Turmoil in residential solar

The first quarter of 2017 was not an easy time for the U.S. residential solar market. Overall, the volume of solar deployed fell 17% from the first quarter of 2016 and 11% from the fourth quarter, as the first time in recent memory that market volumes have fallen on both a year-over-year and quarter-over-quarter basis.

At the same time, Tesla and Vivint, as two of the three largest residential solar companies, not only saw significant reductions in solar installations versus a year ago, but actively scaled back their deployment. Executives from both companies described a shift in business approaches away from the pursuit of growth at any cost to more strategic and profitable sales.

This is coming as net metering policies are increasingly under attack in the United States, while the early adopter demographics have been exhausted in the largest markets. It’s been a tough time for residential solar companies, with several high profile bankruptcies punctuating these changes, including that of Sungevity, one of the largest players in the space.

And at the same time, new business models and new markets are emerging, as states that were previously off-limits open up.

California come-down

The biggest factor in the residential market slowdown in Q1 was trouble in California. The state’s residential solar installations fell a stunning 31% year-on-year, and since California still represented more than a third of the total market, this was likely at least a significant contributor, if not a main cause, in the bankruptcies of Sungevity, HelioPower, Ten K Solar, and American Solar Direct.

California’s slump was driven by a number of factors, in what was really the perfect storm. Perhaps the most obvious was the weather, with torrential rains in January and February stopping work crews dead in their tracks throughout much of the state.

Another factor that cannot be ignored was the shift to Net Metering 2.0, which has been strongly correlated with declines in installation volumes each time the policy takes effect in new utility service areas.

This is somewhat ironic, given that the policy is one of the mildest makeovers of net metering to happen in any state to date, with limited effects on compensation and payback times. But more than destroying the economics of customer-sited PV, the policy change has done something that can be just as damaging, at least in the short run: It has introduced complexity.

With the new time-of-use (TOU) rates, it can be a lot harder to calculate payback, which inhibits the sales process. Customers don’t understand the economics of TOU rates, and salespeople are often lost as well. “I don’t think the vast majority of companies know how to sell under the new policy,” Sullivan Solar CEO Dan Sullivan told pv magazine in March, eight months after Net Metering 2.0 took effect in San Diego.

TOU rates enhance the value of energy storage, and advocates are looking forward to a future of PV paired with batteries. However, without subsidies this combination does not yet pay for itself in a reasonable time frame. And while the five rounds of the Self-Generation Incentive Program (SGIP) are expected to support as many as 10,000 residential battery systems, it is uncertain that even this level of deployment will drive down prices enough to make the numbers work for most homeowners.

Customer acquisition and installer pull-back

While California is responsible for much of the fall in numbers, top Northeastern state markets such as New York, Maryland, and Massachusetts are also seeing declining growth rates, and market volumes fell in all three from Q4 to Q1. These states are experiencing another issue that is being seen in California: customer burnout.

In any of these states, the customers who are being pitched PV systems in 2017 are not the “first movers.” They are the people who for whatever reason chose not to deploy solar as the market boomed, and they may be turned off by the way that many solar companies are attempting to reach them.

GTM Research notes that many of the larger companies are moving away from door-to-door sales, particularly in the markets with high levels of deployed solar. “Customers have had their doors knocked on seven or eight times in a week, they’re tired of it,” stated GTM Research Solar Analyst Allison Mond.

Companies are looking to new acquisition practices, such as Vivint’s use of retail kiosks and Tesla offering solar alongside its electric vehicles and batteries. “SolarCity, Tesla, down to the long tail of installers, are really trying to figure out how they are going to grow without spending ridiculous amounts of money on customer acquisition,” explains Mond. One of the changes she cites is a move away from purchased leads, noting that a lot of issues with overly aggressive and unethical sales practices arise from purchased leads.

But as this happens, national installers are both spending more to acquire customers and pulling back from markets. This is particularly true for the markets where customer acquisition is more difficult, but may have more to do with internal changes at the companies involved.

Upon taking control of SolarCity, Tesla has shifted the focus to increased profitability, and has been satisfied with smaller deployment volumes. Vivint, which has struggled in the wake of the failed acquisition by SunEdison, has also taken what it describes as a more “disciplined” approach. This includes a focus on the markets and segments where the company’s executives know that they can make money. As these companies pull back, it is unavoidably having impacts on the market. “It’s not the case that the market share left by SolarCity pulling back will or can be met by the long-tail of local installers,” explains GTM Research Solar Market Analyst Austin Perea.

An exception to all of this is Sunrun, which continued to grow despite overall market contraction during Q1, and is projecting a 15% growth in deployment over the full year 2017. Sunrun Senior Manager of Public Policy Lauren Randall credits the company’s balance of deploying solar both through a network of local, third-party installers and its own internal workforce, as well as its range of offerings including third-party solar arrangements, loans, and direct purchase options.

New horizons

As residential markets slow down in California and the Northeast, they are picking up in other states, and GTM Research identifies Utah, Texas, and South Carolina as major emerging markets for residential solar. One of the most interesting things about this development is the way that markets are growing state-by-state, with no one region dominating new deployment. “There is not a lot of homogeneity in terms of how geographic regions approach residential solar,” notes Perea.

As such, the combination of healthy net metering policies and state or utility-level incentives often set the stage for market growth. GTM Research cites a 25% state-level tax credit in South Carolina, as well as incentives in the service areas of Texas utilities ONCOR, Austin Energy, and CPS. Perea also warns that these incentives could lead to a boom-and-bust pattern, particularly in Texas, and ONCOR has recently attempted to impose a hybrid fixed and demand charge in customer electricity rates which could kill residential solar.

But the big prize in terms of emerging residential markets is Florida. With 20 million residents, Florida is the third-largest state in the U.S. by population, meaning that the potential addressable market is huge. And in the wake of a successful political battle to roll back tax burdens on not only commercial and industrial solar but also distributed systems under a leasing model, residential solar companies including market leaders Tesla and Vivint have flocked to Florida.

Justin Hoysradt, the CEO of VinyaSun, says that there are a number of reasons to look at Florida’s solar market. “You have an entire state that has some of the best solar potential in the country, an untapped marketplace, A-grade net metering, and reduced property taxes on residential and commercial, as well as leasing beginning 2018,” explains Hoysradt. “And because of HVAC load and lack of gas heating, system sizes are two times as large as in other states.”

And while Florida still does not allow power purchase agreements for commercial or residential systems, Hoysradt estimates that the changes brought in under Amendment 4 will change the tax burden on leased systems from $0.05 to $0.01 per kilowatt hour, enough to give such systems an edge over Florida’s low retail electricity rates. “In direct ownership and lease, the economics are working very well,” notes Hoysradt.

Difficulties ahead

Nationally, the future still looks cloudy for residential solar. The new state markets that have opened up have not yet made up for the decline in residential solar in California and other key markets, and GTM Research says that it is possible that the national market contraction seen in Q1 could last throughout 2017.

Going forward, the policy landscape is a challenging one, and a central problem is that net metering remains under attack. Despite the return of the policy in Nevada, which was signed into law in mid-June, already this year Maine and Indiana have taken decisive action to dismantle their net metering policies.

They are not alone. In its Q1 report the North Carolina Clean Energy Technology Center (NCCETC) documented actions to change net metering policies in 21 states. But unlike the radical changes seen in Nevada, Indiana, and Maine, many of these actions will not scrap the policy outright, and among the most common changes to net metering policies documented by NCCETC are various alterations to the systems of crediting PV system owners for the electricity they produce.

So while net metering itself might not go away, the general direction is that these policies will not have the lucrative terms that they once did. In the long run, there is a fundamental economic issue. High penetrations of solar, as have been seen in California, wipe out mid-day demand, and this in turn reduces wholesale prices. With the increasing growth of solar, utilities, grid operators, and regulators will only be able to ignore a surplus of mid-day electricity for so long.

A move to TOU Rates, as was done in California, is one way to deal with this. At high solar penetrations, TOU rates mean delayed payback time and less attractive economics for PV system owners without energy storage. And the antidote to this, self-consumption, has not made for as attractive a market in Hawaii and California, and may never.

The good news is that prices continue to fall sharply, both for PV systems and batteries, with GTM Research putting the average residential PV system price at $2.84 per watt during Q1. But battery storage typically doubles this cost, and is not yet economic without heavy subsidies. Put all of these factors together, and the short and mid-term diagnosis for residential solar shows difficulties ahead, at least in mature markets.

It will be up to the solar industry to adapt to the new environment, and leading companies are all taking their own tack on how to expand consumer offerings. Vivint is leading the way with the integration of smart home features with solar, while Sunrun reports early success with its Brightbox solar and storage offering, and Tesla readies the roll-out of its Solar Roof product.

Ultimately, these companies have no choice but to innovate. The world around them is not standing still, and continued growth is not getting any easier.

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