Solar Power International is in full swing in Chicago, complete with the flurry of merger and acquisition announcements, product releases, and, my favorite, study and analysis presentations. Greentech Media Research Solar Analyst Nicole Litvak delivered a presentation earlier this week reviewing her evaluation of the trending in residential solar. The most exciting results show an underlying change in the economy and opening up of loan availability and raise some important questions about the direction of effort needed to reduce the cost of solar.
The Return of Debt Financing!
When the housing market crashed in 2007/2008, it had a chilling effect on sales of residential solar. The business model innovation that came to market at that time, the solar lease, created an exciting new market for residential solar and filled the gap that was left when many homeowners saw the equity in their homes dry up. Up until this time, the residential solar market was a cash and rebate-based system. Debt financing backed by home equity was a common way to finance purchasing home solar.
The SunRun, SolarCity, Sungevity models grew rapidly during this period from 2007 until now and are still growing. However, the analysis by Litvak shows a leveling off in the percentage makeup of third-party owned residential solar over 2013 across key US markets.
Over the course of 2013, as the overall US economy has improved (albiet very slowly), lenders have begun to ease restrictions on loaning and, in some housing markets, value has begun to return to homes, though still way off their 2006 peak. (Sorry, California).
Third-party owned residential solar created a philosophical schism in the solar industry. (See my own vs. lease article co-authored with Liz Merry from 2011) Some argued that it eroded the investment options for the homeowner by removing their ability to take tax credits directly, some were upset that - like with any financed products - the consumer ended up paying many times more than the cash value of the system over the course of the lease. Regardless of where many stood on the issue, it was plain as day that it opened up an entirely new market segment and was a viable alternative for solar installers to sitting on their hands and waiting for the lending market to improve.
However, much like in the downstream automobile industry, options to buy create a strong market. You can buy outright, you can lease, you can engage in several different kind of lending options to get behind the wheel. When there are options and choice diversity, there is strength on the side of the consumer. The top solar companies see this and are aligning their sales strategies behind offering choices.
The Rise of Operating and Maintenance (O&M) Services
Much like the auto industry, too, much has changed since the first Model Ts rolled off the production line. An entire robust aftermarket services industry of repairs, upgrades, detail cleaning and much more has grown around the sale of vehicles.
This, too, is becoming slowly visible in the solar industry.
Perhaps the most important innovation outside of the financial model that made the sale of solar possible through third-party ownership was the contractual obligation to long-term maintenance over the period of that contract. When I worked to introduce SunRun's 0-down solar in Massachusetts in 2009, the maintenance aspect was baffling to potential customers. After all, many of us cash-fueled installers predicated our pitches on the "maintenance-free" systems. Sure, there are no mechanical parts (unless you bought a tracker), so it doesn't need upkeep the same way a car does, but over time, the wind/sun/rain/ice/nearby tree takes its toll on system production and equipment longevity.
Now, almost five years after the explosion of residential third-party ownership, operating and maintenance or "Fleet Operations" is a rapidly growing division in many of the top solar installers, backed by an even more rapidly growing hardware and software monitoring services sector. Notably, Also Energy announced its acquisition of DECK Monitoring earlier this week at SPI, creating a behemoth monitoring empire with complementary products and markets.
Companies like NextPhase and True South Renewables are already offering white label O&M services to service the portfolios of the top residential solar installers. Expect more competition to enter this space and more innovation combining the monitoring solutions and O&M service providers to continue to coalesce.
Return to Ownership and the Rise of O&M
With Litvak's analysis showing leveling off of third-party ownership and with many solar providers launching loan programs to promote ownership, diversification in sales strategies should follow. However, I expect that O&M services will become a line item on many of the loan-backed residential sales. While a package part of the third-party deals, the convenience and "peace of mind" behind long-term O&M is not too dissimilar from extended warranties. This is a promising new revenue stream for solar companies and a strong sign from growth in the O&M space.
Consumer will demand the benefits of the established long-term and hassle-free culture of residential solar even with a shift back to ownership. There will be a lot of exciting opportunity in this space.