Underdogs Have Puncher's Chance to Upend SolarCity's Dominance

In the residential solar market, it seems like there's SolarCity (NASDAQ: SCTY  ) and everyone else and with a 32% market share in the U.S. that's close to the case. But the industry is still so early in its maturity that SolarCity's dominance doesn't mean it's game over for competitors; they're just playing catchup when it comes to infrastructure and market share.

We've seen SunPower (NASDAQ: SPWR  ) make major inroads with its dealer network, installing 44 MW of residential solar in the fourth quarter to 70 MW at SolarCity. 

But there's noise quietly building among a few smaller players that are consolidating in an effort to challenge SolarCity's residential solar dominance. Let's take a look at those moves and where the market is headed.

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

Consolidation is the name of the game
In just the last few months, consolidation has taken place at a rapid rate in residential solar. RGS Energy (NASDAQ: RGSE  ) bought Syndicated Solar and Mercury Energy last year and announced yesterday that it's buying Sunetric in Hawaii, which had $38 million in revenue last year.

Source: SolarCity.

Sunrun recently bought REC Solar's residential business and reportedly struck a partnership deal with Sungevity to finance projects.

The other big deal was NRG Energy's (NYSE: NRG  ) acquisition of Roof Diagnostics Solar, the eighth-largest installer in the country.  

Given the success of SolarCity and the advantages that come with scale, it's not surprising that consolidation is taking place in residential solar. 

How competitors are attacking SolarCity
What's interesting about the downstream solar space is that companies are going about making sales in different ways. SolarCity has built most of its success on the $0 down lease model and with securitization has low-cost financing. So, competitors are trying to compete with cash sales and loans.

A residential solar installation by SunPower. Source: SunPower.

SunPower sold 70% of its projects for cash in the fourth quarter and is offering more loan products through banking partners. RGS Energy us also building a model that doesn't care whether you lease, pay cash, or get a loan.

Right now, the leasing model is winning, but I think that will shift long term. It's easy to see why a lease is attractive if your options are a $0 down lease or paying $30,000 for a system. But as costs fall and systems are installed for closer to $10,000, it's more attractive to pay cash. Banks are also finding ways to offer loans on lower-cost systems, helped by the history the industry has already built with leasing systems.

As larger players emerge and more financing options open up, it's the cost of the system that will matter and competition will heat up.

Can smaller players win? 
When it comes to solar leases, SolarCity is the dominant player and I don't see that changing long term. So, for RGS Energy, Sunrun, NRG Energy, or any other competitor to take share, they'll have to offer lower lease costs or cash sales. They may not be the high-margin business SolarCity is building with leases but going to consumers with a broad portfolio of products and financing options will be a great way to grow in solar. The next year or two will tell if consolidation and broader offerings can take market share, but I give these new, larger competitors a puncher's chance to outpace industry growth over the next five years. 

Three stock picks to ride America's energy bonanza
Record energy production in the U.S. is changing the country and finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, The Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 31, 2014, at 10:34 AM, NHWeston102 wrote:

    Solar is probably still at its "Let-a-Hundred-Flowers-Bloom" stage where nearly everyone can find a piece of the action. However, the Darwinian process is likely going to begin, especially if NatGas just doesn't start delivering what its advocates hope and the Sun-belt demographics in this country begin to weigh on the scales of purchase. Watch for Buffett in the solar space.

  • Report this Comment On March 31, 2014, at 3:34 PM, ronwiserinvestor wrote:

    Here's some reality from the trenches: SolarWorld's latest trade war complaint has already impacted pricing for the major name brand Chinese manufacturers which have now been forced to raise pricing for the larger solar lease and PPA players.

    Smaller dealers are still able to buy much lower priced (sub 55 cents per watt) non-name brand, but still high quality solar panels which were already in the country prior to the latest price increase.

    These lower priced modules will not help the solar lease and PPA companies because they have large contractual agreement with their established Chinese vendors that they must honor.

    This will make the solar leases and PPA companies even less competitive as we move further into 2014's selling season.

    Couple the much lower cost for these smaller dealer's purchased system pricing with all of the new $0 down loan offerings with tax deductible interest, (remember leases and PPAs don't offer tax deductible interest) and you have the makings of a rapid death spiral for the solar lease and PPA companies.

    Word is spreading fast. Consumers today want much lower (sub $2.90 per watt) system pricing, $0 down solar financing with tax deductible interest, they want to keep the 30% federal tax credit and any cash rebates and they want to own their systems instead of renting from a solar lease company.

    The low hanging fruit (non solar savvy) consumers have been picked. Customer acquisition cost continues to increase. 2014 will spell the end of solar leases and PPA company's domination of the market. System sales (not leases) will "own" the market this year. No pun intended.

  • Report this Comment On March 31, 2014, at 4:23 PM, speculawyer wrote:

    People need to realize that solar leases are a rip-off. You are MUCH better off by taking out a home equity loan and paying the lowest bidder to install a system. That way you get the 30% tax-credit and you can deduct your interest payments.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2894925, ~/Articles/ArticleHandler.aspx, 8/30/2015 4:15:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Travis Hoium

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

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:06 PM
NRG $20.22 Up +0.40 +2.02%
NRG Energy, Inc. CAPS Rating: ***
RGSE $1.36 Up +0.28 +25.93%
Real Goods Solar CAPS Rating: *
SCTY $48.00 Up +1.77 +3.83%
SolarCity CAPS Rating: ****
SPWR $24.32 Up +0.45 +1.89%
SunPower Corporati… CAPS Rating: ****