Image source: Getty Images.

The battle for customers in the residential solar industry has gotten hot in 2016, with No. 1 player SolarCity (NASDAQ:SCTY.DL) and No. 2 player Vivint Solar (NYSE:VSLR) struggling to hold off smaller competitors. Loans have started to compete with leases in the market, efficiency and energy management are becoming more valuable, and both companies have dealt with offers to be taken over.

Combine all of these factors and you have an industry in flux. The company which can navigate the waters best should create a lot of value for shareholders, and right now Vivint Solar looks to be on the right path.

Coming back from the abyss

Vivint Solar's 116% increase in revenue to $34.9 million and profit of $12.4 million -- a loss of $0.49 per share after pulling out one-time benefits -- are worth noting. But more important for investors to watch are cost, installation, and booking trends.

When Vivint Solar agreed to be bought out by SunEdison in July 2015, its business started moving backward almost immediately. Here is a look at installations by quarter:

Image source: Vivint Solar.

And here is a look at cost per watt:

Image source: Vivint Solar.

You can see that both hit a low in the second quarter of 2015 and then got steadily worse over the next three quarters. And that's why the turnaround in Q2 2016 is impressive. The company is back to executing its core business and has gotten over the SunEdison hangover.

The question SolarCity investors will be asking is whether the No. 1 residential solar installer in the country can do the same.

Are changes in residential solar going to hit the big installers?

The broad question facing Vivint Solar is: How will the residential solar industry change in the next few years?

According to GTM Research, smaller, regional solar installers are gaining market share from companies like Vivint Solar and SolarCity in 2016. They have a low cost structure without the national infrastructure of Vivint and SolarCity, allowing them to be nimble.

One area in which regional installers have led the market is moving to loans rather than the leases or power purchase agreements that dominate both Vivint Solar and SolarCity's installations. Loans also make the cost of going solar lower for customers overall, at a time when both SolarCity and Vivint Solar are raising prices for the energy they sell to customers. Long-term, this decision to raise prices works against the falling costs of installing solar, and puts both companies up against smaller installers which are lowering costs.

Vivint Solar is starting to roll out its loan product and hopes to have it in most markets by the end of the third quarter; SolarCity launched a loan product at the beginning of the second quarter. So keep an eye on how margins and installations trend, now that both are competing with regional installers on a more level playing field.

The good and bad of residential solar

There's no question that residential solar is changing, and it's still uncertain how those changes will help or hurt major installers like Vivint Solar and SolarCity. For now, Vivint Solar is back to lowering costs and at least keeping installations flat for the quarter. The key for the second half of the year is seeing traction in loan and cash sales, which could help cash flow and make the business more stable long-term. But competitors are coming, and the battle for customers in residential solar isn't getting any easier.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.