Recent solar industry headlines (see the latest from Forbes) would suggest that international trade negotiations (or perhaps more precisely, disputes or wars) are among the most important things to know about solar. Opinions vary on the efficacy of such international policy, but suffice it to say that this escalating trade kerfuffle is masking the growing strength of the solar industry. Let’s not get caught up in the headlines. Be smart and take a deeper dive.
Part of the beauty of solar is that it comes in many shapes and forms, ranging from utility-scale solar farms to smaller-scale applications on homes and businesses. I want to focus here on bread-and-butter solar applications for homes, leaving the bigger, headline-grabbing projects aside.
Residential solar is no longer just a “California and a bunch of others” story
Far from being a luxury for the rich, residential solar has grown to being a legitimate complement to grid electricity (alternative if paired with energy storage) across the US. Generally speaking, the reason is simple — cost. On average, residential solar is now cheaper in essentially every state in the US according to SUNMetrix, which produces a state-by-state solar cost comparison analysis. Even if the solar federal tax credit were completely eliminated, only two states would no longer offer cost savings to solar adopters.
Figure 1: US Solar Cost Comparison with Grid Electricity
Source: SUNMetrix, 2018
Figure 2: Annual Residential Solar Installations
Source: GTM Research & SEIA, 2018
Precipitous reduction in solar costs, and still going
Let’s put some numbers to this story. According to the National Renewable Energy Laboratory (NREL), residential solar costs have decreased from a levelized cost of energy (LCOE) of $0.52/kWh in 2010 to $0.151/kWh in 2017, with projections to reach $0.09/kWh or below by 2030 depending on technological innovations. That is over a 70% reduction in solar electricity costs the last 7+ years, with another 40% reduction projected over the next decade or so at a minimum. Translation: The already significant financial benefit of solar will only grow over time. #WhySolar
Figure 3: Comparison of Modeled Solar Cost Pathways
Source: NREL, 2018
The clever skeptic may retort — this is apples-to-oranges when you compare the average cost of electricity on your utility bill with the initial installation cost of solar. Good point, oh revered skeptic. Initial capital costs to install solar have always been a limiting factor for potential consumers. Fortunately, this is also precisely the problem that was solved in order to unlock the potential of this market. Early on, the solution was for solar companies to offer long-term power purchase agreements (PPAs) to customers. The solar company would install the system at no cost, retain ownership of the system over the long-term, and sell the homeowner power from the solar panels at a specified rate over, say, 20 years.
While PPAs still exist, they are giving way to solar loans, which allow the homeowner to retain ownership of the system and pay it down over time as with any other loan. Point being — there are many options to offset those initial capital costs over a long period of time so that the solar adopter is, in effect, making an apples-to-apples monthly payment.
These dramatic cost reductions paired with a wider array of consumer financing options have driven massive growth in market adoption, which is generally what we see in market growth, as shown in the GTM Research graph below. It is not the quintessential hockey stick graph due some policy uncertainty at various times in the past, but the growth trends are apparent, and not projected to abate even after the federal tax credit for solar is eliminated in 2022.
Figure 4: US Solar Installation Forecast, 2010-2023E
Source: GTM Research & SEIA, 2018
Still miles to go in market potential
Even with this rapid market growth, there is still a large untapped, addressable market throughout the US. According to the NREL, there is a 30 GW annual technical market potential for residential solar nationwide across both new construction and roof replacements. “Technical” being the operative word here. There are many factors beyond just technical feasibility that drive market adoption, especially when it comes to a big expenditure for a person’s home.
Notwithstanding, the point is clear. The addressable market dwarfs the current market penetration numbers, which were at just above 2 GW in 2017 according to GTM Research.
Figure 5: Average estimated annual residential rooftop PV market capacity potential from 2017 – 2030
Source: NREL, 2018
Parsing the signal out of the noise among the morass of residential solar companies
At its core, the residential solar business is relatively simple — sales, equipment, installation. As such, there are fewer barriers to entry compared to many industries, which has paved the way for hordes of supremely adequate solar installation companies. It is the quintessential “two guys (or gals) and a truck” phenomenon. It is not too hard to make reasonable money installing solar systems (at least for a little while), so a bunch of relatively unsophisticated companies are doing it.
Yes, you have the publicly traded stars out there — SunRun, Vivnt, prior to its Tesla acquisition SolarCity, etc. However, these national brands appear to be ceding their market position in many geographies to more locally grown and known companies that are buffeted by the holy grail of marketing, happy customers and word-of-mouth advertising. There is a smorgasbord of these smaller, local and regional companies. Some have really refined operations, well-oiled machines so to speak. Others have slick advertising, but spotty execution. In all cases, it is really difficult to cut through the noise to discern which are positioned to capitalize on the growing market opportunity in residential solar.
Here are five hallmarks of a “cream of the crop” residential solar company:
- Low and shrinking cost of customer acquisition — This nut has been tough to crack, especially for national companies. If the solar provider is entirely dependent on purchased leads (e.g., potential customers that are identified by third parties and sold to solar providers), then that indicates a weakness in the sales strategy and team, and the potential for ballooning costs over time. If referrals and other word-of-mouth leads which have a much higher conversion-to-sale rate make up a bigger mix of the sales, that is the marker of a company with brand recognition and positive customer track record. The key is concentrating lead generation on high conversion target customers.
- Stable to decreasing equipment procurement costs — Economies of scale in purchasing power and access to working capital to push equipment costs to near wholesale level are essential to maintaining margins, and also evidence of being a preferred customer to suppliers, always a good thing, especially when any price volatility hits.
- Stable to decreasing soft installation costs as a percentage of total turnkey costs — Soft costs are the primary reason why residential solar is so much more expensive than larger-scale projects. Companies that can innovate to lower this as a percentage of total turnkey costs will have a competitive advantage over peers, so long as quality is not sacrificed.
- Increasing integration with home energy services — Here is where things get interesting. Many solar providers have ventured (bravely or naively) into other home energy services and failed due to mission creep. The solar provider that can mine the customer relationship for more than just solar installation will increase that precious thing which is the total lifetime value of the customer. Energy audits, retrofits, HVAC, etc. are areas to target, but with piercing focus on execution as product offerings are expanded beyond just solar. Another way of doing this is to establish deeper ties with the roofing and new home construction industries.
- Product innovation with newer proven technologies such as energy storage — We are no longer two years from being two years away for residential energy storage. The technology is here, and the costs have plummeted even faster than solar. The policy and market mechanisms needed to maximize the potential market compensation for energy storage are still in the works. But the solar+storage opportunity is ripe for the taking. The enterprising residential solar provider will be ready and willing to make the leap.
Buyer beware, there is no magic formula to identifying the best performers among residential solar providers. It requires diligence, research, and some perceptive sleuthing to find those diamonds in the rough. The market conditions are ripe, however, for a number of successes to emerge out of this exciting sector.