Please ensure Javascript is enabled for purposes of website accessibility

Residential Solar Costs Begin to Flatline

By Travis Hoium - Aug 26, 2017 at 8:12AM

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

If the solar industry can't cut costs, it may not be able to grow into new markets across the country.

When Tesla's (TSLA 3.89%) SolarCity was independent and growing quickly, the company's business was driven by the rapidly falling cost of installing solar panels. Not only were panels themselves getting cheaper, but companies were becoming more efficient selling and installing systems, lowering labor costs along the way. 

But the last two years has seen residential solar costs flatten. And with Tesla de-emphasizing its solar business, Vivint Solar (VSLR) and Sunrun (RUN 8.66%) are the two biggest installers to watch. If current trends continue, they may struggle to lower costs in 2017 and that could limit opportunities for growth. 

A rooftop solar installation on a large roof on a sunny day.

Image source: Getty Images.

Where are the cost reductions? 

Below is a chart of the total cost to build and install solar systems for Vivint Solar. You can see that costs have fluctuated over the last five quarters, but have generally been between $2.85 and $3.00 per watt. Notice that installations costs have gone down, but sales and marketing and administrative costs have gone up as sales to early adopters have dried up. 

Vivint Solar's cost per watt over time, starting at $3.21 in Q1 2015 and falling to $2.88 in Q2 2017.

Image source: Vivint Solar.

A similar trend shows up at Sunrun. Overall, its costs have been flat over the last four quarters and overall installation costs are up as well. 

Sunrun's cost per watt over time.

Image source: Sunrun.

The fact that solar costs haven't come down considerably in the past year is notable because solar module costs dropped by about one-third between the second quarter of 2016 and the end of 2016 (or $0.15 per watt). That alone should have helped reduce costs, but it didn't. A major reason is that residential solar installers are spending more than ever to acquire customers. 

Why cutting costs is such a big deal

The fact that solar costs aren't coming down rapidly doesn't bode well for future growth of the national installers. They need costs to decline to move into markets that aren't as sunny or electricity costs aren't as high as places like Hawaii, California, or Massachusetts. 

In particular, states like Florida and Texas should be growth markets, but they have much lower utility electricity costs of 10.5 cents/kWh and 8.7 cents/kWh, which is much lower than a state like California at 15.4 cents/kWh. High installation costs will limit the market. That makes the flat-lining costs troubling for national installers.  

Rethinking residential solar

The cost trends you see above are also indicative of a changing residential solar market for investors. Ever since the rooftop solar industry started to emerge as a viable product, it was dominated by companies with scale and low costs from the buying power scale brought, despite the fact that they were installing commodity products. But over the past two years, scale has become a hindrance. 

Local and regional installers have gained market share since early 2016 because they are no longer at a component cost disadvantage and they have a lower cost base than national companies. They don't have the overhead of sales and administrative staff, often operating a small shop with a few crews. And a small installer can sell most systems on referrals, lowering customer acquisition costs. 

Product differentiation is also something small installers are having some success with. SunPower's (SPWR 7.63%) high-efficiency solar panels are gaining market share and its model to sell through local and regional installers gives it more flexibility as market conditions change (see Nevada's solar turmoil). 

Digital sales will also need to play a bigger role, which could help lower overall installation costs. But I think it's clear that the low-hanging fruit, in terms of both cost cuts and customers wanting to go solar, has been picked. And companies are going to have to differentiate on something other than cost alone. 

Travis Hoium owns shares of SunPower. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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

Vivint Solar, Inc. Stock Quote
Vivint Solar, Inc.
Sunrun Inc. Stock Quote
Sunrun Inc.
$37.02 (8.66%) $2.95
Tesla, Inc. Stock Quote
Tesla, Inc.
$883.07 (3.89%) $33.07
SunPower Corporation Stock Quote
SunPower Corporation
$26.53 (7.63%) $1.88

*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 analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

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.