📦 Supply Chain Woes in Clean Energy #007
moving the goods
It’s honestly sad that while consumers can get anything near-instantaneously at the push of a button, businesses are stuck with rudimentary tools. As we’ve seen firsthand through recent climate disasters, delayed orders, and shipping ports at a standstill, the physical world and more specifically, the global supply chain is seemingly held up by a house of cards. It’s striking how billions of dollars funded floofy web3 startups in 2021 as solar installers still ordered parts over phone and email. Today, investors chase the next big, generative AI company, but to me, it seems like the more pressing problems are in the physical world.
We take so much of modern civilization for granted. Just how we don’t worry about what happens after we flush the toilet, we rarely ever pause to understand how the supply chain actually works. Somehow Amazon packages arrive at our doorsteps two days later and we can get ripe avocados from Mexico all-year-round. Sci-fi writer Arthur C. Clarke said “Any sufficiently advanced technology is indistinguishable from magic” and I’d say that today’s modern consumer luxuries would seem like straight-up wizardry to anyone time-traveling from the past. I wish I could say the same is true for businesses operating in logistics, supply chain, and clean energy.
In order to achieve net-zero carbon emissions, we’ll need to build a lot more clean energy infrastructure - solar, storage, hydro, geothermal, nuclear, you name it. We also need to rapidly adopt and deploy devices like heat pumps that run off renewably-generated electricity, rather than dinosaur juice.
Regardless of whether we resolve the skilled worker shortage or other bottlenecks, clean energy businesses must somehow still procure the necessary materials and equipment; all that stuff has to come from somewhere. During my research process into clean energy which mostly focused on residential solar, I heard directly from solar installers that their two biggest issues were the labor shortage followed by supply chain issues. Last time we covered the skilled worker shortage, so today let’s dive into:
The clean energy supply chain
Insights from visiting a solar installer
What solutions exist today
The clean energy supply chain
Just like all squares are rectangles, but not all rectangles are squares, renewable energy is construction, but not all construction is renewables. Framing the build-out of clean energy infrastructure as a series of construction projects helps us understand how the sector operates given their shared cultural and operational DNA.
More than $300 billion of commercial construction materials are ordered every year in the U.S. using systems that often haven’t been updated since the 1980s, leading to enormous amounts of waste - Michael Brown, General Partner at Battery Ventures
Construction is a massive market that suffers from low margins and high resistance to adopt technology. On average, construction firms spend 1.5% of their revenue on technology whereas the median spend is 3.3%. Given the industry operates on an average razor-thin 5% profit margin and the day-to-day operations are quite complex, there’s little wiggle room to try and test new software. This chicken-and-the-egg situation results in contractors and subcontractors managing their materials (40% of total project costs) “largely by text, calls, email, spreadsheets, and yes, even fax sometimes.”
I wish I could say that specifically renewables are different from the rest of construction, but I haven’t found many exceptions. Getting back to the specifics of clean energy…
To reach net zero goals, more than $4 trillion will need to be invested in renewable energy infrastructure globally by 2030, tripling the current installed base of wind and solar. - CTVC
Turbo-charged by the Inflation Reduction Act, the clean energy transition is already underway. But how are the actual solar panels going to end up on homeowners’ roofs or laid out in tidy rows at a utility-scale solar farm? Tracing backwards step-by-step brings us to China, where so much of our stuff gets produced, but especially so when it comes to solar:
It might appear that China dominates the solar manufacturing landscape (and it still does), but since this diagram (created in 2021), geopolitical tensions between the US and China led to heavy solar tariffs. As a result, major Chinese solar manufacturers ramped up investment in their Southeast Asia operations to evade these new trade policies. Domestically, the IRA (and similar policy in Europe) are fueling an on-shoring of manufacturing capabilities with significant incentives. In the US, there’s already been $92B in new investments in just battery supply chain since the introduction of these new clean energy bills.
But how do these solar panel parts actually leave the factory and arrive at the local rooftop installer’s warehouse? As consumers, we have the convenience of getting anything we can think of from eCommerce stores — so what do clean energy businesses rely on? It turns out, the answer depends. Residential solar installers rely on a middleman, the supplier (AKA distributor), to serve as the conduit between themselves and the manufacturer. For utility-scale projects, the sheer scale of the solar farm warrants the project buyer (often an investment firm) to quarterback the purchasing of the solar modules directly from the manufacturer. Since utility-scale solar projects are in the millions of dollars, it’s worth going straight to the source for both cost and quality control.
Like the overall supply chain, the flow of clean energy materials also suffers from cancelations and delays. In November 2021, due to astronomical shipping prices and a shortage of polysilicon, a key solar ingredient, “56% of worldwide utility-scale solar projects planned for 2022 could be postposed or cancelled.” Like the slinky, whenever there’s a compression or expansion, by the manufacturer or customer, it takes a while for the rest of the supply chain to react.
Insights from visiting a solar installer
While actively researching the clean energy supply chain with the intention of starting a company in the space, I became frustrated with how little is publicly documented on the internet so I had to go see for myself. Up until this point, I had already cold-called dozens of solar installers on the phone, but those conversations weren’t fruitful because they were primarily “front-desk” admin folks or they thought I was a salesperson. It wasn’t until I physically visited a solar installer in the Bay Area with 20 locations nationally that I started to discover some major pain points.
I arrived midday without notice at this solar installer’s warehouse in an industrial park and there were two employees. The warehouse manager (we’ll call him Joe) was kind enough to walk me through some of their core workflows and answer the rest of my questions during his smoke break. Joe’s primary responsibility is to ensure the warehouse is properly stocked with the correct materials ranging from solar modules, racking units, wirings, battery storage, and tools. To catalog the hundreds of unique SKUs, they use the ERP software Oracle NetSuite (founded in 1998 to give you a sense of how clunky it is) and the first issue is that it’s not 100% up-to-date. It would be a logistical nightmare to maintain complete digital records because the installation crews arrive at 6am and are instructed by management to be out by 7am. Since they’re in a rush to grab all the parts they need, they’ll often skip the process of updating NetSuite for cheap parts that are dime a dozen. There were also plenty of clipboards and papers laid out across the desk that were other forms of record-keeping.
As we started to dig into the procurement process, I was shocked by some of the inefficiencies that we uncovered. Due to their focus on smaller scale residential and commercial projects, they rely on their preferred supplier, CED Greentech, the largest clean energy vendor in the US. Joe and I were both dumbfounded by the fact that all shipments would come from CED’s San Diego distribution center even though they had a Bay Area location only 15 miles away from where they were. He explained that since the company was founded in San Diego, they’ve just always gotten their shipments from CED in San Diego. It’s mind-boggling how they haven’t gotten around to updating their procurement process to use the local CED branch. Think about all the unnecessary emissions from the FedEx freight trucks on the 500mi commute between San Diego and the Bay Area.
I wish that was the biggest inefficiency that I found. I was curious about to what extent do solar installers interact with the manufacturers given their heavy reliance on the supplier to facilitate. Joe brought up one issue with a specific solar manufacturer where they kept sending pictures of the defected part over email. After many back-and-forths (because the manufacturer was in denial), they conceded, but by then, the project timeline was already off by two weeks.
I brought up how whenever I order anything on Amazon, I expect it to arrive in two days at my doorstep and asked if there’s a similar level of reliability with CED Greentech. Joe explained that there’s always at least one or more parts that get backordered every time he places a requisition with CED. When an item isn’t available with CED Greentech, they still need to get it somehow.
Over email, Joe has to write back and forth with the internal purchasing department on how they plan to resolve the missing part(s) and repeatedly follow-up to make sure the parts eventually get shipped. But when there are missing parts on short notice, that’s called will call. All solar installers try to avoid will calls at all costs, but they’re inevitable. When they do occur, the purchasing department scours the internet using mainly Google, but Joe said they’ve even bought from eBay before! His process includes manually calling up local suppliers which usually takes multiple calls. Procuring parts via will call always ends up being significantly more expensive. When Joe had to source a 60-amp fuse connector, he paid a local supplier $240 when it normally costs $120. What happens with all these extra premiums adding up? Well, they get passed down to the customer. It’s great that the solar industry is booming and will continue to be supercharged with the IRA. On the other hand, these legitimate issues are hindering progress on increasing clean energy adoption because all these homeowners are paying for the industry’s inefficiencies. It’s like the exact opposite of trickle-down economics. More like trickle-down-pay-extra-for-no-reason.
What solutions exist today
At the confluence of outdated software like NetSuite, the Inflation Reduction Act, and of course, the climate crisis, is the perfect storm for drastically improving productivity in a legacy industry that has historically shied away from new technology. There are plenty of construction tech companies out there today, all vying to enable builders to build better:
The most relevant section here is Supplies given it’s tied directly to the supply chain. Of the existing companies, I found Kojo (formerly Agora) to be the most compelling with their team’s strong background and approach of embedding neatly into the existing construction workflow which involves many complex processes that often occur offline. I confirmed this with other solar installers who mentioned integration to other software tools like Procore as a must-have. After all, if the latest-and-greatest tech is supposed to increase efficiency, it has to work with how construction is done, rather than try to enforce an entirely new way of working. That said, Kojo doesn’t have a clean energy focus, leaving an open opportunity in the most rapidly growing subcategory of construction.
Even with all the head-scratching and supply chain inefficiencies that I uncovered when visiting the solar installer, suppliers still serve an important role. As much as we all want to optimize the supply chain, cutting out the middleman is not necessarily the best move or even possible. Suppliers take on a certain level of risk when they purchase materials ahead of when they’ll actually be ordered by clean energy businesses. Given the low profit margins and also complex spiderweb of subcontractors, financing is a key value proposition that suppliers offer. It’s common for suppliers to allow their customers a certain period of wiggle room to pay after the order is delivered, which is referred to as net 30 or net 60 depending on the time window allowed. Given clean energy businesses operate on tight cashflow cycles and projects take time, these flexible terms are practically required. Lastly, the solar installer that I visited had their own small warehouse, but it only had enough capacity for a short time horizon of materials so the supplier relationship is key. Suppliers have the physical warehousing to store materials which shortens the delivery radius to a region rather than having to wait for a part to be shipped from the manufacturer (often in China).
Closing thoughts
Of all the climate areas that I’ve researched so far, this has been the most fascinating, but also the most frustrating since I honestly have no clear sense of what the ideal solution looks like. Digging into the clean energy supply chain reinforced my belief that climate is everything everywhere all at once. The problems that “people in climate” are trying to solve span every industry and the reflexive framing of this means that companies that don’t brand themselves as a “climate company” may actually play a key role in averting the climate crisis. With the labor shortage, I highlighted Upsmith and Faraday which are training the next generation of skilled workers. For the clean energy supply chain, it might be something like Kojo that makes a meaningful dent in how businesses procure materials.
Charlie Munger said, “Show me the incentives and I’ll show you the outcome.” There’s a reason why suppliers like CED Greentech and installers like the one I visited are stuck in their same ways of working. They’re not lazy; they’re doing what’s always worked. It’ll take a healthy dose of competition that adopts modern technology to get the whole industry moving in the right direction.
There are many ways this could play out. Large consumer-facing companies like Tesla or SunRun with vertical supply chains could extend their dominance if they can figure out how to improve their customer service and local operations. It’s possible, but I think unlikely, that one or more of the suppliers embrace tech from within. We may even see big outside players enter the arena like Home Depot, Lowe’s, or even Amazon for Businesses. I just know that something needs to change. It’s hard to imagine that in ten years these solar installers will still be using email and Oracle NetSuite to run their businesses. Solving the climate crisis requires adoption of clean energy by the masses and that means a healthy supply chain, the structural skeleton of our economy and livelihood.