One of the great growth markets of U.S. solar power is commercial solar, encompassing large roofs on top of warehouses, carports, and community solar projects. These projects have always struggled with being harder to finance than residential or utility-scale projects. They have also been fighting an uphill battle against commercial utility rate structures, which usually have a usage component and a demand component that undercuts the economics of solar power.
In 2017, the dam started to break for commercial solar in the U.S. Large companies started to install more solar and energy storage started to be included in solar packages. According to GTM Research, 2017 commercial solar installations were up 28% year over year in the U.S. to 2,147 MW while residential solar installations fell 16% to 2,227 MW. What may be surprising is that SunPower Corporation (NASDAQ:SPWR) is taking the biggest share of the market and its two biggest competitors may be sinking before our eyes.
SunPower's play in commercial solar
According to GTM Research, SunPower installed 231.2 MW of commercial solar in 2017 to lead the market. Tesla (NASDAQ:TSLA) and NRG Energy (NYSE:NRG) took second and third with 156 MW and 145.7 MW, respectively (which I'll cover in a minute).
A couple of things are interesting about SunPower's large market share in commercial solar. One is that it proves efficiency matters for commercial customers. SunPower's entire pitch is built around a high-efficiency solar panel that's able to generate more electricity over 30 or 40 years than competitors. Commercial customers seem to see the value in the product.
The other interesting takeaway is that SunPower isn't the direct installer of these projects, but rather designs a turnkey solution for installers and then sets them loose to sell into the market. SunPower still retains sales channels to large corporate customers, but it's really bringing a pre-engineered solution to the market and letting others do the leg work selling and installing solar-power systems.
These fact that commercial customers value the pre-engineered solution and see the value in higher quality products, but don't require a vertically integrated solution, could shape the future of the market. More companies are moving away from financing, selling, and manufacturing solar under one roof, splitting the business segments into distinct businesses. In commercial solar, SunPower seems to be ahead of the game.
Competitors are fading
I mentioned that Tesla and NRG Energy were second and third in market share behind SunPower, but they may not be there long. Tesla's solar installations fell 57% in the fourth quarter of 2017 to their lowest level since early in 2014, and there doesn't seem to be much investment in the company's solar business today. NRG Energy recently sold nearly all of its renewable energy business and is exiting the small-scale solar development business. In a year, it may not even make the list of commercial solar companies.
Tesla and NRG Energy are shrinking as SunPower is growing, and with the commercial solar business overall picking up steam, that could leave SunPower in a surprisingly powerful position in the market.
Is this SunPower's breakout market?
SunPower is definitely gaining traction in commercial solar, but now it needs to turn the business into a moneymaker. Gross margins in 2017 were 3.6%, 7.1%, 16.2%, and 9.9% in commercial solar from Q1 2017 to Q4 2017 at SunPower, anemic margins that aren't sustainable for the company. Management has said margins should improve, but there haven't been many gains yet.
If SunPower can generate gross margins in the mid to high teens in commercial solar, it could make the company an attractive investment. But if it's gaining market share by undercutting others on cost, that isn't a sustainable model. I like SunPower's growth in commercial solar, but want to see more pricing power, something the company hasn't been able to demonstrate yet.