So far, there have been two very different business models in the U.S. residential solar market. SolarCity (NASDAQ:SCTY) and Vivent have built their businesses on vertical integration, owning the sales channel, installation trucks, as well as financing. The model has been successful since they're the two largest residential solar installers in the U.S.
Most other companies, like SunPower (NASDAQ:SPWR), Sunrun, Real Goods Solar (NASDAQ: RSOL), and Clean Power Finance, stick to a specific niche in the market. In some cases, they work with each other to provide services the other doesn't offer.
What could change that is if rumors of Sunrun acquiring REC Solar, a top 5 residential solar installer, turn out to be true. For one, it would alienate other partners but it could also create the vertical integration that has led to success for SolarCity and Vivent. Let's look at what could change if Sunrun expands beyond financing.
Will the big three emerge?
If Sunrun were to buy REC Solar, it would probably also acquire other valued partners to create some national scale. If it did, the big three solar installers would be SolarCity, Vivent, and Sunrun, all offering similar products and financing and owning about 50% of the market.
SolarCity and Vivent are already proving that owning the full downstream business is gaining a significant share of the market, so it wouldn't be surprising to see others follow suit.
This would also put pressure on Real Goods Solar, soon to be called RGS Energy, SunPower, and others to change strategies mid-stream. SunPower, in particular, may have to take on capabilities it's avoided so far. SunPower primarily works with smaller dealers to sell panels and offer its lease financing. So far, that's been a fairly small business for SunPower and with others taking share it may require some downstream acquisitions to garner a significant share of the market.
Stuck in the middle is a company like RGS Energy and hundreds of small installers around the country. RGS currently leans on partners like Sunrun and Clean Power Finance to supply financing and other services, like other small companies do. These small operators may not have the financial, sales, or branding muscle to compete against SolarCity, Vivent, and a potentially larger Sunrun.
Watch for big changes in residential solar
The success of SolarCity will definitely have an impact on how other companies operate and if they keep gaining share someone will have to react. I think this is a business that's ripe for consolidation and it's just a matter of who makes the move to buy up more downstream capabilities.
SunPower has the balance sheet to acquire small installers and currently doesn't have much, if any, share with the largest installers/financiers because they're seen as a competitor. Sunrun would be a good merger candidate for a large installer and could bring some of its network into the fold as well.
If one merger is announced, I think it could open the floodgates for more M&A activity in this business. Branding and scale is clearly more important than many companies thought and SolarCity's success in residential solar will become a model for companies looking to build market share.