Residential and utility-scale solar have both become big markets in the U.S. Utilities know they can find many developers willing to build projects and provide low-cost electricity through power purchase agreements. In most of the country, homeowners can get solar on their roofs that costs less than electricity from the utility.
One market that hasn't yet taken off is commercial solar, installations on large rooftops like warehouses and department stores. Outside of a handful of big companies, it's difficult to make the economics of commercial solar work. But that may be changing with a few new solutions companies are offering today.
The roadblocks for commercial solar
Two major roadblocks keep the commercial solar industry from booming. The first is that commercial and industrial customers generally pay electricity bills with two components: a demand charge and a consumption charge. The demand charge is a fee based on the peak energy consumption during a month, even if that peak only happened for 15 minutes, and a consumption charge is based on how much electricity was used, similar to a residential electricity bill.
Residential solar systems generally offset consumption charge, but the commercial billing structure means large customers pay less per kWh. Solar can't compete if costs are too low -- unless solar is paired with storage.
The other big challenge is that commercial customers are generally higher risk than homeowners. That may sound counterintuitive, but companies go out of business, which could result in a default, and often a solar installer is dealing with both a building owner and a tenant. That makes selling solar extremely complex.
Solving a big solar roadblock
The Solar Energy Industries Association released a model commercial power purchase agreement for commercial customers earlier this year. This is the kind of model that residential installers began adopting about a decade ago, which helped increase adoption.
Developing individual contracts for each customer can be extremely costly for installers. That's one reason you see companies like SunPower (NASDAQ:SPWR) and Tesla's (NASDAQ:TSLA) SolarCity working with big companies like Target and Wal-Mart in commercial solar. One contract can cover many sites, making the legal work worthwhile. A model contract could make solar more economical for smaller businesses and building owners.
Storage could solve some commercial solar problems
If companies pair solar with energy storage, they can solve some of the demand charge issues I mentioned above. Commercial buildings in some locations have made the economics of energy storage work on a stand-alone basis, so if they're paired with solar, the economics could be even better.
SunPower is pushing hard into solar plus storage for commercial buildings and has the No. 1 market position in commercial solar to build from. Tesla, Sunrun (NASDAQ:RUN), and Vivint Solar (NYSE:VSLR) are also companies to watch given their energy storage solutions and large installation networks. This would be something of a transition for them because they all are currently more focused on residential solar than commercial customers right now.
Commercial solar could be a big market for solar companies
If the combination of solar, energy storage, and standardized contracts can increase the adoption of commercial solar systems, the potential would be enormous. According to NREL, the technical potential of medium and large building rooftop solar in the U.S. is 386 GW, or 26 times all of the solar installed in the U.S. last year. That could keep solar manufacturers and installers busy for many years to come.