Residential solar has reached a blistering pace of installations – around 100,000 by the end of this year alone – and it's all thanks to third-party leases and power purchase agreements funded by tax equity. Although the quarterly increase seems to have levelled off, that model has ruled the US market so far. But the crowning achievement of the residential market could lose at least some of its shine, according to analysts at GTM Research.
“In the debate over third-party ownership (TPO) or direct sales, people ask us a lot about which of these models will win out in the long run,” said Nicole Litvak, solar analyst at GTM Research.
Historical trends indicate that TPO has become the dominant model in the major US markets mainly because of the cost of solar.
“At the beginning of 2010 average system costs were almost US$7/W for residential solar, which translates to about US$35,000 for a 5kW system,” Litvak said.
“In 2008, we saw companies like SolarCity and Sunrun who came out with these leases and power purchase agreements and realised it was so much easier to sell and scale that model.
“It was beneficial not just for the consumer who was finally able to finance a system that they couldn't previously afford, but it was also useful for smaller installers who previously had trouble selling those systems.”
Banks, corporates and utilities have been eager to offset their tax liabilities with the 30% Investment Tax Credit. Earlier this month, Vivint Solar announced that it had raised more than US$540 million to finance residential solar projects, swelling the funds available for distributed PV generation to US$5.54 billion.
But have we reached “peak TPO”? GTM Research's graph certainly seems to suggest a tipping point.
“The penetration of TPO is levelling off or even declining in some states,” Litvak said. “The reason for that is that costs have come down dramatically – in the second quarter of this year residential system costs were down to about US$4.81/W.
This is good news in preparation for the sunset of the ITC to 10% from 2016 as companies such as SolarCity have business models that would not exist without the credit.
“Consumer interest has increased as more as they realise they could afford to own their own system. Industry realised there was demand for that. So over the past few months we've seen a lot of new loan programmes emerge.”
Oneroof Energy and Sungevity, who had previously been operating leases and PPAs, now have loan programmes. Banks like Admirals and Enerbank have developed loans specifically for solar. “Sungage is trying to be the Sunrun of loans,” Litvak said last week at the Solar Power International Conference in Chicago.
Although it's going to be a little trickier to track the loans taken out under these programmes, Sunpower's US$100 million loan fund suggests the funds may be large, but not on a scale with the tax equity machine.
“We will continue to see companies and especially installers pushing loans,” she said. “Now that installers realise they can sell directly they almost prefer that over going with a leasing partner, so they're going to be trying to push those cash sales. As they do so, that competition could drive down the cost of solar even more.”
Reductions in the cost of solar will continue, particularly if these stubborn “soft” costs that are so hard to treat are addressed.
Installers can't individually do much about permitting, except perhaps lobby for changes at the municipal level. Customer acquisition is a major contributor to costs in the US, more so in other markets.
As Verengo Solar president Ken Button pointed out during the Roth Capital Symposium at SPI, the US is still a country where solar has to be sold rather than bought; such is the acceptance of PV in Germany where consumers don't need convincing by marketers that solar is a good idea.
But it's the soft costs that installers can and should do something about. A GTM Research report into residential sector acquisition costs in the US found that the costs are around 49c/W or about 10% of average system costs, almost US$3,000 for a 6kW system.
“Of the various costs within customer acquisition we found that the most variable cost was lead generation – 50% of customers come from referrals,” Litvak said.
“But over the next few years we expect this breakdown to change and shift towards some of these lead channels that have higher closing rates and lower costs.
Bidding platforms such as One Block Off The Grid or Energysage are emerging that allow customers to put information and receive bids from different companies to increase competition in a way that almost emulates the utility-scale RFP process.
Until they were acquired, by SolarCity and Solar Universe respectively, Paramount Solar and Gen 10 were two of the biggest residential project originators.
“SolarCity and Solar Universe both realised how valuable those models were and decided to internalise them,” Litvak said.
“Paramount solar became the industry's leading expert on phone sales. Last year, the majority of customers went to SolarCity. This year they began working more with other installers even installing systems themselves or raising their own funds. SolarCity saw that and immediately acquired them because they knew it was so valuable to acquire that sales infrastructure and process.”
SolarCity should also save money on installation costs after its recent acquisition of ZepSolar.
“It was also an offensive move towards other installers,” Litvak said. “Zep has about a 30% market share in residential in particular. Vivint Solar is the second largest installer after SolarCity and it exclusively uses Zep so it will be interesting to see how those market dynamics play out.”
Retail partnerships are also springing up with home improvement stores, home security and energy management providers, environmental groups and car dealers.
“Car dealers are a really interesting example. Customers who have a credit score to finance a car are probably eligible for solar as well and they own their own home,” she said. “SolarCity and Sunpower have found those to be really successful partnerships.”
But one of the most significant emerging trends seems to be utility involvement in residential solar.
“They've been a little more involved on the commercial side, but we think this is going to be one of the most important trends in residential solar over the next decade,” Litvak said.
“Up to now utilities have often been thought of as the enemy of solar. We see net energy metering battles and value of solar discussions happening across the country. But at the same time we've seen utilities become involved in distributed solar including residential in a number of different ways.”
Litvak noted as an example SolarCity's recently announced a partnership with Viridian, a retail electricity provider, to offer day and night clean energy.
Utilities are also starting to finance projects themselves. NRG Energy is acting as a lease provider financier, PG&E has invested tax equity funds in SolarCity and Sunrun, she said.
“Duke Energy had a pilot programme where they leased rooftops from homeowners,” she said. “They developed the solar and owned the systems and the power; they were just paying customers for the rooftop. So this was just utility side of the meter generation.
“The other type of utility-owned generation which we haven't seen yet, that we think is going to be more important and more prevalent than any of these models, is utilities developing solar themselves in their own territories or other utility territories. It's an enormous opportunity that hasn't been tapped yet.”
What will happen to the market when the utility behemoths really put skin in the residential game remains to be seen. But there's plenty of headroom in that market segment.
If we've had “peak TPO” will we then see “peak solar” after the ITC expires in 2016?
“We'll see a drop off in 2017 after the ITC expires,” she said. “But one question that was asked the other day was whether 2016 will be the absolute peak of residential solar and the answer is that we're pretty confident absolutely not. After the drop in 2017 we'll see growth resume in the following year as the economics improve.”