Residential solar has been the hottest (although not the biggest) sub-market in the solar industry for at least five years now. Companies like SolarCity (NASDAQ:SCTY) have made residential solar a possibility for millions of Americans by offering easy to understand financing, and rapidly falling costs have made it affordable across the country.
But commercial solar, with panels placed on the vast expanse of apartment, warehouse, and office building rooftops, along with concepts like solar carports, are actually a bigger opportunity for the solar industry. The problem is, electricity costs for these commercial installations are often much cheaper than residential solar and differing rate structures make it harder to justify many commercial solar systems, even though they're cheaper to build than residential solar.
New products from SolarCity and now SunPower (NASDAQ:SPWR) could bring a renaissance in commercial solar. And that could lead to a big increase in profits for investors.
Commercial solar's big problem
Before I get to the new solutions SolarCity and SunPower are offering, it's important to put this importance of commercial solar into context. SunPower, which makes high efficiency solar panels, has one of the largest commercial solar businesses in the U.S., but it doesn't make any money in commercial solar.
The gross margin of 6.4% last quarter is well below residential and commercial and would leave the company with a loss if the other segments performed that poorly. Similarly, SolarCity has very low margins on the systems it sells, many of which are in the commercial segment. So, boosting margins in commercial solar would help both companies dramatically.
Answering the market need
Last year, SolarCity introduced a product called ZS Peak that it said would reduce commercial solar installation time by 50% and allow for 20% to 50% more panels on each roof. As the company grows out its commercial solar presence this should help make it more cost competitive, especially when combined with energy storage offerings.
SunPower took a step in the same direction on Monday with a new commercial system called Helix. Like SunPower's utility solar offering, Oasis, this is a fully integrated system that's essentially plug and play for installers. It even snaps together without any tools.
The cable management and power station will allow most assembly to take place in SunPower factories rather than on-site. Now, wiring a commercial solar system should be easier and lead to higher reliability.
What separates this product from SolarCity's, besides higher panel efficiency, is the energy management backbone called EnergyLink developed with EnerNOC (NASDAQ:ENOC). The EnergyLink system can allow a customer to monitor energy usage across multiple buildings, whether they have solar or not. Increasing understanding of energy consumption and generation is half the battle for solar companies trying to sell systems today.
The EnergyLink product can also be integrated with energy storage, although that's not standard, like SunPower's partner Stem offers for commercial energy storage systems. When combined with utility tariff modeling built into EnergyLink this could add another level of cost savings for commercial customers.
A big opportunity for solar developers
SolarCity doesn't break out commercial results separately from its operations, but if SunPower's results are any indication the margins in that business are thin. What both companies hope is that these new products will make commercial solar attractive for more customers and they'll be able to lower costs enough to expand margins.
In the case of SunPower, the anemic margins of commercial solar historically leave the company a huge upside if the Helix system brings in new sales and margin expansion. This is something to keep a close eye on in 2016 because it could turn a weakness into a strength and result in much higher profitability for SunPower.
Travis Hoium owns shares of SunPower. The Motley Fool owns shares of and recommends EnerNOC and 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.