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SolarCity Just Got a Big Competitor in Residential Solar

Yesterday, the rumors of solar leasing company Sunrun integrating vertically came true. The company acquired REC Solar's residential solar business, AEE Solar, and SnapNRack. AEE Solar is a wholesaler for solar related products, and SnapNRack makes racking for solar installations.

This creates a more formidable competitor to SolarCity (NASDAQ: SCTY  ) and changes the landscape of residential solar for a number of companies. Here's what you should take away from this deal.

The race to integrate is on
Until now, SolarCity and Vivent have been the only two residential solar installers who were vertically integrated, owning origination, installation, and financing. The Sunrun acquisition brings a leading financing firm and fourth-largest installer REC Solar together to make three companies who have vertically integrated.

SolarCity workers installing a residential solar system. Source: SolarCity.

It's become apparent in recent quarters that operational scale is increasingly important for residential solar installers, and the vertically integrated model has been stealing market share from specialist companies. Being able to spread operating costs over a larger swath of projects and marketing to a broader base has proven its advantage, and this is the business plan of the future.

This leaves Clean Power Finance and SunPower (NASDAQ: SPWR  ) as the two major companies with leasing arms that rely on third-party dealers to install and originate projects, but that may change. SunPower could acquire downstream installers, like it did in utility and commercial solar, and Clean Power Finance could look for alternatives as well. 

A residential solar system from SunPower. The company is going to have to decide if this is a business it wants to put money in to compete. Source: SunPower.

What happens now?
Considering the success SolarCity has had gaining share over the past year, it's not surprising other companies are following their strategy. Operational and brand scale are needed to compete in the solar market today, and that's what SolarCity, Vivent, and Sunrun are building.

I think the next question is whether or not SunPower follows suit. It's built a decent sized residential solar business by partnering with small dealers, but it may be squeezed out by larger rivals in the residential business. It could choose to acquire partners to expand this business, stay the course, or choose to focus on downstream markets like utility and commercial solar, where it currently holds a large share. Given the new shape of the industry, I think an acquisition or two may be in play before long. 

The other thing to consider is that competition will now heat up for residential solar companies. If we have three or four large installers with lots of overhead, they'll need to sell quickly to keep installation crews busy. That increases bargaining power for savvy buyers who can get companies to bid against each other.

Foolish bottom line
We're still early in the growth of residential solar, but we're already seeing that SolarCity's vertically integrated model is winning, and competitors are following it. Next we'll have to see if that means margins move lower as competition heats up. 

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  • Report this Comment On February 06, 2014, at 11:29 AM, ffbj wrote:

    I think the biggest challenge for Solar City and other residential installers is the entrenched utility companies who are fighting tooth and nail to resend

    net-metering and in lieu of that charging solar users additional fees and other such methodologies to curtail the adoption of residential solar power.

  • Report this Comment On February 06, 2014, at 12:09 PM, ffbj wrote:

    An example of how they operate. Xcel for instance:

    They asked for a 10% increase in what they charge for electricity in January 2013. So immediately starting in February they got that increase temporarily until the legislature got around to debating and resolving the question. Eventually in December 2013, the legislature decided that this was an exorbitant increase and gave them (Xcel) slightly more than inflation, a 3% increase,reasonable from most peoples perspective. Of course Xcel was not too happy though they did get to charge people (overcharge) for 9 months at 7%, which they had to pay back, at the average interest rate, read: next to nothing.

    Meanwhile they have all this extra cash coming in, while the stock market appreciates around 28%. Gosh! I hope at least they put some of that in the market.

    Bottom line is that there is a reason they are called: regulated utilities, and there's good reason to regulate them. Problems develop, inevitably,

    when the regulators are in bed with the regulates.

    (Rant continues)

    Then the utility itself faces a common problem with non-competitive, monopolistic. and by needs be, regulated structures, which inevitably breeds mediocrity, for one. These structures tends towards antagonistic relationship between customer and the structure, in this case the utility. As a result of the tendency towards antagonistic relations with it's customer base, along with the probability that the relationship with the regulator, government, is not so hot either, the utility can end up, in the case of Xcel, fighting all over the place: Colorado, Arizona, and other mid-western states, as a result of their view that Solar and other co-generation methods of producing electricity are a threat to their monopoly.

    They spend a lot of coin in these fights, and in advertising their good cop face. (Maybe they used some of the money they over-charged people to pay for some of this.) We really are on your side, but they really are bad cops, but it's not all their fault. It's the environment in which they are placed.

    But instead of spending their money for high priced legal departments, and in-efficacious, costly

    advertising campaigns, lobbying, they should just focus all their efforts on cutting costs while improving infrastructure. Thus making themselves more competitive, and not because you are penalizing people to go solar, but because you offer a competitively priced service.

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Travis Hoium

Travis Hoium has been writing for since July 2010 and covers the solar industry, renewable energy, and gaming stocks among other things.

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