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Electrical Potential: Reducing Customer Acquisition Cost and Increasing Lifetime Value in Solar and Competitive Electricity

Posted on February 28, 2013 by Josh Lutton and Iain Drummond

Two of the most compelling stories in energy over the past few years have been the rapid growth of competitive electricity supply (“CES”) and rooftop solar. Although the two industries directly compete in some states, we have worked with executives in each industry who know relatively little about the other. However, we believe CES and solar businesses could help one another reduce customer acquisition costs and solar companies could help CES businesses stabilize cash flows over a longer period and increase customer lifetime value.

Both industries have enjoyed rapid growth in recent years. Eleven million consumers in 13 states plus the District of Columbia buy power generation services from competitive suppliers. (For the most part these consumers continue to buy electricity delivery services from a local monopoly utility.) The number of residential CES customers has grown at 16% annually since 2008 and more than half the consumers in some markets buy from a competitive supplier.

Meanwhile, the amount of residential solar capacity installed each year has grown at an annual rate of 56%. One of the key drivers of this growth has been the emergence of third-party-owner financing models, in which consumers spend little or no money up front but agree to host systems at their homes and buy the power produced for 15 to 20 years. Another has been a precipitous fall in the cost of solar equipment.

[Read more…]

Ignorance

Posted on January 11, 2013 by Josh Lutton

I recently read a delightful little book, Ignorance, by Stuart Firestein, chairman of the department of biology at Columbia University, and had a chance to discuss it with him over dinner a few weeks later.  The book is about how Firestein thinks science (and other research and scholarship) really works.  In my experience, many of the same principals apply in business.

Firestein thinks we hold mere facts too dearly: “When I sit down with colleagues over a beer at a meeting, we don’t go over the facts, we don’t talk about what’s known; we talk about what we’d like to figure out, about what needs to be done.”

He uses the term “ignorance” not as a pejorative but as a description of a state: “the absence of fact, understanding, insight, or clarity about something…not an individual lack of information but a communal gap in knowledge…it is a case where data don’t exist, or more commonly, where the existing data don’t make sense, don’t add up to a coherent explanation, cannot be used to make a prediction or statement about some thing or event.”

What we really want to do with science, research, or analysis is (a) understand where we are ignorant, (b) conduct research to elucidate, and (c) open up new areas of ignorance.  We want to refine our mental model of the world.

At one point, Firestein lists some questions he and his students have asked other scientists probing the boundaries of their ignorance.  As I read his questions, my mind went to business, and I wondered if I could create a similar list in that domain:

[Read more…]

Best Business Books 2012

Posted on December 26, 2012 by Josh Lutton

Every year between Christmas and New Year’s I look forward to catching up on some reading.  This year I’m reading Nassim Nicholas Taleb’s Antifragile.  Looking for some suggested reading yourself?  Here are my personal nominations for Best Business Books 2012:

[Read more…]

Local Chinese Solar Subsidies and Loss Aversion

Posted on October 19, 2012 by Josh Lutton

Yesterday I read a Raymond James analyst report (by Pavel Molchanov and Alex Morris) mentioning a Financial Times report that a senior Chinese government official said the country’s solar industry was like a “patient on life support,” that it would have to go through a painful series of cutbacks that would need to take place through “powerful market competition and cruel elimination,” and that support from the central government would not be forthcoming.

That’s tough love, especially considering many feel Chinese solar subsidies (through loose credit terms) are what drove the industry to its current 2X oversupply situation.  (To be fair, it didn’t help that many Western countries cut installation subsidies at the same time capacity was exploding.)

Unfortunately, as Raymond James and the FT also reported, it is local Chinese governments that have been giving manufacturers support lately.  The cities of Xinyu and Wuxi have given LDK and Suntech $80 million and $32 million, respectively.  This looks like a classic case of loss aversion, which as I explained in another post makes humans prone to make unfortunate gambles when facing difficult choices.

[Read more…]

SolarCity S-1: Observations

Posted on October 8, 2012 by Josh Lutton

SolarCity, the largest residential and commercial solar installer in North America, has filed a public registration statement for its IPO (see it here).  Here are a few observations we pulled from the document.

Installer Gross Margins

SolarCity reported overall gross margins of 21% for 2011 and 30% in the first half of 2012.  However the really dramatic revelation in the S-1 is the difference in gross margins between systems they sold for cash and those they financed:

[Read more…]

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