SolarCity (NASDAQ: SCTY ) has risen to dominance in the residential solar industry and built a $6 billion market cap in the process. It's done this by expanding more aggressively and offering innovative financing to customers than any other installer.
The company competes against mom-and-pop shops, multinational corporations, and everything in between in a very fragmented business. The challenge for SolarCity's continued growth is keeping the sales channel full of high value residential solar projects. If it can do that, the sky's the limit for the company. But as competitors emerge, I see a threat forming -- the biggest one SolarCity has faced yet.
SolarCity has built an incredible 32% market share in the residential solar market, and outside of that, there's no one who has more than a 10% share. But there are an increasing number of large companies looking at getting into the business and they have the expertise and balance sheets that should concern SolarCity.
First, you have early movers in residential solar like Sunrun, Clean Power Finance, and SunPower (NASDAQ: SPWR ) , which provide financing and other services but work with dealers to do the actual installation. These are the immediate threat, but it's when utilities get involved that this business gets interesting.
The latest trend is for utilities to get into solar by forming a fund and then selling residential systems directly to customers. This is what Integrys Energy Group (NYSE: TEG ) is doing with a fund it recently launched with Clean Power Finance's online platform. Integrys is providing the funding and the sales channel while Clean Power Finance provides bidding tools and installation partners to build the residential solar systems.
Integrys isn't the only utility looking into solar. Edison International (NYSE: EIX ) and Duke Energy (NYSE: DUK ) both invested equity in Clean Power Finance, along with two unnamed utilities. Utilities are also beginning to start funds similar to Integrys' to finance and sell solar projects, although they've remained largely silent so far. These are well-funded utilities with sales channels SolarCity doesn't have. They already have a point of contact with millions of customers around the country, and if they can figure out a way to sell residential solar effectively they could become huge competitors.
SolarCity sees the challenge coming
Don't think SolarCity doesn't see the competition coming. There's a reason it offered to pay $120 million for Paramount Solar last year, adding essentially a telemarketing sales channel to its efforts. It also partnered with Home Depot to add a retail-sales channel and made the recent announcement that it will offer ways for individuals and small institutions to invest in solar. SolarCity is building as many sales channels as possible, hoping to reach customers before someone else does.
But SolarCity doesn't have a natural way to reach customers like a utility does, hence the door-to-door and phone-call sales. Utilities have a point of contact at least once a month when customers pay their bills, and they can offer solar without adding a new bill to pay. If utilities can leverage that contact to install solar on rooftops and in turn own the systems it'll be a significant competitor.
The one thing that will keep utilities or other competitors from encroaching on SolarCity's business is having a national scale and product offerings (like the new online-investing marketplace) that a utility doesn't have, and that's why these strategic acquisitions have been made over the past year.
The biggest long-term threat
For now, there aren't many utilities, if any, who can efficiently compete with SolarCity in selling or installing solar. But remember that the utilities are just getting started, and California and Arizona account for a vast majority of solar installations right now, and that's where SolarCity has a huge head start. But the dynamic could change quickly as states like New York, Massachusetts, Texas, and others grow and utilities figure out ways to invest in solar.
Of course, there's no guarantee utilities will get solar right and take any share. Keep an eye on SolarCity's market share as well as how utilities attack the solar market in coming years to see if competitors are making inroads. If either market share or value per watt installed falls, it'll be a sign competition is heating up.
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