How Will Residential Solar Play Out in the U.S.?

When analyzing the solar industry, one of the biggest questions I ponder is: What does the future of the residential solar market look like? Thus far, SolarCity (NASDAQ: SCTY  ) has been far and away the most successful company, building a footprint that spans 15 states with more added regularly and the company plans to install as much as 1 gigawatt of solar next year.

Behind SolarCity are a number of large and small companies taking a variety of different strategies. SunPower (NASDAQ: SPWR  ) uses an independent dealer network to install its panels, providing leasing and loan financing. Sunrun and Clean Power Finance provide financial leases but until recently stayed out of the installation game. NRG Energy (NYSE: NRG  ) is building a strategy that could show how utilities can get into residential solar. And that's just scratching the surface of the companies and strategies taking shape in residential solar.

It's far too early to say that one company or strategy has won, but understanding the landscape and where companies fit in is important for investors. From there, we can look at trends and see where likely winners are. So, let's look at what these companies are doing and what the industry might look like in the future.

SolarCity's workers install a residential solar system.

What is residential solar?
When going and get a quote for a residential solar-power system from a company like SolarCity, or an independent installer, there are many components to deal with, including solar panels, racking, inverters, installation labor, and financing.

Explained below is how these pieces interact, and at the end of this article we'll be able to piece together some sort of picture of how the solar industry works and how it might unfold in the future.

SunPower's X-Series panel, which is currently 21.5% efficient with higher performance in pre-production. Source: SunPower.

The equipment
All residential solar projects incorporate essentially the same equipment. There are the solar panels, racking to attach them to the roof, wiring, an inverter/meter to turn DC current into AC current, and usually a monitoring platform.

The first and most important component is the solar panel, which actually turns the sun's energy into electrical energy. Generally speaking, there are three groups of panels available to homeowners. There are multi-crystalline panels that are the least expensive and generally around 15% efficient at converting sunlight into electricity. These include Trina Solar, Yingli Green Energy panels, and Kyocera as well as others outside of China.

Monocrystalline panels are slightly more efficient and are also made by Yingli as well as JA Solar and many others. These panels are typically 15% to 17% efficient and can be higher for some manufacturers.

The next level is a back contact monocrystalline panel, which is what SunPower makes. The company's current X-Series product is 21.5% efficient and 23% panels will be made when its new manufacturing facility opens next year. SunPower's panels are typically more expensive on a per watt basis than the companies mentioned above, but that doesn't mean each kW-hr of electricity costs more. Click here to see an article which lays out how SunPower can generate electricity at a lower cost than competitors, even with a more expensive panel. 

Inverters turn the DC current from a solar panel into AC current that the grid runs on and is typically a separate component, although some modules now come with a micro inverter already installed. Enphase (NASDAQ: ENPH  ) is a big name in this market along with Power-One, which was acquired by ABB last year. The challenge is that differentiation is very difficult in the inverter market, which increases price competition and has kept Enphase, in particular, from reporting a profit.

Items like monitoring, racking, and wiring may differ slightly based on the company and will primarily change or be standardized to lower installation costs. When it comes to equipment, the panel is key and for many companies, and that's the first choice consumers are going to make. 

A residential solar community with installations by SunPower. Source: SunPower.

The installation
When SolarCity or another dealer give a solar quote, they're more than likely working for an installer, which is where a majority of the cost that goes into building a residential solar-power system. These are the people who come to your house and put up the panels, connect them to the grid, and perform maintenance over the term of a lease.

Performing installation efficiently is also where the best companies are lowering costs. SolarCity would like to get to the point where every crew is installing two systems per day, one in the morning and one in the afternoon. Some of the equipment, like racking, from Zep Solar, an acquisition last year, create efficiencies in that process. 

What differentiates installers is the quality of the system they build and the quality of customer service in the sales process and beyond. SolarCity is building a national network and standardizes some of this process while smaller independent dealers will work with a variety of partners to build and finance a system. It's these financing offers that really differentiate dealers and installers. 

The financing
One of the biggest differentiators over the last three years in residential solar is financing. SolarCity didn't invent the solar lease, but it brought it to the masses and hopes to have 1 million solar leases in place by 2018.

What drove the success of the solar lease was the relatively high cost of residential solar-power systems and the complexity of taking advantage of tax credits. If you think about a 5 kilowatt solar system that costs $25,000, it's a big bite for a homeowner to write that large of a check or take that kind of loan. But SolarCity, Sunrun, CleanPower Finance, and SunPower are just a few companies who now offer solar in bite size pieces in the form of a lease that comes with a lower monthly cost per kW-hr than electricity from the grid in many locations.

The lease company then takes care of the tax credits by selling them to equity investors, performs maintenance, and makes a tidy margin in the process. SolarCity estimates that its systems installed in the first quarter will generate $1.83 per watt in retained value, or the present value of all future cash flows. Considering the fact that installation costs are now likely below $3 per watt (versus the $5 example I used previously), that's an incredibly high margin and is why SolarCity has the valuation it does.

SolarCity is expanding its offerings with energy storage, which is seen above. Source: SolarCity.

If there's one constant about solar, it's that nothing stays the same for long and that will likely go for leases as well. What could challenge the lease long-term is growth in solar loans. These are personal loans to build solar projects and are still in the development phase.

There are two reasons loans may grow as a percentage of solar-power systems in the future. First, the investment tax credit will go from 30% to 10% in 2017 -- unless it's extended -- and it will be easier for homeowners to use the credit themselves.

The second factor is that system costs are falling rapidly. If the $25,000 system referenced previously costs $10,000 in five years -- or the same $2.00 per watt that utility scale systems are built for today -- it'll give homeowners more incentive to get a loan or pay cash.

On Monday, SunPower announced a $200 million loan partnership with Admirals bank to expand its loan offerings. Loans are growing, it's just a question of what percentage of the residential solar market they'll have in the future. 

The solar market may not be dominated by loans or cash sales in the future, but it'll likely be a larger piece of the pie. To give some reference, leases are about 20% of the auto market and I wouldn't be shocked to see the industry trend in that direction long-term.

How it all fits together
So, how should you be investing in residential solar?

The market is growing rapidly, up 38% in Q1 to 232 megawatts nationally. Companies with exposure to the market like SolarCity, who installed 67 megawatts of residential solar, and SunPower, who installed 35 megawatts of U.S. residential solar are two to watch.

What's key to understand right now is how companies are differentiating themselves.

SolarCity is growing through scale, lowering costs by standardizing installations, and efficiently accessing capital markets to finance its leases. Keep in mind that SolarCity's management has explicitly stated that it wants to own projects, meaning lease is its future. SolarCity ran a 5% gross margin on systems it sold last quarter, so leases are where it adds value to shareholders.

NRG Energy is growing in the residential market, recently acquiring Roof Diagnostics Solar, who was the fifth largest installer in the country. Look for NRG to leverage its large balance sheet to provide low costs and use established relationships with customers to sell solar. If a big company is going to take a significant share of residential solar my money would be on NRG Energy.

SunPower is the only solar panel maker in this group, but it makes the most efficient panels in the industry at 21.5% and rising. That means consumers can pack more power generation on a single rooftop, lowering balance of system costs per watt. Unlike SolarCity, SunPower doesn't favor lease, offering loans and cash sales. Last quarter, it sold 24 of 35 megawatts for cash. It's expanding in leases but look for it to be more balanced, for better or worse. SunPower is also the only international player in this group, installing 108 megawatts of international residential solar last quarter. Keep in mind too that, unlike SolarCity, SunPower doesn't "own the trucks," instead working primarily with independent dealers.

RGS Energy is an independent installer that has traditionally worked with Sunrun and Clean Power Finance for leasing financing. It is moving into financing its own projects now and will sell leases, loans, or cash projects to customers. This is the smallest installer but has high potential to go along with high risk given the large competitors getting into this space.

SunPower's headquarters, lined with solar panels. Source: SunPower.

Foolish bottom line
Who wins in the residential solar market depends on how the market plays out. If leases are the dominant sales method then SolarCity is the clear leader and has the scale to hit its 1 million customer target by 2018.

If loans and cash become a bigger part of the market then I see RGS Energy and SunPower stealing share because of their flexible model. NRG Energy is a wildcard that isn't yet established enough to know how they'll fit in the market but I'd also expect them to be a big player. 

RGS Energy gets the benefit of being financing agnostic while also not being tied to a technology, like SunPower is. That's why this is an intriguing company, despite the risk of being small in size. 

Don't underestimate how technology fits into residential solar as well. SunPower's panels generate about 50% more power than a typical SolarCity installation, which uses Trina Solar, REC Solar, or another standard panel. As costs come down, efficiency will become more important.

The advantage for SolarCity, NRG Energy, RGS Energy, and others is that they can buy whatever panels are most economical. That gives flexibility to adapt as new technology comes out. 

There are a lot of moving parts in residential solar and it'll take years to figure out who the biggest winners are. I'm betting on companies with superior technology and flexibility in financing, because I don't think leases will be a majority of the market in five years. So, SunPower is my bet and RGS Energy is my dark horse.

Remember, you should take in as much information as possible to develop your own opinion. Stay tuned to see how the industry plays out because the only thing we know for sure is that the solar industry of tomorrow will look very different from the one we see today. 

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Read/Post Comments (18) | Recommend This Article (31)

Comments from our Foolish Readers

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  • Report this Comment On June 16, 2014, at 9:33 PM, bonsaibean wrote:

    Gave up trying to pick THE winner here, and looking at the solar ETFs (TAN for one) instead. I think certainly the industry will do very well as a whole.

  • Report this Comment On June 16, 2014, at 9:34 PM, ronwiserinvestor wrote:

    Yes, high priced solar systems did drive the success of solar leases but those high prices no longer exist in today's market. A high quality grid tie solar system can be installed for less than $11,000 after applying the 30% federal tax credit today, not the $25,000 mentioned in this article.

    This much lower pricing coupled with $0 down solar loans with tax deductible interest that is now available to dealers large and small will be the down fall of companies that offer leases and PPAs. Unlike a lease or PPA, $0 down solar loans allow the consumer to own their low maintenance solar system while retaining the 30% federal tax credit and any applicable cash rebate

    Another high performance PV technology that is currently available is Hyper X Solar's N-Type, thin film passivated, tunneling junction architecture that provides higher efficiency, a smaller footprint and a much lower cost which makes Hyper X solar's price/performance ratio hard to compete against when compared to conventional solar panels.

    Hyper X solar offers a better PTC to STC ratio "Real World" performance according to the California Energy Commission's performance rating listings than over 100 of SunPower's solar panel models.

    Hyper X solar also offers an industry leading -0.27%/degree C temperature coefficient rating for better performance in hot/warm climates and best of all Hyper X solar systems are priced thousands less and even tens of thousands less on larger systems than a SunPower solar system.

    In my opinion, much lower pricing on higher performance technology coupled with $0 down solar loans with tax deductible interest will win this market in the end.

  • Report this Comment On June 17, 2014, at 9:39 AM, TMFFlushDraw wrote:

    Well, SolarCity just acquired a "high efficiency" module manufacturer (18.4%) so that may answer part of the debate. Efficiency is definitely winning.

    Travis Hoium

  • Report this Comment On June 17, 2014, at 12:47 PM, rayfrombristol wrote:

    "Clean energy is one of the world’s fastest growing industries, and already makes up 20 percent of the world’s energy supply."

  • Report this Comment On June 17, 2014, at 2:37 PM, axz055 wrote:

    I would question how much money there is to be made by investors in the long-term in residential solar. In a few years, as production ramps up and efficiencies begin to approach theoretical limits (29% for silicon), the panels will start to become commoditized.

    The barrier to entry for installation doesn't sound like it's any higher than a general contractor. If you want to install a new furnace, you don't call Trane, you call a local contractor. Why should putting solar panels on your roof be any different?

  • Report this Comment On June 23, 2014, at 2:53 PM, RavenManiac1968 wrote:

    I bought 45 sunpower panels for my house in 2011. I expect to breakeven in 2018, that is a 7 year payback excluding the residual value of the panels. I love the panels and I'm very glad I bought them. The governement should definately continue the subsidy.

    Does anyone know why home builders don't incldued them as an option? Seems like more people would buy them if they could get them as part of an initial mortgage.

  • Report this Comment On June 23, 2014, at 6:38 PM, ROCKJCP wrote:

    Until states like Nevada reverse the meter and pay residents for excess power residential use will be speculative. Many are calling for ellimation of any and all solar/wind subsidees and that must be facored in to an investment.

  • Report this Comment On June 23, 2014, at 8:14 PM, vvicorka wrote:

    $11K is still too much. How many years should it pass to be paid off by saving on the electricity bill....

  • Report this Comment On June 23, 2014, at 8:37 PM, michaelessein wrote:

    i hope it does well!

  • Report this Comment On June 23, 2014, at 9:49 PM, wvowell wrote:

    There are two important facts you are not providing information on:

    1. What does an efficiency of 25% mean? I'm assuming it means that you can get 25% of the energy that the sun is projecting on the panel. So if I have a roof that is covered 100% with solar panels-- How many BTU's or KW can I get? How much of my monthly or yearly energy is this? How consistent is this on a daily basis?

    2. The government (by the way that is us) is giving a 30% tax credit. This is not free. All of us are paying for all of you that have solar panels. The true cost includes the 30%tax credit!! What does this do the cost per KW? Without this tax credit would the industry survive?

    I'm not against Solar Panels. I'm just not sure this is a truly cost justified system. And is it really viable everywhere? I'm sure cloud cover and average temperatures in a region have a major impact on the viability of this source of energy.

    Other forms such as nuclear, natural gas, and coal are more efficient, cost effective and more viable than SOLAR.

    Let's continue developing Solar, but as competition against nuclear, natural gas, and coal.

    Let's stop our tyrannical government from forcing and controlling what we do at the expense of our freedom and liberty.

    One more comment, the idea that carbon emissions are so deadly is so wrong, not proven, and is only used to take our freedoms away.

    You "Green" lovers need to wake up!!

  • Report this Comment On June 23, 2014, at 11:12 PM, 25deltaskew wrote:

    Contrary to the previous post (and I mean no disrespect), carbon emissions are what make the planet Venus a hellish inferno, so let's not delude ourselves with ideologically-driven unscientific oil lobby talking points. The government, in the interest of society, is providing subsidies as an incentive for investment in solar of several viable solutions to the carbon emission problem. How that can be equated to the government "taking is away your freedom", reeks of radical right wing John Birch Society libertarianism, which I personally find reprehensible.

    An industry in such an early stage requires vast sums of investment. The risk has been so high that few private investors are willing to fork over the capital to spend on R&D. Hence, the NEED for government subsidy as the government is the only entity capable of investing this enormous sum which will benefit our country in the long run. The technology "subsidized" by the government to land a man on the moon took decades to reach the average person, but without the initial investment by government, would never have.

    Solar produces just 1% of energy production which leaves open a huge opportunity to take market share from traditional energy producers. Yes, it's in the early stages, but so was computer software in the 1980's, so were automobiles in the 1910s, or the internet in the 1990s. Solar is here to stay and it has barely scratched the surface. Just imagine the cash flow from installing solar panels on every building where it's viable. The potential is enormous AND you're helping to solve the most important problem of this century, that of climate change.

    Solar will reach cost parity with fossil fuel within 10 years which will make it that much more competitive compared to fossil fuels. This is a no-brainer. Solar energy is going to be so cheap in less than 20-30 years that you'll be able to turn any surface facing the sun into a mini power plant with efficiencies high enough to take entire neighborhoods off the grid. Fossil fuels seem so 19th century by comparison.

    I have about 3% of my portfolio in nothing but solar stocks.

  • Report this Comment On June 24, 2014, at 4:25 AM, kamsmart wrote:

    25deltaskew, appreciate your response. Good decision to have 3% of your portfolio in solar stocks! I have myself about 1.75% of my portfolio in solar energy sector, and looking into increasing my allocation!

  • Report this Comment On June 24, 2014, at 7:25 AM, wvowell wrote:

    "25deltaskew" you ignore my questions. Which is typical of liberals.

    My two questions/points are valid and need to be considered for the long term viability of solar power.

    The great inventions like the automobile were done with private investment not forced government investment.

    Some government investment can be beneficial but when it is designed to FORCE us to eliminate one thing in order to FORCE us to do another it is call tyranny. And that is what is occurring.

    And there is NO credible evidence that so called "green house" gases are destroying our environment.

  • Report this Comment On June 24, 2014, at 10:23 AM, Charlotte49er wrote:

    Buy a whole lot of TAN and just enjoy the ride!

  • Report this Comment On June 24, 2014, at 10:36 AM, TMFFlushDraw wrote:


    I'm not going to get into the climate change debate in this comment but here's an article I recently did on the topic.

    As for the cost of solar, I will add more. The cost of solar energy on a kW-hr basis (which is how we should be looking at it) depends on a lot of things like solar intensity where you live, how your home is laid out, etc. and the comparison to your grid costs are important. So, in places like Hawaii where there's lots of sun and very high grid costs (burning imported oil for electricity) solar is actually so economical and growing so fast the grid is being stretched just to handle it.

    On a utility scale, FSLR and SPWR have signed power purchase agreements to sell power for 5-10 cents per kW-hr depending on the project (stats in the article linked below). SPWR is building a 70 MW project in Chile with zero government subsidy and selling it into the grid at market prices.

    There's also trajectory to keep in mind. In 3 years, the cost of residential solar systems nationwide have dropped 34% and utility scale systems have fallen 59% (per GTM Research). So, unlike natural gas, oil, coal, nuclear the cost of solar is falling rapidly and the trend will continue.

    The article below spells out some incredible stats about the industry that you might find interesting.

    From a subsidy side, countries around the world are rapidly slashing subsidies like tax credits and feed-in tariffs to solar energy because the costs have fallen so fast. Germany's grid was inundated with solar far faster than expected because solar is now less costly than buying electricity from the grid. The feed-in tariff rate for solar is now less than the grid.

    Governments have also supported the expansion of domestic energy sources throughout history and oil & gas still receive far more in subsidies than solar on an absolute basis. Most in the solar industry are OK with subsidies being eliminated for all energy sources. A level playing field would be good for everyone, including solar. But that won't happen either.

    Hope that helps,

    Travis Hoium

  • Report this Comment On June 24, 2014, at 10:44 AM, TMFFlushDraw wrote:


    I completely disagree. Keep in mind that TAN owns a large basket of solar stocks, so while you're get exposure to the winners you're also guaranteed to own the losers.

    Large holdings have included LDK Solar, Suntech Power, and Q-Cells, who all went bankrupt.

    Over the last 5 years, SPWR is up 54% and TAN is down 52%.

    Not saying it will do worse than the market, just that a basket of the 4-5 best solar companies is a better strategy in my opinion. SPWR, FSLR, SCTY, and NYLD are my picks in that order.

    Travis Hoium

  • Report this Comment On June 24, 2014, at 6:24 PM, 25deltaskew wrote:


    ""25deltaskew" you ignore my questions. Which is typical of liberals."

    I addressed your questions with my opposing view of why solar IS viable long-term.


    "The great inventions like the automobile were done with private investment not forced government investment."

    Computers, internet, railroads, satellites, etc etc all had their infancy period where no commercial usage existed and the only entity capable of making huge R&D investments not to be realized for decades is/was the government. You're being intellectually dishonest in your denial of the benefits that come from government investment in areas of enormous social benefit but little commercial value for a foreseeable future.


    "Some government investment can be beneficial but when it is designed to FORCE us to eliminate one thing in order to FORCE us to do another it is call tyranny. And that is what is occurring."

    Some? You mean the hundreds of billions of dollars of investment in technology, science, universities, etc. That isn't some, that is A LOT. Is it beneficial or not? It's not a "some" kind of assessment. The internet didn't start off with "some" government investment. It was pretty much ALL government investment. You are also NOT forced to stop using traditional fuel sources. You are merely incentivized. You are free to drive you F450 pick-up truck all you want. The context in which you are using the word tyranny would also include government subsidy of education, because you know, FORCING people to be educated is tyrannical.


    "And there is NO credible evidence that so called "green house" gases are destroying our environment."

    Nobody has convince you of the science behind man-made climate change. The great thing about science is, it's true whether you believe it or not. The sad thing about this is that you have the internet in which to see the evidence for yourself.

    In its fourth assessment (AR4 2007) of the relevant scientific literature, the Intergovernmental Panel on Climate Change (IPCC) reported that scientists were more than 90% certain that most of global warming was being caused by increasing concentrations of greenhouse gases produced by human activities. In 2010 that finding was recognized by the national science academies of all major industrialized nations.

    No wonder you think solar is not viable. You are a global warming denier. Typical of a Fox News watchin' John Bircher libertarian, if you want throw around statements like, "Which is typical of liberals." :P However, I'd prefer not to address you by person out of respect, were respect given.

  • Report this Comment On June 26, 2014, at 12:42 PM, hbofbyu wrote:

    Solar cells only absorb a narrow range of wavelengths very efficiently. The energy at other wavelengths is not absorbed at all or is converted into waste heat rather than electricity. As a result, a solar cell can only convert so many photons into electricity, up to a theoretical limit of about 33.5 percent efficiency (called the Shockley-Queissner limit).

    This was big news in my neighborhood:

    If breakthroughs like this pan out you will see faster adoption and no need for tax breaks and subsidies.

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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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