Over the last few years I've had a chance to interview a number of executives from the solar industry ranging from the biggest companies to the smallest start-ups you've never heard of. Each CEO or executive had their own view of how the solar industry would play out and how their company would grow in the future and nearly every prediction turned out to be wrong.

Some of the biggest strategic shifts have come from residential solar installers where companies like Clean Power Finance and Sunrun railed on SolarCity (NASDAQ:SCTY) for "owning the trucks" and SunPower (NASDAQ:SPWR) for having panels that were "too expensive".  

But Sunrun recently bought installer REC Solar's residential solar unit so it could "own  the trucks" and today SolarCity bought Silevo, a high efficiency solar panel manufacturer. Like it or not, vertical integration is taking place in residential solar and this is just the tip of the iceberg.

Spwr Residential Close Up

A SunPower residential solar system. Source: SunPower.

Why companies are going vertical
The residential solar market is really in an early phase of its development and is taking an analogous path to what utility scale solar did a few years ago. That's when solar panel manufacturers SunPower and First Solar (NASDAQ:FSLR) bought utility scale project development companies to create captive demand for their modules.

Residential solar is essentially playing out the same way but this time financiers (Sunrun, SolarCity, and Clean Power Finance) are coming from a position of strength and are the acquiring companies.

Scty

Community solar installations like this one from SolarCity will also play a large role in future demand. Source: SolarCity.

This allows them to ensure supply, predict costs, and in the case of Sunrun ensure there's demand for its financing.

The efficiency gap
Another notable takeaway from recent developments is that efficiency is becoming more important in residential solar, something companies have denied in the past. As the cost of panels have come down the balance of the system's cost is a larger percentage of each installation. To reduce costs on a per kW-hr basis, companies are buying panels that get more energy out of each square inch, putting a premium on efficiency.

That and having captive supply drove SolarCity's acquisition of Silevo and it has driven SunPower's increasing profitability over the last two years. Look for companies with high efficiency technology to be both in high demand and acquisition targets over the next few years. Even companies with little production history, like Silevo, will have a lot of value.

Vertical integration is winning
Soon, most solar companies you see will do everything from making panels to financing solar installations and that's not a bad thing for the solar industry. It will help lower costs and companies like SolarCity and SunPower can continue to push efficiency higher while Chinese manufacturers that make commodity panels fall behind.

Now if First Solar can get its TetraSun acquisition up and running we could have three solar powerhouses competing for the residential solar space, an area with huge growth potential for all involved.

Travis Hoium manages an account that owns shares of SunPower and is personally long shares and options of SunPower. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.