Sungevity, Founded by Greenpeace Activist, Tackles Climate Change as “The Amazon of Solar Electricity”

9/22/10Follow @wroush

Yesterday we told you all about Recurve, a San Francisco home energy auditing and retrofitting startup whose founder argues that before energy-conscious homeowners put solar panels on the roof, they should focus on fixing what’s under it—poor insulation, leaky ducts and windows, inefficient HVAC systems, and the like. But let’s assume you’ve done all that. What’s next? Here in California, there’s an array of companies working to make it far easier and more affordable to install electricity-generating solar panels on your home.

One of the most innovative and fast-growing startups in this industry is Oakland, CA-based Sungevity, which is probably unlike any cleantech company you’ve heard of. The company doesn’t have its own installation workforce, and unlike competing firms such as SunRun, it doesn’t have “power purchase agreements” under which homeowners buy electricity from the company. What it does have is software. It’s got applications that allow technicians to peer down from the sky (via Google Earth-style satellite photos) and figure out exactly how many solar panels will fit on your roof, then generate a project estimate. It’s got applications to automate the sales process, and it’s got applications to cut through the red tape around permitting for solar installations.

In effect, Sungevity is a new low-overhead, high-efficiency middleman in a business that’s long been a cottage industry, dominated by small solar installers who have to roll a truck every time a potential customer requests an estimate. (In many of these respects, Sungevity is similar to Recurve, which, as I explained yesterday, is also using software to systematize and scale up a cottage industry—in its case, home energy retrofitting.)

Danny KennedyDanny Kennedy, Sungevity’s founder, argues that simplifying and automating the solar installation process is the only way to bring this form of renewable power to the mass market. Together with co-founders Andrew Birch and Alec Guettel and chief financial officer Charles Ferer, he’s built a business that’s collected $9 million in venture backing and is set to grow from $3 million in revenue in 2009 to nearly $30 million this year, with no end in sight. The core of the business model is the 10-year “solar lease,” an idea Ferer brought with him from former employer Solar City. In return for assigning solar tax credits and rebates to the lender—Sungevity and its financial partner US Bank, in this case—homeowners get to install solar panels for only about half of the actual cost of equipment and labor, and they can pay for the project over the course of 120 months.

Sitting down with Kennedy to talk leases and rebates and software is an unusual experience, given that his background isn’t in the energy business at all, but in environmental activism. A native of Australia, Kennedy is a 12-year veteran of Greenpeace, where he started out in the 1990s working to block oil projects in Africa and went on to run the organization’s California Clean Energy campaign. That campaign helped to bring about Governor Schwarzenegger’s $2.8 billion California Solar Initiative, under which the state is providing cash rebates of $1 to $2 per watt for solar photovoltaic installations. (A typical home installation might amount to 3 to 10 kilowatts.)

Those rebates are a big part of what’s making programs like Sungevity’s solar leases affordable, and are one of the reasons Kennedy and co-founders decided to build their business in the Bay Area. Another is the population’s openness to new ways of doing business: “If there is anywhere that’s going to be comfortable adapting to Internet commerce models [for solar installation], it’s California,” Kennedy says.

Our look at Sungevity comes in the form of an extended Q&A. In Part 1, below, Kennedy talks about Sungevity’s business model and technology, and describes how the installation process works. In Part 2, coming tomorrow, he talks about how he made the leap from Greenpeace to energy entrepreneurship, how Sungevity plans to scale up, and how the company’s work fits into global efforts to reduce carbon emissions and blunt the effects of climate change.

Xconomy: What is the mission of Sungevity?

Danny Kennedy: The big picture mission is to take solar to scale. Which I’m sure every solar entrepreneur says they want to do, but our vision is to do it in the residential market, which is ultimately the highest value market for solar electricity. Finding a scalable way to deliver solar electricity to residential customers in middle America is the best chance to make large profitable ventures, which will in turn scale the production and consumption of solar itself.

If you can capture developed-country, grid-connected markets, such as the wealthy German, Japanese, or California markets, it will drive solar production in factories around the world, so that the learning curve kicks in. With every doubling in volume [in solar production] there has been a price reduction of 18 percent. So if you create demand in California, exporters selling into that market build bigger factories, the price comes down, and the price of solar electricity comes down. We’ve seen that in spades. Over the last couple of years we have doubled the volume, and sure enough the costs have fallen more than 50 percent in the last year alone, so that the price of solar electricity is now down in the competitive range for residential rates structures. Some of our customers get solar electricity from us for around 18 cents per kilowatt-hour, which is very competitive with PG&E. So the vision is to take it to the residential market en masse, with an easy and affordable value proposition.

To make it easy, that meant doing it online. We wanted to provide a solar-electricity-seeking customer with a similar process to iTunes or Netflix and familiar online commerce models. Affordability means offering finance solutions to customers so they don’t have to pay the up-front capital costs. Unfortunately, our journey started in 2008. We came to market thinking we would have banks and others lining up to provide financing, and then the world fell apart, and the financial industry forgot about solar financing for two years. We did a lot of cash sales in the first couple of years while we honed the tools.

X: Tell me some more about the specific tools.

DK: Our technology is software. We are a supplier-neutral vendor of the solar hardware. We make it easy for customers to go solar by putting the whole purchasing process online. That reduces our cost structure, which makes us a more profitable business and improves the experience of the customer, and that is really key. Mass uptake, from novelty to ubiquity in the next decade, is only going to happen if this stuff is really easy.

The conventional process was fraught with lots of contractor interactions, and time at home waiting for people to come and take measurements of your roof, and then waiting around for them to come back and pitch you a proposal, and then trying to pick between KACO and Fronius inverters. We have simplified and standardized it and put it online, which makes for a much more compelling buying process. The secret sauce, if you like, is a remote solar design tool that we built a couple of years ago which allows us to take a satellite view, similar to a Google Map, and pair it with angled aerial photos from planes. Without giving away the IP, we use the trigonometry and the angles and pitches in the roof, which then allows us to fully engineer the system without a site visit. The craft of solar installation requires getting four numbers: the length and width of the installed area, the pitch, and the azimuth [the compass direction], plus identifying any design obstacles. Anyone can use Google Earth to look down and see the length and the width. We’ve developed algorithms that also work out the pitch and the orientation to the compass, which gives us an accurate, rules-based reading.

You can have a cool tool, but unless it’s integrated into your business model it may not improve things that much. When I first moved back here and told people we were going to do remote site design and sell by phone, they said ‘You’re crazy—every roof is different. You have to visit every home.’ We really got poo-pooed. But our argument was that it’s not scalable to have a sales force driving around in traffic in suburbia. So the first two years was proving the concept. If we hadn’t built those two key pieces, the inside sales tool and the remote design tool, we wouldn’t be able to be the scalable business that we are today. We can be sitting here in Oakland and selling to Denver. That’s the benefit.

X: Who thought up the remote design tool?

DK: I would give credit to Andrew Birch for the details of the business model. He and I dreamed of a software application that allow us to do the site visit remotely. Google Earth was just becoming commonplace then. People were getting familiar with satellite imagery and GIS tools. But it took an uncommon genius, a young software developer in Australia, to build that for us. His name is Adam Pryor. He’s still based in Sydney, and a lot of the IP is his. He built it with a company called Extro Interactive, the developers for the website. He did the CRM stuff too. When we licensed the aerial photos through Bing and Microsoft, part of their license agreement is they have a know-how clause—they get to peek under the hood. They sent a guy here to have a look at how we were using the images, and he said “Wow, we have 300 developers in Redmond and we haven’t cracked that nut yet.”

X: What’s this inside sales tool that you mentioned?

DK: It’s a bespoke CRM [customer relationship management] system that we’ve built specifically for the solar residential electricity business. There are competitors trying to work out how to do remote solar design with their own tools, but they still don’t have the systems to take advantage of it, because they are doing the conventional sales visits. We have never had a sales force that goes out to do site visits. Some of the other industry players are now adopting our model. Solar City has gone to 40 percent inside sales. Others surely will too, because the cost structure of running cars around with guys is just too high.

X: Can you talk a little about the way you help homeowners finance a solar installation?

DK: The affordability comes through the solar lease. Charles Ferer [Sungevity's chief financial officer] brought us that know-how—he is like our Eric Schmidt. He was the CFO at Solar City, and had been there when they innovated the solar lease, and he helped us create our own solar lease. I believe the financial engineering in the last three to five years in this space has been as important as any technological engineering. The product itself is great; it’s bomb-proof, it sits around and creates electricity at 15 percent efficiency, which is unbelievable—try thinking of another mechanism that turns sunlight into a free service at 15 percent efficiency. There isn’t one. Our problem has been getting these things to market.

You have probably heard the analogy to cell phones. If you had to pay for your handset and all the phone calls you were ever going to make in advance, you wouldn’t sign up. But because you can pay it off in the course of a contract as you go, we’ve all taken it on. The S-curve from less than 1 percent penetration 20 years ago to 90 percent penetration today is the same S curve that I think this technology is on, and the thing that makes it most likely to succeed is financing.

X: How do the leases actually work? Does the homeowner own the solar equipment that goes on his house, or do you?

DK: You don’t own it, we do, in a joint venture with an investor. In our case, right now, it’s US Bank. You assign the tax credit to the investor, and you also assign the rebates that you get from the State of California. Between those two values—the tax equity investment and the rebate stream, plus some depreciation value that the investor can also get—about half of the system is already paid for up front. Then the lease payments over the 10-year term pay for the rest. It’s a win-win-win, because the customer is getting a solar system for cheap. In most cases in California, 60 percent of our customers are cash-flow positive. Their monthly payment to us, with no investment up front, is less than they were paying to their utility from month 1, and in all cases, by month 120 they are saving money.

X: Your leases sound different from the situation where a solar provider pays for the installation of the equipment, and then the homeowner pays them for the electricity.

DK: Yes, that’s called a power purchase agreement, and our model is slightly different. We model the amount of electricity and we say “this is the performance your system will get,” and you will pay us a monthly lease that rises 2.5 percent per annum, which is a built-in but known inflator, where as electricity prices are known to go up more than 2.5 percent. You just pay us that monthly fee. With a power purchase agreement you pay for the power consumed. That is SunRun’s model. I think both models are powerful. The benefits of the Sungevity solar lease are a lower inflator, a lower price, and a shorter term. Power purchase agreements are mostly structured around an 18- to 20-year term, whereas ours is 10 years. For a lot of customers, it’s easier to imagine committing to 10 years.

But the important thing here is that there are options emerging. I don’t want to get into shilling Sungevity versus the competitors. The fantastic news of the last two years is that there is a smorgasbord of solar options that make it easy and affordable. We think we are at the cutting edge of that, with the best solar lease in the space, but the fact is that there are other models too.

X: To what extent is your business dependent on government subsidies, in the form of tax credits for solar installation?

DK: The biggest legislative marker, in my view, was when the value [of a solar installation] assignable to the tax credit investor went from a $2,000 flat amount for any residential system to 30 percent of the value of the system, which was ushered in on the back of the 2008 bailout bill. That really makes this space wide open. When we were doing cash sales in 2008, there were also some rich rebates being offered in San Francisco, as well as the state rebates which have since been stepped down. We also had crews working for us who were workforce development crews, so we had an additional rebate for creating “green-collar” jobs. We were selling small systems for as little as $2,000 cash. It was the cheapest solar on Earth—25 years of electricity for $2,000. It was pretty amazing, and it was a lot of fun. That was when we started selling by e-mail only, or over the Web, with not even a phone call, let alone a home visit.

X: When you’re designing these installations remotely, without even looking at the site first, isn’t there a risk than when the contractors get to the home, your measurements will turn out to be wrong, or you won’t be able to complete the job the way you thought?

DK: It’s really the law of large numbers—a million solar roofs is the goal here. You can work around the statistical variations. You can say that 1 in 150 homes is not going to have the rafter specs that we require, but we can afford that. In the odd case that comes up, we have an out in the contract, saying that the customer has to upgrade their rafters or we are not obliged to fulfill. These things have come up; when you’re installing on older building stock, sometimes it’s not up to the task of supporting new solar panels. The difference is that whereas the cottage-industry, conventional process would go and do a site visit with a two-hour truck roll and a guy and the overhead and the insurance cost for getting on the roof and all the rest, and then tell the customer “Sorry, you can’t go solar,” we do all that at this end.

X: How long does it take to get solar on your roof, from beginning to end?

DK: To chunk out a solar sale for you, first there’s the research and the cost-gathering from the customer’s point of view. Most California customers do comparison shopping. They get two or three quotes. So there is that phase. Then there is committing and buying, signing the lease. Then there is the waiting for Godot, as whoever your provider is goes through the permitting, applications, and rebating for you. We try do all that for you and keep the customer experience painless. But depending on the jurisdiction, it can take between four and 12 weeks. It seems to be getting even worse in Southern California—I could rave to you about how the paperwork is a burden of about a dollar per watt in back-office costs. Then there is the construction project. That’s really just the final mile, and only 10 percent of the cost of the whole thing is the labor on the roof. It takes two days in most cases. If you have a McMansion with 15 kilowatts it will take longer.

X: Is there anything you can do to speed up the process?

DK: We have streamlined it as much as possible. We are on the cutting edge of digital filing and digital signatures. We have been running a campaign since 2009 to make utilities accept electronic signatures on rebate applications. They used to return it if it wasn’t in blue ink or black ink. Crazy stuff like that. But we suffer like the rest of the industry. Since we have standardized and digitized and put everything into our CRM, there is an integration and sophistication to our business that is probably better than the cottage industry, but I won’t say we’re without pain around that.

X: Where do you get the solar panels that you install? Do you have a direct line to the big manufacturers in China or Europe? Do you have to keep a big inventory on hand?

DK: Our premise coming in is that these black rectangles would become significantly oversupplied. There is a slight tightening of supply right now, but broadly there is more production capability than demand. We would like to be a bit like Dell—it should be a dump-in-driveway situation, where you batch ship from China or Oregon or wherever, Mrs. Jones orders 5 kilowatts, we send the panels and the inverter by rail, and we’re done. We are not there yet, but we have built a software solution to manage that. We need some visibility, because we’re moving roughly a megawatt a month, and working three to six months in advance.

X: Who does the installation? You don’t have your own building contractors, do you?

DK: We own the customer relationship. We create this great experience where they buy or lease from us and work with us for 10 years. But the installation will be done by a subcontractor. You are not going to get to a million roofs, let alone 3 million or 4 million, by growing the existing cottage industry of 500 mom-and-pop solar installation shops. You are going to do it by leveraging the existing infrastructure of heating, ventilation, air conditioning, electrical, and cable installers. Pretty much anyone with a ladder and a truck can do solar installation. We have a mix of electrical contractors and solar installers, about 45 crews across Arizona, Colorado, and California.

There is a lot of indirect employment coming from Sungevity. There’s 40 percent unemployment in the construction sector due to the recession, and we’re getting them into the green economy. So from a customer point of view, there is the satisfaction of knowing that there is a local craftsman coming around to do your solar installation. It goes back to the business model. We have centralized and standardized the things that can be centralized and standardized in solar purchasing, and we outsource those things that are hyperlocal and need to be done in the community.

X: Why did you start Sungevity in California, and do you plan to grow beyond this region?

DK: I had lived here for some of the 1990s and in 2000-2001, and I knew a lot of the solar industry players here as an advocate. I knew this was a great place to try this business model. If there is anywhere that’s going to be comfortable adapting to Internet commerce models, it’s California. There is also a great rebate program here, since 2007. There’s the solar resource. So there are a lot of good reasons to pilot here. But we’ve always had the global ambition that this will be a household name that will ultimately be identified as the one-stop-shop. We want to be the Amazon of solar electricity.

X: How big do you think this opportunity is?

DK: In 2011 and 2012 we will continue to more than double each year. Obviously, we could mis-execute and stuff it up. But if we don’t stuff it up, the only way is up and to the right. There is no ceiling on this market. We are at 0.4 percent of California roof space, and even less of U.S. roof space. We could very feasibly fill 40 percent of the roof space. So that’s a factor of 100. My view is that this needs to be done in the next decade if we are going to make a real, meaningful contribution to solving climate change. So we are going to grow 100-fold in 10 or 20 years. If you are well placed, you should do well in this industry. The bigger challenge is how does the company connect with that growth and how does the company culture survive that transformation and continue to execute.

In Part 2: Why Kennedy left Greenpeace, and his thoughts on climate change and the Obama Administration’s lackluster record so far on clean-energy legislation.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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