REC expansion causes rethink on vertical integration strategy

REC Solar, the Duke Energy-owned commercial and industrial (C&I) company, is making a push into new markets along the US East Coast without using in-house installation teams, reflecting what may be a growing trend away from vertical integration.

REC builds rooftop and ground-mounted PV systems for C&I clients, from supermarkets to farms, signing long-term power-purchase agreements (PPAs) with them.

Previously the California-based company focused largely on its home state and Hawaii, and it has long taken a vertically integrated approach, doing everything from sales to EPC to O&M work.

But this week, it unveiled a major expansion of its channel partner programme, meaning it is on the hunt for smaller solar companies as partners that can find new customers and build systems in places where REC does not have the manpower.

REC will provide finance, something many smaller solar companies struggle to obtain quickly and cheaply on their own, with parent company Duke Energy eventually taking ownership of the PV systems and PPAs.

Duke, the largest US investor-owned electricity utility, acquired REC last year, in a deal that snapped heads across the solar industry.

Vertical integration is becoming less important in the distributed solar industry, says Ryan Stepp, REC’s new director of channel and partner sales.

“The fastest way to meet demand in a growing market is through partnerships,” Stepp tells Recharge.

“You can hit the targets you need to hit without having to invest in all the infrastructure you’d need to do it all yourself.

“We want to be a leader in Massachusetts. So do we go and hire 100 people there — project managers, sales people, installers? Or are we better served by partnering and relying on folks already serving that market?

“We believe it’s the latter.”

The expansion of REC’s channel partner programme, backed by $225m of initial financing from Duke, “will give us a window into markets where we haven’t had a strong focus”, particularly the East Coast, Stepp says. “Massachusetts, New York, Connecticut, Maryland, New Jersey — we’ll have a presence in all of those markets.”

As it expands throughout the East Coast, REC will compete against players such as Connecticut's Greenskies Renewable Energy, recently named the country’s largest C&I installer by GTM Research.

The shift away from vertical integration runs contrary to the direction the distributed solar sector had been heading in.

SolarCity, the largest residential installer and a leading player in the C&I space, has invested heavily in amassing an enormous team of downstream installers to complement its sales and financing arms.

Sunrun, another national player, bought REC’s residential unit in 2014 so that it too could become vertically integrated.

Increasingly, though, companies are embracing so-called virtual vertical integration, with different specialists occupying different rungs of the industry. This helps smaller players compete against the national giants, and may be slowing consolidation.

REC has worked with channel partners in the past, albeit on a smaller scale, Stepp says. “We might have had a partner, somebody who’s a developer, who says, ‘I’ve got a lead, will you guys pay me a few pennies per Watt if I make the introduction?’

“But now we’re formalising the process. We’re making it bigger and better in the sense that we’re opening our doors and giving them access to all the things we have access to.”

REC has taken steps over the past few years to address key obstacles holding back the C&I segment, which (particularly at the smaller end) is widely seen as the most difficult solar market in the US today.

C&I’s challenges are myriad, including the fact that unlike residential customers, many small businesses do not have credit scores, making financing more difficult.

But REC believes it has solved many of the sector’s problems, thanks partly to Duke’s backing, and that the C&I market’s growth will accelerate as the company extends its advantages to a growing network of partners.

“We’re hoping we can go in and grab a lion’s share of this market with our partners,” Stepp says. “You will see us growing pretty steadily over the next three to five business quarters.”