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US rooftop PV – big growth, big uncertainty

No figure has struck fear into the hearts of US utility executives in recent years quite like the rooftop solar installation man.

Big utilities are learning to live with, and in some cases even love, large-scale renewables. But the spectacular rise of the rooftop PV market signals something altogether more unsettling: the democratisation of power generation and a two-way energy market.

By the standards of the energy business, US rooftop solar has an exciting story to tell: close ties to Silicon Valley’s elite; charismatic young leaders like SolarCity’s Lyndon Rive and Sunrun’s Lynn Jurich; a convenient adversary in the old utility monopolies; and the promise of market disruption and consumer empowerment.

Homeowners’ appetite for rooftop solar in places like California has exceeded anyone’s expectations, leading to nervous talk in traditional energy circles of “grid defection” and the “utility death spiral”.

To some investors, US rooftop solar companies have looked more akin to Google or Uber than to traditional energy companies — and with growth figures to match. Between 2011 and 2014, the residential market expanded by more than 50% annually; last year it grew 75% to reach 2.1GW.

Distributed solar, which includes systems atop homes and businesses, accounted for 14% of all new generation capacity added in 2015, up from 4% in 2010.And here’s the kicker: the market is just getting started. Less than 2% of American homes and commercial buildings have solar installed today.

Financial concerns

Yet for all its powerful momentum, the sector has taken on a dimmer glow of late.SolarCity, whose chairman and largest shareholder is Tesla’s Elon Musk, is cutting jobs after repeatedly lowering its deployment guidance over the past year.

Far from cheering SunEdison’s offer last summer to buy Vivint Solar, the number-two rooftop player, SunEdison’s investors panicked, helping to send its shares into a downward spiral that ended in bankruptcy.

NRG, one of the first major US energy companies to muscle into rooftop solar, reportedly fired 500 people in its home solar unit earlier this year, and has decided it no longer wants to own residential PV assets.

Meanwhile, First Solar, a master of the utility-scale solar game, quietly ceased production this summer of its TetraSun high-efficiency silicon modules, which were aimed at the rooftop market.

Nearly all public rooftop solar companies are losing money, and stock prices are down brutally across the sector. Shares of SolarCity lost 60% of their value in the year to June, when Tesla offered to buy the company in a deal some analysts were quick to dismiss as a “bailout”.

“We’re no longer in a 50%-plus annual growth rate market,” says Cory Honeyman, associate director for US solar at GTM Research. “And the market’s facing some long-term questions about net metering two to three years down the road.”

“The market needs to sort of reset and sort itself out,” Honeyman says. “We’re in a transition period for rooftop solar.”

The biggest source of short-term uncertainty is the questionable financial health of the major rooftop solar companies and the viability of their shape-shifting business models.

For years, companies like SolarCity have been chasing — and delivering — breakneck installation growth. They’ve done so largely through the third-party ownership model, which sees them installing expensive systems for homeowners at no upfront cost.

For the companies, that results in big short-term losses but locks in decades-long revenue streams through solar leases or electricity sales. With interest rates at historic lows, investors cheered the top-line growth and forgave the losses. More recently, though, some have grown nervous and started demanding nearer-term profits. Not all companies may be able to make the pivot quickly enough.

“One of the concerns in the last six months in particular is what happens if the cost of capital begins to pick up again for these residential solar providers,” Pavel Molchanov, equity research analyst at Raymond James, tells Recharge.

“It’s been easier for these companies to grow their top line,” he says. “Making money, getting margin… that’s the tricky part.”

A pivot to slower growth will weigh on the market as whole, but many believe the slowdown is for the best. The residential market will still grow 20-30% a year over the next half-decade, predicts Danny Abajian, vice president for project finance at Sunrun. “That’s quite healthy for companies that are amassing physical growth,” he says.

Changing tactics

Another source of concern has been the speed at which rooftop solar companies have tweaked their tactics.

Take SolarCity, which is based near San Francisco and employs around 15,000 workers in nearly two dozen states.

Over the past few years, the company launched a PV loan product; binned it; launched a new one; diversified into the storage business; entered the PV manufacturing business; broke ground at a 1GW module factory in New York; and launched a sideline in grid-scale solar projects.

“If I look at the last couple of years, there’s been a lot of moving parts,” Krish Sankar, an equity research analyst at Bank of America Merrill Lynch, told SolarCity’s Rive in May. “What, exactly, is the business model of SolarCity?”

Where some see strategic flip-flopping, others see creative, nimble companies adapting to a fast-moving market and competitive landscape. There are a bewildering number of models within the rooftop solar sector these days, and the space is fluid.

Some companies, like SolarCity, are vertically integrated, doing everything from cold-calling potential customers to installing systems on roofs.

Others, like Sungevity, run remote site analyses and act as online platforms, linking would-be solar customers with financiers and local installers. Still others, like Sunrun, are hybrids.

Product offerings, too, are evolving rapidly. Tesla’s offer to buy SolarCity, to be voted on by shareholders later this year, is based on Musk’s “no-brainer” idea of seamlessly integrating electric vehicles, home batteries and rooftop PV systems.

SolarCity is not alone in turning its sights to sleek product design. This spring SunPower unveiled its Equinox ‘all-in-one’ residential product, combining PV panels, microinverters, mounting equipment, and a smart energy management system.

Customers can watch their energy production rise and fall on their smartphones.SunPower views Equinox as a platform that can add features in the future, from storage to electric-vehicle connectivity to more generation capacity, explains Howard Wenger, president of business units.

Only a few months old, Equinox already accounts for half of SunPower’s US residential sales.“This is what consumers really want — all these things from one company,” Wenger says.

The impact of net metering

The thorniest long-term issue for residential solar is that of net energy metering (NEM) — policies that allow PV system owners to sell excess power back to the grid and receive the same “full retail” price they would have paid to buy that energy.

The proliferation of NEM policies in dozens of states over the past few decades has been central to the market’s explosive growth.In recent years, however, utilities have started pushing back against NEM, sparking fierce and often acrimonious battles with solar companies and their advocates.

Utilities argue that distributed solar shifts grid maintenance costs onto non-solar customers.

Unsurprisingly, PV companies see things differently. In their view, the utilities are focusing only on the limited downsides that may come with distributed solar and none of the many upsides, like the avoidance of new power lines and carbon emissions.In the vast majority of regulatory dust-ups to date, the solar industry has prevailed in defending NEM policies.

Critically, regulators in California — by far the largest state market — decided earlier this year to preserve the main elements of NEM until 2019, buying some breathing space.

But the occasional regulatory losses — in Nevada and Hawaii, most notably — have reverberated loudly. Nevada’s decision late last year to dismantle its NEM policy, including for existing PV systems, was particularly damaging, with a spillover effect on potential customers even in states with little regulatory risk. 

Solar companies have been right to defend NEM. For utilities to attack the policy in places like Kansas, where there is virtually no distributed solar, is laughable. But the solar industry has been slow to acknowledge the reality that retail NEM is plainly unsustainable once the rooftop market reaches a certain size. The question is what comes next.

The default in some states may be to offer solar owners the avoided-cost rate, or the rate at which the utility could supply the power itself, says Camron Barati, North America solar analyst at IHS. But at this point that’s “really not competitive for customer-sited generation, especially at the residential scale”, he says.

The NEM issue is one of the biggest reasons rooftop solar stocks have fallen so hard over the past year, says Molchanov. “For investors in SolarCity’s stock, or Sunrun’s, or Vivint’s, of course they care about this – and it’s very legitimate.”

Regulators will be wrestling with the distributed solar question for years – maybe decades – to come. Thankfully, recent months have provided a glimpse of what a future could look like in which utilities and rooftop PV companies thrive side by side.

One of the most promising signs came this spring in New York, the fastest-growing state market.

Three big solar companies — SolarCity, Sunrun and SunEdison — filed a proposal alongside six utilities that would see NEM left more or less intact until 2020, after which time rooftop PV owners would be compensated “more accurately” for the the power they sell back to the grid.

Such compromises will need to account for the reality that solar power is worth more in certain places and at certain times of day than others. Under California’s incoming “time of use” model, homeowners may be paid less for their excess power in the afternoon, when the grid is flooded with solar power.“It’s not that the economics of rooftop solar automatically get worse in state markets where these kinds of [ideas] are put forth,” Honeyman says.

“It’s just that they get more complicated.”The devil will be in the details. But the “proactive” approach taken in New York is a good sign, Honeyman believes.“There’s been progress in opening the debate to discussing not only the cost of distributed energy resources but also the benefits.”

New opportunities

In the meantime, the industry may crack open new opportunities. Small commercial buildings are a huge untapped market. So, too, are states across the US south, including Texas.

Then there are international markets. Musk hopes to sell residential solar-plus-storage systems in the 40 countries where Tesla already operates, describing Germany and Australia as especially promising markets. E.ON is an investor in Sungevity, which is going public later this year, and the German utility could help the California-based company accelerate its push into Europe.

The jury’s still out on which of today’s rooftop solar companies will succeed in the long run, Molchanov says. Like SolarCity, some may become acquisition targets, with late-to-the-game utilities as potential buyers. “Or maybe a big industrial company, like GE or Siemens, will want to get into this market,” he says.

The big picture is that at less than 2%, rooftop solar penetration is still “extremely, extremely low” in the US.“I’m not saying it’s going to go to 100%, or even 50%,” he says. “But it can definitely go to 10% in the next decade. And if that happens there’s still tremendous room for growth.”

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