Please ensure Javascript is enabled for purposes of website accessibility

Commercial Installations Could Propel Solar Forward in 2016

By Travis Hoium - May 26, 2016 at 8:13AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Residential solar's massive growth days appear to be over, but commercial solar could be an even bigger opportunity.

The ZS Peak commercial solar system. Image source: SolarCity. 

As the market for residential solar in the U.S. starts to slow, installers are looking for ways to expand their markets into commercial solar, which has a number of similarities. Most commercial installations are on rooftops, just like residential solar, and as a result, some of the same companies are winning in both markets.

But commercial solar also has some structural differences that make it both difficult and a big, largely untapped opportunity in the U.S.

Commercial solar is fragmented in the U.S.

It may seem like commercial solar would be an easy market to enter in the U.S., but it's proven very difficult for some big solar companies. SolarCity (SCTY.DL) has struggled to hit its own growth targets and project timelines, and has only 14% of the market. That's followed by 7% for SunPower (SPWR -3.36%), but the top 10 installers still had just 42% market share in 2015.

Image source: GTM Research U.S. Commercial Solar Landscape 2016-2020.

The reason for this fragmentation has a lot to do with how the commercial market is structured, but that structure also creates arguably a bigger opportunity for developers than they have in residential solar.

Commercial solar is different from residential solar

The first thing to understand is that selling solar to commercial customers is very different than selling to residential customers. It may seem counterintuitive, but commercial customers generally have worse credit ratings than a homeowner, so getting a loan or getting investors to fund leases is actually harder.

Commercial customers also generally pay lower electricity rates than residential customers, have shorter contract terms, and can negotiate their own contracts with solar installers. This makes energy sales more costly and potentially less lucrative than residential solar is today.

But it also presents some interesting opportunities for companies who can offer a full suite of solutions. Commercial buildings pay lower electricity rates than retail, but they often pay demand charges based on peak energy demand in a month, even if that demand only exists for a few minutes. This can make energy storage an economical option for commercial customers. And they may take more interest in the monitoring and control options some solar companies are building into their systems to control costs further. 

SunPower's Helix system. Image source: SunPower.

Why big names will win big in commercial solar

If you look at the products SolarCity and SunPower have introduced in the last few years, two of the most important are ZS Peak and Helix, respectively. These are standardized installations on commercial rooftops and other structures that help lower the cost for installers. In theory, the same number of installers as it takes to put up a 5 kW or 8 kW solar system on a residential roof can put up 13 times that  or more. It's very difficult for small installers to create such standardization or efficiency, so the big players should win big. And that's just the beginning.

What may drive further adoption and value creation is the fact that energy storage and sophisticated energy management make a lot of sense for commercial customers. SolarCity is working with Tesla Motors' (TSLA -8.01%) Powerpack to provide backup storage and its monitoring system called DemandLogic to create multiple layers of value in commercial energy. SunPower has a similar partnership for energy storage with Stem and EnergyLink software that provides energy monitoring and management to its customers.

This suite of offerings isn't generally valuable for residential consumers because they can't monetize them in the same way commercial customers can. They're also a differentiator, which should help companies like SolarCity and SunPower take a disproportionate share in the commercial market in the future.

Commercial solar could be more than just rooftops

An extension of the solar systems on big box rooftops or industrial buildings that is generally associated with commercial solar, is a burgeoning market in off-site commercial solar. First Solar (FSLR -2.77%) is building a plant for Apple  and indirectly for Switch in Nevada, SunPower has built multiple on- and off-site systems for Apple around the world. More and more, companies are looking for a way to directly buy renewable energy even if they can't get it on their roof.

That creates a commercial market that even utility-focused companies like First Solar can play in. They're signing agreements directly with commercial offtakers or sometimes with the utility as an intermediary, expanding commercial demand for solar energy. First Solar, in particular, has shown plans to add energy storage and smarter controls to these kinds of installations.

Commercial solar could be big business in 2016

As companies find it harder to sell residential solar systems, many commercial customers are seeking out solar energy to make their operations greener. A fragmented market and multiple value creation opportunities lend themselves to larger, more integrated installers. That, in turn, should create a major tailwind for companies like SolarCity, SunPower, and First Solar in 2016 and beyond.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
FSLR
$64.63 (-2.77%) $-1.84
SunPower Corporation Stock Quote
SunPower Corporation
SPWR
$16.12 (-3.36%) $0.56
SolarCity Corporation Stock Quote
SolarCity Corporation
SCTY.DL
Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$652.58 (-8.01%) $-56.84

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.