State of the Solar Union

By Lisa Sundeen.

In the past several years, the residential solar industry has experienced a series of dramatic swings. The federal investment tax credit (ITC) was extended as a part of the federal omnibus appropriations spending bill at the end of 2015, yet the top three public solar companies have since watched stocks plummet more than 50%. The United States surpassed one million installations, but one of the largest renewable energy developers in the world declared bankruptcy this April. What is going on?

Explaining the history of the residential solar industry, albeit a relatively short one, requires nuanced analysis and more text than a single blog post allows. Despite the turbulence, however, several trends have started to stand out and may shed some light on the future of the industry. Specifically, customers are beginning to use loans to purchase solar systems; companies are changing their customer acquisition tactics; and states and utilities are engaging in comprehensive policy reform. Both customers and companies will continue to track these trends in order to get the best solar deals possible.

The first trend of transitioning from third-party-ownership (TPO) financing models to loans has been a long time coming. In 2015 TPO constituted 72% of residential solar systems, but GTM Research now anticipates that loans will gain market share and even surpass TPO by 2020 (Green Tech Media). As the cost of solar comes down and payback times decrease, homeowners may find loans to be more appealing than a 20-year lease arrangement. Furthermore, customers can often receive the same operations and maintenance deals from solar companies regardless of whether the system is leased or loaned. Another perk is the simplicity of selling a home with a purchased solar system versus convincing a prospective homebuyer to assume a lease contract or power purchase agreement. As the industry builds its track record, banks feel increasingly comfortable financing solar. However, just as banks are becoming more comfortable with financing solar systems through loans, the investment community is growing increasingly skeptical of the various non-Generally Accepted Accounting Principles (GAAP) financial metrics devised by TPO companies.

The second trend highlights the need to tackle the infamous soft costs associated with residential solar. As solar hardware costs come down, companies are now focusing on lowering nonphysical costs such as sales, permitting, and administration. For some companies, the cost of sales and marketing is responsible for roughly 30% of the total cost of installation! See SolarCity’s First Quarter 2016 Earnings Report for an example. The large national solar companies are each trying different tactics to acquire customers more cheaply. Some are focusing on their inside sales channels, while others are cross-marketing solar with other companies, such as utilities, that already have a large customer base. New online marketplaces are also changing solar sales. Solar shopping platforms like EnergySage, Google’s Project SunRoof, and Pick My Solar not only give customers more options but enable local installers to pitch to customers on a level playing field. Which would you prefer when considering a home solar system: hearing a pitch from a door-to-door sales person or comparing multiple quotes through an online service similar to Expedia?

Finally, policy battles are heating up across the country. Legislative initiatives and regulatory proceedings are nothing new to the industry, but the scale and significance of these developments have grown. Since the Public Utilities Commission of Nevada decided to eliminate net metering (NEM) for any new customers as well as all pre-existing customers, applications for residential solar interconnections in Nevada have dropped by more than 90% (Green Media). On the other hand, states like New York and California are also considering alternatives to NEM but in a more analytical manner. Over a period of several years, New York’s Reforming the Energy Vision proceeding will consider how to compensate distributed generation appropriately as well how to reward utilities for supporting distributed generation. No one yet knows which alternative to traditional NEM will work best, but dozens of states are bumping up against NEM caps and cannot wait to find out.

Given these trends, one can see why this industry has earned the moniker “the solar-coaster.” Fortunately—or perhaps unfortunately—the primary trend that will continue to drive this industry is climate change. Those who make it to the end of the ride will be the customers, companies, and states that exhibit openness to change and understand the gravity of climate change.

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