SOLAR WATER HEATING SYSTEMS

(A Preliminary Industry Study)

A. PRODUCT PROFILE

1. Product Type

Solar Water Heating Systems

2. System Description

Solar Power System refers to the conversion of sunlight to produce electricity or heat
(fluid or air). Using solar power to produce electricity is not the same as using solar to
produce heat. Photovoltaic (PV) principles are used to produce electricity. Solar
thermal principles are applied to produce hot fluids or air.

Solar hot water refers to water heated by solar energy. Solar heating systems are
generally composed of solar thermal collectors, a fluid system to move the heat from
the collector to its point of usage, and a reservoir or tank for heat storage and
subsequent use. The systems may be used to hear water for home or business use,
for swimming pools, under-floor heating, or as an energy input for space heating and
cooling and industrial applications.

Solar hot water systems can be classified in different ways:

• The type of collector used

• The location of the collector --- roof-mount, ground-mount, wall-amount
• The location of the storage tank in relation to the collector
• The requirement for a pump --- active vs. passive
• The method of heat transfer --- open-loop or closed-lop (via heat exchanger)

Attachment 1 provides a detailed description of the solar water heating system

being used in the market today. Attachment 2 relates to a summary description of
the PV application in electricity generation.

3. Solar Water Heating Advantages

• Federal and state incentives / rebates / tax credits

• Utility rebates / net metering credits (sells unused solar power to utility firm)
• 30% reduction in actual electricity bill
• Environmental quality-compliant / go-green responsive
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B. MARKETS: Solar Water Heaters

1. Market Segment

The major market segments of solar water heating systems, referring to applications,
are as follows:

• Residential properties
• Small business structures
• Home builder businesses
• Large institutional facilities

For the purpose of this study, residential, small business, and home builder market
segment will be the key target markets, with California and Hawaii as the prospective
priority areas of operation.

2. Current Market Prices

Local prices of solar water heater vary, depending on the system configuration as
determined by the estimated power requirement of a particular household or small
business. At current market prices, a solar water heater for typical household use can
sell from $ 6,000 - $ 8,000 per unit.

3. Market Size

Solar Water Heating System: California and Hawaii

Estimated Market Size

State Residential1 Business Sector2 Total Market3

California 7.40 M 4.3 M 11.7 M
Hawaii 0.24 M4 0.1 M 0.3 M
Total 7.64 M 4.4 M 12.0 M

1
Represents total number of occupied housing units (homeowners and renters) / estimates made from US Census
2
Represents number of businesses including non-employer establishments / estimates made from US Census data

3
Refers to total number of residential and business prospects; institutional market growth is 4% in California and
6% in Hawaii --- includes non-employer / home-based businesses, deflated by 50% to smooth out double-count of
home based non-employer firms w/ occupied housing units
4
20% of all homes in Hawaii already have solar water heating units installed
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According to the Environmental and Energy Study Institute (EESI), there are 1.5
million solar water heaters already in use in U.S. homes and businesses.

4. Market Value

The solar power energy is an $11 Billion industry. The total US market for solar
water heating systems could be around 38% of total ($3.8 Billion). The California
market represents about 18% of total US market, while Hawaii corners less than 1%.

Solar Heating System: California and Hawaii

Estimated Market Value

Estimated Market Value (US$ Million)

Low Price Medium Price High Price
State Market Size ($6K / system) ($7K / system) ($8K / system)
California 11.7 M 70 117 134
Hawaii 0.3 M 3 4 4
Total 12.0 M 103 121 138

C. INDUSTRY PROFITABILITY

1. Gross Profit

On a per unit basis, the solar manufacturer / integrator sells the solar water heater at
a transfer price of $1,800 to the distributor / retailer. The retailer sells the unit from
$6,000 to $8,000, but pays for the installation cost and other incidental set-up
expenses that could total to a high of $3,840. The following presents a per unit gross
profit calculation for the retail of solar water heater (costing generally based on water
treatment business model):

% of High Low Medium High

Price Offer Estimate Estimate Estimate
Revenue / Unit 100.0 $ 6,000 $ 7,000 $ 8,000
Less:
Cost of Sales 22.5 1,800 1,800 1,800
Service & Installation 12.5 1,000 1,000 1,000
Bank Discounts Taken 10.0 600 700 800
Freight Expense 2.0 120 140 160
Sales Returns and Credits 1.0 60 70 80
Total % Cost of Sales 48.0 3,580 3,710 3,840
Gross Profit ($) 2,420 3,290 4,160

Gross Profit Rate (%) 40% 47% 52%

Retailers need to remain guided by the industry’s competitive pricing climate while
striving to pursue an aggressive marketing posture. Just like in any business model,
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profitability has to be shaped by the company’s capacity to develop stable revenue

stream and to manage costs in order to yield predictable business profitability.

2. Operating Expenses (OPEX)

The key OPEX items of solar water heating system retailers can be estimated as
follows:
% of Revenue
Salary 8.0
Sales Commission 10.0
Marketing Incentive (e.g. Referrals) 10.0
Other Expenses 8.0

Total OPEX % of Revenue 36.0%

3. Net Profit Rate

The profit potential for a retailer in solar water heating business can be calculated
based on the system’s pricing offer, such as:

Based on Unit Sales Revenue

At $6,000 / Unit At $7,000 / Unit At $8,000 Unit
% Amount % Amount % Amount
Gross Profit 37% 2,220 46% 3,220 52% 4,160
Operating Expenses (OPEX) 36% 2,160 36% 2,520 36% 2,880
Net Profit 1% $60 10% $700 16% $1,280

4. Breakeven Volume

Based on the water treatment system business model, at a unit price of $8,000.00 and
at an estimated monthly sales volume of 30 units, the breakeven volume for typical
“solar water heater” retail business may be calculated as follows:

% of
Sales Unit Volume Sales
Revenu Price Revenue
e
Unit Sales 100.0 $8,000 Total Sales 30 $240,000
Variable Cost Fixed Cost
% of Unit % of Total Cost
Sales Sales Sales
Cost of Sales 22.5 1,800 Salary 8.0 19,200
Service and 12.5 1,000 Referral 10.0 24,000
Installation Incentive
Bank Discounts 10.0 180 Other Expenses 8.0 19,200
Taken
Sales Commission 10.0 180
Sales Returns & 1.0 18
Credits
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Sales Tax Expense 0.5 9

Freight Expense 2.0 36
Materials and Tools 0.5 9
Total Variable 59.0 3,232 Total Fixed 26.0 62,400
Cost Cost

Breakeven Volume = Total Fixed Cost / (Unit Selling Price – Unit Variable Cost)
= 62,400 / (8,000 – 3,232) = 62,400 / 4,768
= 13 solar water heaters, or $104,000

D. COMPETITION

There are several companies engaged in the US solar energy industry, more
particularly solar water heater. In the upstream, where production starts, there is a
concentrate of a few, large players, while the number of companies increases
significantly further downstream in the value chain. Most industry players are involved in
sales and installation of solar systems, usually the service integrator type. Generally
there are three main types of industry players:

• Independent solar power specialists (e.g. retailers, contractors, and

integrators)

• Electronics and semiconductor companies (e.g. Sharp and Mitsubishi)

• Energy companies (e.g. BP Solar and Shell)

In Hawaii, there could be about 20-25 key companies that are actively engaged in the
distribution of solar water heating systems (See Attachment 3 for 18 of these
companies).

The global solar thermal market is dominated by: China, Europe, Japan, and India.

• Attachment 3 presents a list of 15 major companies

engaged in solar heating systems, contractors and retailers included.

• Attachment 4 provides a sample profile of an American

company in solar power systems including solar water heating systems.

• Attachment 5 shows the sales performance of selected

US-based solar power companies.

E. PRODUCTION
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US-made solar heating technologies, systems, and components can be conveniently

sourced locally. Imported brands, produced in other countries, may also be bought
locally at lower prices, especially those made in China. Importation of foreign-made
solar heating systems, components, and ancillaries is an option to take for US-based
companies wanting to go into distribution, integration, or retailing of the product.

F. GOVERNMENT ROLE

The continuing definitive role of the US government, both federal and state
organizations, in the development of renewable energy sources, accentuates the
attractiveness of the solar water heating industry for new investments.

The installation of a solar water heater in every new home construction has been
mandated and made obligatory by law in Hawaii. In California, huge incentives for water
heater installation, in the form of utility rebates and tax credits, have been legislated and
approved. This regulatory impetus will stimulate the industry into dramatic incremental
expansion where solar power specialists and retailers are expected to play an important
role in business development and product distribution.

G. ENTRY CONSIDERATION

Based on discussions with providers of both solar water heater and solar electricity for
residential and small business establishments, it appears that there is greater business
rationale in going into solar water heater from a retail investment consideration. The
following presents the comparative advantages of solar water heater over solar
electricity as a point of entry in the solar energy business.

RETAILER’
s Solar Heater (SH) Solar Electricity Advant
CONCERN (SE) age
Key 40%-70% Energy-saving 40%-70% Energy-saving -
Functionality
Scope of Water Heater only All electricity-driven SE
Savings appliances
Price High at $6K -$8K Low at $35K - $50K SH
Affordability
Gross Profit 40% - 52% 40% - 52% -
Rate
Ease of Higher due to lower price Lower due to higher price SH
Referral barrier barrier
Ease of Higher due to smaller loan Lower due to higher loan SH
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Financing value value

Ease of Higher w/handy inst. Kit Lower / bulkier, more SH
Installation complicated
Technical Needs dedicated installer/s Needs dedicated installer/s -
Services
Storage Space Requires less storage Requires much bigger SH
space storage
Customer 4-5 yrs. after rebate / 15 yrs. after rebate / SH
Payback incentive incentive
Risk of Lower / simpler & lighter Higher /complex & heavy SH
Damages mount mount

H. KEY SUCCESS FACTORS (KSF)

The key factors for success in the solar water heater industry are as follows:

Key Success Factor KSF Narrative

Cost-effective supply source
Excellent installation capability
Competent Sales Engineers
Updated prospecting system
Customer-friendly promotions
Visible Web presence
Efficient back office support
Well-defined business policy
Solar system supplier that can give the best pricing concession
Trained in-house installers / no back jobs / no property damage
Aggressive roadrunners with complete product knowledge
Computer-controlled prospecting and sales tracking system
Promotion program that helps in customer’s system repayment
High-impact, properly maintained, and user-friendly website
Lean but effective back office complement in initial operations
Clearly documented internal policies, understood and followed
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