GTM Research's quarterly U.S. Solar Market Insight Report is out for the first quarter of 2015, and depending on how you look at it, there are both good and bad signs for the industry. Installations fell year over year for the first time since at least 2010, and both commercial and utility-scale installations fell as well.
But 2015 is still expected to be a record year for the solar industry in the U.S. Let's dig into the numbers and what they mean for investors.
Residential solar is growing like gangbusters
One segment of the market that isn't struggling is residential solar. Installations rose 76% from a year ago to over 400 MW installed. This industry has been on a growth streak, and it has now passed commercial solar in size.
Interestingly, GTM Research expects this growth to continue into 2016 before taking a hit in 2017, when the ITC expires. However, it'll take a smaller hit than utility-scale projects, which are predicted to collapse without the ITC.
I recently talked with GTM Research vice president Shayle Kann, and he said residential systems aren't as price-sensitive as commercial and utility-scale projects, which are on razor-thin margins against grid energy. In 2017, the market may shrink back to states where solar made economic sense even a few years ago, and installers like SolarCity (NASDAQ:SCTY.DL) and althought Vivint Solar (NYSE:VSLR) may have to accept lower margins, they'll still see a big market even after their biggest tax incentive expires.
Commercial solar is struggling
The commercial solar market has a lot of potential. These are installations on large rooftops of department stores or warehouses, and they provide cheaper energy than residential solar. But commercial installations shrunk 3% from a year ago, so it's not nearly the success residential solar is right now.
According to Kann, this market is fighting against lower grid electricity rates that make it harder for solar to compete. But long term, what they're calling a technology convergence will improve the economics of commercial solar. This is what I highlighted earlier this week with energy storage, load control, and demand response working together with solar to add value for customers.
Long term, commercial solar will be a big market, but it may need a few more years for the technology convergence to reach its potential.
Utility scale solar down, but looking bright
One of the surprising numbers from the GTM Research report was that utility-scale installations fell 26% in the first quarter to 644 MW, worse than any quarter in 2014.
However, new projects added to the pipeline during the quarter totalted 1.3 GW, and that's in addition to 4 GW worth of projects that are now under construction, so the utility segment should grow from 3.9 GW installed in 2014. Look for installers like First Solar (NASDAQ: FSLR), SunPower (NASDAQ: SPWR), and SunEdison (NYSE: SUNE) to push through as many projects as they can by the end of 2016 when the investment tax credit falls from 30% to 10% for utility scale projects.
What the solar industry really needs
The decline in solar installations year over year was a bit surprising in GTM Research's report but installations can be lumpy and there are still bright spots for the future. What this report does highlight is that the solar industry needs to expand beyond California if it wants to develop a solid foundation for the future. 718 MW of 1,306 MW (55%) built in Q1 were in California, which is an incredibly high concentration for any industry.
A negative ruling relating to net metering or another policy change could have a massive impact on the industry overnight. What the solar industry needs is to be more competitive in states beyond California or it risks a quick downturn, something we've seen as policies changed for solar overseas.
I'm very bullish on solar in the U.S. but it may not be a path straight up for the industry. There will be bumps along the way and between now and 2017 it could be very bumpy.