How to set up a Solar services Company?

 

RAMA BETHMANGALKAR, INVESTMENT MANAGER, VENTUREAST

The case:

Ritesh Kumar believes there is potential to tap into the solar power generation market. Based in Gurgaon, he initially wants to start offering solar services by setting up solar panels for commercial and government customers and eventually, get into providing his services to the residential market. He is backed by 20 years of experience in the power and energy industry, where he honed his talent and experience.

The Expert: 

Rama Bethmangalkar is a principal at Ventureast, a venture capital firm. He works with companies in the technology, telecommunications, outsourcing, financial services, and alternative energy sectors. Bethmangalkar brings rich experience in working with entrepreneurs and CEOs as they deal with myriad operational, people and strategic issues. He holds two U.S. patents for his work in the area of High Availability systems software. Prior to joining Ventureast, he spent seven years with Sun Microsystems in California, where he played varied roles in its systems management and computer systems groups, including leadership roles in marketing, product management and engineering functions. Bethmangalkar holds an MBA from Cornell University, Masters in Computer Science from the University of Rhode Island and Bachelors in Computer Science from the University of Mysore.

Expert talk:

The latent demand for solar power is getting stronger each year in India due to the increasing energy deficit. However, two primary issues in the business proposition still needs considerable attention: i) asset financing, where by reputed financial institutions underwrite 70 – 80 per cent of the total cost and ii) ensure that the panels/other critical components are of high quality and its respective vendors would be in a position to honour warranties. Kumar may want to work with a few carefully selected vendors to address the quality issue (as opposed to being solely driven by lowest cost provider) and simultaneously work hard on convincing NBFCs (non banking financial company) and banks to extend financing to solar assets just as these institutions finance cars and vehicles.

The market for rooftop solar services is huge in India with few players in the segment. The customer base can include both industrial and commercial ones with whom Kumar can work to bring about a viable and sustainable solution. His initial target customers would be industrial/commercial such as small-medium industries, which have the need for energy during daytime, have ample rooftop area and may be currently using diesel to supplement grid power. To get through to him, his USP should be simple – sell electricity as opposed to panels/system. The customer pays for electricity units (KW-hr) generated and does not have to worry about system design, maintenance etc. The initial capital requirement (until the business model is proven) need not be high. Kumar may be able to fund it through a combination of self funding, angel investors and working capital loans. It’s always prudent to tap grants and other forms of non-dilutive financing so long as the cost to avail such funding is reasonable. However, one should not expect any concessions and the business model should be independent of subsidies and environmental benefits.

Early on, the challenges for Kumar could be numerous but getting the initial breakthroughs with financing institutions is the key. There are no substitutes for patience and hard work here.

Setting it up

The business is of systems integration and services. Kumar can gain knowledge through trade conferences, journals, a short stint in Germany or California, where several companies have already solved many business/technical problems. This business should procure the panels that are suited for the specific customer environment. It’s a function of cost and energy yield of the panel. Kumar should not be concerned with producing cells or panels as there are enough players in the market already and only focus on leveraging commercial off-the-shelf products to design solutions that meet the client’s needs.

The amount of power he needs to supply completely depends on each individual customer. There are usually two figures to work with: peak energy demand and average energy demand. Peak load happens when all the appliances in an establishment are used simultaneously, which occurs about 10 per cent of the time, while the demand for the average load is present for the remaining amount of time. Although diesel generator sets can vary to provide power between these two needs, solar cells can’t do that as it is impractical to dynamically resize the panels to match the user’s load conditions. Hence, this average energy requirement is highly customised according to each customer’s needs and the amount of rooftop space that is available. While the average demand could be 100KW-hr but the available rooftop space can accommodate only about 20 KW-hr. In such a case, Kumar needs to convince the customer about the amount he saves by switching for that amount of solar energy.

Revenue model

Kumar can opt for an operating expense (opex) model rather than the capital expenditure one. In the opex model, the company takes on the cost of the solar panels to procure, install and maintain it, and charges the customer on a per unit consumption basis. A power purchasing agreement ensures the customer buys power from the service provider for a stipulated period of time. If he sells power at a certain amount per unit, he could, say, after a certain period of time reduce the rate to link it to increasing government power tariffs or rising diesel cost. Thus, ensuring the complementary role alternative energy will play.

Kumar’s pricing strategy should be to sell by unit of electricity. The price should factor in total lifetime cost of energy generation, the savings the customer may be incurring by moving from a more expensive alternative (if applicable), expected return on investment from the venture etc. If the business is purely selling energy, it could be profitable in a few years. The margins depend on how efficiently the business is managed, working capital management, leveraging technology etc. To calculate his return on investment, standard financial models are available. However, one needs to get into great detail to validate each and every assumption. Another critical step in the process is to develop sensitivity analysis for key variables such as interest rates for financing, expected rate of inflation for labour involved in ongoing operations and maintenance of the plant etc. Once commissioned, it’s extremely important to monitor the technical and financial performance in real-time against the initial assumptions and take appropriate corrective action for any adverse developments.

Hiring

To build a great team that is crucial for Kumar, the senior team should include people with experience directly related to the core business and expertise in finance – to develop the win-win commercial package for customers, lenders and last but not least, the business. Considering that the market for solar power is still nascent, hence it requires a significant amount of evangelising in addition to traditional sales and marketing strategies that would require a strong marketing team. And the operations team should have people with knowledge of energy management, power systems & electronics. His initial team strength depends on the scale of the project and the target geographical area. Of course, the common trait across all members is entrepreneurial spirit and willingness to solve technical, business and inter-personal issues.

Marketing strategy

To help customers get past the mindset of switching to alternative energy due to its high initial cost, Kumar can relieve them the burden of high initial cost through innovative financing packages. He should develop a solid customer base that can reference and encourage customers to do reference checks including site visits.

Scaling up

The demand for energy that can be rapidly generated is quite high in India and will fuel the growth of the sector. In addition, developing a consumer focussed regional/national brand is important from the perspective of scaling up. Kumar’s focus could be to target large residential communities either for individual residences or to power their common utilities like lifts, pump sets, etc. This again depends on the amount of rooftop space available. To fund such a project, he could enter a tripartite agreement between his company, the customer and the bank.

With the right focus and business model, Kumar’s solar services company can grow well in a country that faces constant power shortages.