Australia is leading the way when it comes to residential solar but the commercial and industrial sector is well behind.

By the end of 2016 the commercial and industrial sector accounted for 32% of all installations under the small-scale renewable energy scheme, almost a 20% increase from 2015.

Why the big difference? Maybe business managers aren’t as touchy about their electricity bills as householders, or perhaps they were waiting for the cost of solar to fall into a territory where it ticked all the boxes. Whatever the case, the attitude among business owners is changing. For more and more of them the time has come to get serious about making their own electricity.

The growth in commercial and industrial installations is “definitely happening,” says GEM Energy CEO Jack Hooper. As managers become more aware of their energy needs Hooper says it’s becoming easier to sell commercial systems than residential ones. “What we’ve really seen in the past 12 months is a shift in mindset,” he says. “People are less hesitant about it now.” He attributes this lift in awareness to solar’s penetration in the domestic market. “There have been a lot of success stories of people saving a lot of money on their bills.”

Expectations about the value of renewable energy are being revised, says Todae Solar CEO Danin Kahn. “There’s a perception out there among some organisations that payback is very long or [solar’s] not going to work for them but when they actually look into it they’re pleasantly surprised,” he says. For some, it may be a case of having weighed up an investment in solar a few years ago and finding how far costs have dropped when making a fresh assessment.

Todae has recently finished a 3.4MW project in Western Australia and is working on a 2.7MW interstate rollout and a 1.8MW university project in NSW.

“As time goes by the projects get bigger and bigger and we anticipate down the track we will be working on utility projects,” Kahn says.

Solgen Energy Group head of business development Angie O’Reilly has seen a big shift in the types of inquiries for commercial work, extending up to megawatt scale. “We’re picking up a lot of tenders at the moment,” she says.

Solgen recently completed projects for Adelaide Airport and Canberra Hospital and is working on a 1.5MW installation for Woolworths in Dandenong. “It been a big shift for us in the last six months to doing a lot of those bigger jobs,” O’Reilly says.

Photon Energy business development manager Robert Ibrahim admits the knowledge about solar among commercial and industrial business owners is still a bit patchy. Some get it and some don’t, with costs, payback periods and percentages of self-consumption being particular areas where prospective clients may have unrealistic expectations.

For some new customers, the task of sounding out whether solar is a good investment may not involve a lot of research. Instead, many simply put a job out to tender and let interested parties carry out the feasibility studies. “People are looking to find out more information so they just put it to tender, to just see what companies can pick it up and give them the information they’re looking for,” says O’Reilly at Solgen. For others, a transition to solar may be part of a long-term sustainability plan. “It’s all on the back of the rising cost of electricity for these companies.”

Where the money comes from

The increased levels of sophistication offered in energy efficiency loans are attracting new interest in renewables. Options where systems can be installed at no upfront cost and repaid over seven years make sense to owners who are watching their utility bills go up and up. It’s a “no brainer” decision when repayments are lower than the saving made from lower outgoings on electricity after solar is installed, but that only happens when a system is sized correctly, says Hooper at GEM Energy. “It can allow businesses to put something in at no net capital cost.”

Under such financing schemes systems can be entered as chattels, and be amortised as a balance sheet item, or be viewed as a rent-to-own agreement where the business buys the system at the end of the term.

Hooper says either option is better than a power purchase agreement. “What you spend on a PPA is substantially more than what you’d spend on a lease-to-own,” he says, giving the example of a PPA locking an owner in for 10-15 years on about 16 cents/kWh compared with a lease arrangement which may work out to 10-12 cents/kWh. “PPAs are 30-40% more expensive than some of the better finance products on the market.”

The main beneficiaries of PPAs are the system owners who sell the electricity, he says. “They make 300-400% return on investment on a PPA.”

Storage stacks up

This pick up in solar install activity is hitting installers at the same time as a boost in inquiries about batteries. “Storage seems to be the hot topic at the moment, although [commitments] haven’t reached the tipping point,” says Ibrahim at Photon Energy. Knowledge about what storage can do is still a bit sketchy, he says, and not all solutions are the same: for some, lead-acid; for others, lithium-ion. He won’t mention any brands.

Clients are more savvy about storage, says Hooper at GEM Energy, especially owners on peak demand tariffs who want to do anything in their power to cut consumption from the grid. “At the end of the day it’s all about return on investment,” he says. “If you can put in a battery system that has a seven-year payback, people will buy it.”

When storage technology becomes cheaper, and as power costs keep rising, the relative drop in payback times will see demand for batteries rising. “Every single one of our big commercial systems now are being installed in a future-proof sense, so that we can expect them to want to put batteries on at some point.”

Todae Solar CEO Danin Kahn says storage is more likely to come up as a point of interest than a requirement during initial conversations about new projects. “Storage is still in its infancy and there are lot of organisations that don’t understand exactly what it does or how it works,” he says. “Also, the paybacks are a lot longer than solar.”

Some could benefit from storage if it were only cheaper, he says, and that day is coming. “They may have accessible roof or ground area but they don’t have the load for more solar, so having storage would enable them to double or triple the size of the PV system and use it at different times of the day. In 12 or 24 months those sorts of options will be viable.”

Todae is working on a solar-and-storage project for a council in Victoria.

But not everyone is positively charged about batteries.

“Batteries are not even in the discussion,” says O’Reilly at Solgen. “We find that 99% of the time they are consuming everything that’s produced.” When it comes to designing systems it’s all about self-consumption, she says; no-one is interested in turning out excess electricity with the hope of making a profit from selling surplus into the grid.

Those pesky subsidies

In the world of commercial and industrial installations the projects are also getting bigger, says Hooper at GEM Energy, where owners are opting for systems around 120kW, for instance, and taking the large-scale generation certificates (LGCs), instead of opting for a system under 100kW and claiming the small-scale technology certificates (STCs). “Typically in the past people would have installed less in order to claim the STCs, but the value of the LGCs and the ability to lock people in for seven or eight years at $70-plus per MWh has given people the confidence to invest in larger systems and go on the LGCs trading scheme.”

STCs are traded up front, with one certificate granted for each MWh the system will generate. Prices are currently around $38 per STC (at mid-March). LGCs are issued for each MWh generated on site but are currently trading around $80 – or more than twice as much as STCs. “So each MWh of energy that you generate on site [as an LGC] is worth twice as much [as an STC],” Hooper says.

STCs are issued up front for systems under 100kW and LGCs are doled out for anything larger as the system generates. This means a 100kW system can expect a boost of around $70,000 from trading its STCs, Hooper says, whereas the owner of a 101kW system will have to come up with that capital.

“A lot of businesses don’t want to take the risk. Historically, people would have only gone for STC systems but we’re starting to see now a lot of people opting for LGCs, particularly with the difference finance options out there and energy lease products in the market.”

At Photon Energy Ibrahim says some clients are happy to hold on to large-scale generation certificates (LGCs) and trade them if and when a rise in spot prices benefits them, and others trade them as soon as they are received. LGCs are received as electricity is generated along the way. For smaller systems, the small-scale technology certificates (STCs) earned can account for up to half the cost of a project, Ibrahim says.

If a company has good cashflow and the outlook is for the spot price to improve, it may choose to hang on to certificates and trade them later.

An entrance for smaller installers?

Hooper’s advice to residential installers who may be contemplating a tilt towards the commercial end of the industry is to stay away. “Anybody can install a solar system – that’s not challenging – it’s about how it operates with the local grid,” he says. “The amount of commercial systems where we’ve had to fix them up because they’re not working properly is ridiculous,” he says. The issue is network control.

He gives an example of the Ergon network’s requirement that a solar system must limit its export from 100% to zero within two seconds, or shut itself down. But how can a system respond when major brand inverters take five, three and eight seconds to ramp from 100% to zero?

“I’ve been to sites where I’ve seen 100kW systems making 60-70kWh a day and they should be making consistently over 300kWh – and it’s because the network control equipment that’s been installed isn’t sufficient. It’s not been understood.”

Residential installers who rely on advice from a wholesaler are not equipped, he says, to compete with specialist installers who are hefty enough to employ engineers expert in designing solutions.

“It’s a massive, massive problem,” he says. “The narrow margins are the problem.”

As margins get tighter, the problem gets worse, he says, as costs are cut again and again.

At Todae, Kahn echoes Hooper’s concern about how the technicalities of grid connection can throw a spanner in the works. “That’s where experience comes in handy. There are definitely some networks where it is … more complicated to connect up to the grid,” he says, adding that it helps to have a dedicated team of engineers and grid-connect specialists. “It can be a challenge at times but it’s always doable.”

Big responsibility comes with signing big projects, and that’s a fact commercial installers must face. “It’s not a space you can just walk into, do an install, and then walk away from,” Hooper says. “We have projects that, six months on, I still have to have an electrical engineer go back there every two or three weeks to customise the site controllers to chance the ramping and network protection settings.”

Things go wrong on commercial installations, he says, and the ongoing costs of maintenance and ongoing operations are too often overlooked. The work doesn’t end when the job’s installed. Photon provides full monitoring and reporting service, relying on its proprietary energy management system, and operation and maintenance.

Still, with the increase in activity as inquiries are translated into jobs there is opportunity in the commercial and industrial space, where margins can range between 15% and 20% whereas residential installers are getting by on 5%.

“If you’re a small installer [who wants to get into commercial work], stay under 30kW,” says Hooper at GEM Energy. “Under 30kW it’s not complicated; it’s just like a big residential. Over 30kW it changes.”

Oftentimes the potential difficulties of a project won’t be apparent to the owners when they first brief an install company because they haven’t been up on the roof for a long time. “Sometimes there’s a lot of equipment on the roof and if it’s an old roof or a roof that needs refurbishing that’s something they need to consider as well,” says Ibrahim at Photon Energy. It’s rare that an owner will look to a neighbour’s roof and negotiate a deal where they share cost of generation, he says. “Depending on the commercial facility, if it’s in an industrial estate, but there are always the issues with demarcation and ownership – who owns the roof.”

Photon has enough of a track record among large companies and government that it doesn’t need to ravenously pursue new business at the moment, Ibrahim says. “A lot of people are coming to us now.”

Still on the margins

Installers shouldn’t expect that a slow surge in demand for their services will enable them to tweak margins upwards, Hooper says. “I don’t think we’ll ever be able to increase our margin,” he says. “I think our margin will actually decrease if that happens.”

Margins in the commercial space are paper-thin, he says, with 100kW systems working out to 80 cents per ––Watt, after STCs. A lift in demand in the commercial market which follows a drop of battery prices will only encourage more installers to compete in it, as they did in the PV market.

Fingers crossed that it all ends well…