SPI 2015: The ‘calm before the storm’ for US solar

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As 2015’s Solar Power International gets underway in Los Angeles this week, GTM Research’s senior solar analyst Cory Honeyman explains why a record run of deployment in the last two years is just the beginning as the US market gears up for 18 months of intense activity.

PV Tech: Your latest US solar market insight report revealed 1,393MW of new capacity in Q2 2015. Which areas are seeing the most activity?
Cory Honeyman: At the national level, the market still is growing at a blistering pace; we've now seen seven straight quarters with over a gigawatt added. Residential solar is booming, commercial solar is really struggling under that national level figure while utility solar is on the cusp of eye-popping and unprecedented growth. The second quarter of 2015 has been a kind of transition, an inflection point; over the next 18 months is really when we can expect to see the impacts of the federal ITC's (investment tax credit’s) scheduled drop off begin to heat up and take effect. And so Q2 is really the calm before the storm.

The numbers for the first half of this year were still relatively extremely impressive compared to the last 12 to 18 months with nearly half a gigawatt of residential solar alone added in the second quarter of 2015. That is a continued trend we're seeing with residential solar being the highest growth opportunity in US solar. And it's happening in spite of a lot of policy risk with potential net metering and rate design reforms.

PV Tech: You mention that residential solar is growing despite policy risk – what’s driving that?
CH: It really comes down to dollars and cents, in that residential solar economics are head over heels the most attractive and the most resilient to any kind of reform that would roll back the value of solar. That thesis is not as true for commercial solar, and utility solar is competing in wholesale electricity markets where it’s going head to head with natural gas and so it's a totally different battle and conversation. And that really is what it comes down to: the fact that in California you'll get compensated at over 20 cents per kilowatt hour for a lot of your solar production.

PV Tech: Is there anything you see on the horizon that could affect that picture on the residential side?
CH: There are state markets where state utilities are still toying with proposals that would roll back net metering. But really the national level growth trajectory for residential solar hinges on what happens in California, because that market continues to account for half of residential installation volumes. And so at the tail end of this year, by December, arguably one of the biggest regulatory decisions in residential solar market's history is expected to take place in California where the CPUC [utilities commission] has to decide on the next version of net energy metering. And so whatever outcome arises in December on net metering 2.0 is really going to dictate what the future holds for how much residential solar comes on line over the next five years. 

PV Tech: As your report pointed out, non-residential solar is not faring so well. What’s the story there?
CH: First, in numbers, we saw a little bit under 200MW of non-residential solar added; that’s the first time the market dipped below 200MW on a quarterly basis since the third quarter of 2011. So it’s really going backwards instead of forwards. And the reality is that as state and utility-level incentive funding either depletes or is more volatile in SREC incentive markets, non-residential solar economics are much more sensitive to the loss of incentive funding than residential is. And while we have seen installation costs continue to decline in non-residential solar, they haven't declined enough to counter the loss of incentive funding.

What is becoming increasingly salient as a risk to commercial solar's growth is the fact that rate design matters just as much for non-residential solar economics as it does for residential solar. And for most businesses solar can only offset up to two-thirds to three-fourths of an energy bill, whereas with a homeowner you can usually save up to 90% of your bill or more by going solar. And so really that's what it comes down to and that's what's keeping the market from scaling in the way that residential solar is. 

PV Tech: Is there anything you see that could materially change that equation for the better where non-residential solar is concerned?
CH: Yes, one thing [would be] the solar-plus-storage solution to not only offset energy charges, but offset peak demand charges as well. And then there are also lots of efforts to lower the cost of installing commercial solar. And so specifically there are efforts to improve the customer acquisition process and also to lower the cost of financing, especially targeting the small and medium sized commercial solar segment, so typically projects below 1MW. And that's been evidenced by some recent announcements such as Solarcity ramping up a new fund and a whole new programme targeting the small- and medium-sized business customer base. And also by the host of major residential solar companies that are beginning to ramp up their efforts in commercial solar as well, like Vivint.

PV Tech: It’s only just over a year until the investment tax credit (ITC) is scheduled to drop off. What’s going to happen between now and then?
CH: It goes without saying that all market segments are expected to see a dip in demand if the ITC ultimately does drop to 10% and does expire for non-residential solar. We're already beginning to see the impacts of developers trying to capitalise on as many projects as possible before the ITC does ultimately drop; between the second half of this year through the end of 2016, over 18 months, we expect to see 18GW come on – so on average a gigawatt per month. There won't actually be a gigawatt per month, but there is an unprecedented wave of installations that are trying to be packed into such a short period of time because of how sensitive some of these projects are to the loss of the ITC.

Each market segment will be relatively more or less sensitive to the ITC drop-off. So utility solar, which counts for the lion's share of that 18GW, will be the most sensitive to the ITC drop off. But there is a strong case that distributed and especially residential solar will be more resilient to the ITC drop-off given expected reductions in installation cost and the opportunity for the way residential solar is priced to be still competitive with customers' energy bills. It will still be tough – in 2017 residential solar, in addition to the other market segments will still drop. But the timeline for that market segment to recover is expected to be a quicker period than the other two segments.

PV Tech: What’s your feeling on whether the current lobbying efforts to extend the ITC will bear fruit or not?
CH: No one really knows what's going with political will surrounding the ITC extension as a possibility. But what we do know is that it has been in Obama's budget over the past couple of years, so that's the first stage of establishing some political will. You have seen select senators co-sponsor a bill for a five-year extension to the ITC, and that's what SEIA [the Solar Energy Industry Association] is hoping for as well, so that's kind of the starting point for the conversation. There will be a couple of hotspots in the legislative timeline between now and especially February next year where there will be a lot of traction to put the ITC extension in to the conversation. So I don't know, but over the next six months the tealeaves will become I think much clearer and you will be able to have an increasingly stronger gut feeling about where things are going. 

PV Tech: Assuming the worst, your report puts a figure on it of around a 50% decline in the market. Do you think that will be a permanent hit or a hit for a period until people work new way for things to stack up?
CH: Definitely. You look at homeowners considering doing solar in 2017 and they see their neighbours have got one deal and they can't get that deal that year. So a number of people and businesses refrain from going solar in 2017 when the ITC drops, if it does. But given what we're seeing in terms of cost reduction over the next five years, the market doesn't erase altogether from 2017. We can certainly there will be some core state markets where you'll ultimately see distributed generation economics still be viable, especially for homeowners and businesses. So the market doesn't completely erase, it just becomes less geographically diverse and also less attractive in the states that's it's still viable.

The conversation is different for utility in that you have so much capacity that's been packed into 2016 that the drop is much more stark in 2017. But one thing that's been really interesting is that the thesis has kind of changed from completely bleak to cautiously optimistic about the timeline for all market segments to recover. And there's still a compelling case that over the next part of this decade and by the time we hit the 2019 timeframe you're going to see project economics recover. There's a case for doom and gloom in the near term. But over time with where we're seeing costs go, especially in residential, that market will become the poster child of future growth as opposed to what has been today utility scale driving the majority of demand. 

PV Tech: What are likely to be the hot topics on the show floor at this year’s SPI?
CH: People are laser-focused on optimising their project pipelines for the rest of this year and into 2016. So I think there's going to be a bit of tunnel vision for the next 16 months to make sure sales are optimised as much as possible. The other side of that is that there will be a lot more powerfully focused conversations about the need to discuss the future of the ITC. But when you look at the conversations between companies it's not going to be about lamenting the market disappearing after 2017 it's going to be about what can we still do now over the next year and a half.

US solar project. According to GTM's Cory Honeyman, the next 16-18 months will see a record level of activity in solar deployment in the US. Image: Solar Frontier.
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