2010 for Ontario!

It was a little over a month ago and wrote that I thought that the installed cost for commerical solar photovoltaics would not drop in 2009. We now know that if fact they have. The key factor is the performance of the Canadian dollar along with falling US$ panel pricing. This may be a bit of non-issue however, as many projects will not be in a position to install panels this year unless they are already well into development. Further delays in getting the FIT program running are also pushing many projects into 2010.

This is a bit Ontario-centric, but a review of pricing pressures for 2009 suggests to me that we are unlikely to see the installed cost of PV drop in 2009. Though panel prices seem to be dropping in the US the dollar exchange is substantially off from last year. Last July, we were at par and now we are in the 81 cent range. Additionally, the market that will be created as a result of the OPA’s Feed-In Tariffs will generate a significant spike in activity taxing a number of supply chain areas including experienced installers who are likely to be overbooked going into the third and fourth quarter of the year. Given that many projects are still pending the final approval of the program the pent up demand is all going to sit in the last six months of 2009.

I expect that by 2010 we will see some of this pressure alleviate, though I am not making any assumptions on the exchange rates. But I think we will see capacity develop in the labour market and more wholesalers comfortable buying at favourable exchange rates and storing inventory. We should also see more companies developing scalable solutions and improve their ability to price project risk. However, I don’t expect that we will see significant cost reductions unless we see the Canadian dollar gain ground against the greenback. We are still a long way from the more mainstream markets in the US, and without solar farms driving purchasing power, the Ontario market will not rank in the top three PV markets.

Michigan is poised to create jobs and build a renewable energy industry through the introductions of the best feed-in tariffs for renewables in North America. A bill introduced by Veteran Michigan Assemblywoman Kathleen Law (Dem-23rd District) is the “first comprehensive renewable energy feed-in law to an American state legislature.” according to the press release.

We have long anticipated that Michigan would look to this emerging industry to transition its automotive workforce. However, this bill goes much further than expected. In fact, it goes to the right level. Ontario has lead in this regard, but with feed-in tariffs below what is necessary, the industry suffers from ‘vision without execution’. This bill, if it becomes law will not just see an increase in activity, it will make activity possible.

I applaud this move. We look forward to seeing our Michigan office being in a position to offer a full range of renewables now to the many buildings and organizations looking to benefit from green energy. Congratulations Michigan, we will be watching closely.