Residential solar has seen brighter days.
As detailed in the most recent U.S. Solar Market Insight report, national residential PV installations fell both year-over-year (17 percent) and quarter-over-quarter (11 percent) for the first time since GTM Research began tracking the market on a quarterly basis in 2010. That’s a big deal.
When one takes a closer look at the data, it’s clear that much of this downturn can be pegged to the fortunes of California, which is still the largest state market for residential PV. But the state’s standing is diminishing.
In Q1, California accounted for its smallest share of the national market at 35 percent -- down from 42 percent in Q1 2016 -- while falling over 30 percent year-over-year.
And though California is not in danger of losing its position as the largest state market for residential solar, the downturn in the national market remains inextricably linked to the fate of California. So why is the state experiencing weakness, and what can we learn about what’s happening on the national level?
Policy and the weather explain some, but not all, of California’s weak Q1 performance
Many folks have pointed to the evolving regulatory and policy environment in California (e.g., NEM 2.0) as the reason behind the downturn in Q1, as both SDG&E and PG&E have transitioned to NEM 2.0 and SCE is transitioning in July. But while NEM 2.0 and the corresponding shift to residential time-of-use rates has complicated the sales pitch to customers, conversations with installers suggest that the actual impact on rooftop economics is minimal.
Additionally, this explanation would be more compelling if it was only PG&E that experienced contraction in Q1 -- being the utility’s first full quarter in NEM 2.0 -- but PG&E has been the most resilient investor-owned utility in California, falling less compared to SDG&E and SCE both quarter-over-quarter and year-over-year.
If regulatory and policy constraints can’t paint a full picture of what’s happening in California, California’s weak Q1 can be partially explained by an unseasonably rainy January and February that undeniably resulted in the loss of build time across the state.
However, according to early permit data from OhmHome Solar Index, permits pulled in April were down to January levels. And while a down month for permits doesn’t necessarily negate the weather issue, permits have been trailing since Q1 2016, suggesting an underlying weakness unrelated to cyclical or seasonal issues.
Weather- and policy-related challenges, though material, don’t appear to fully answer the question of why California has experienced weakness as of late.
A look at the fortunes of top national installers paints a clearer picture of what is happening in California and, consequently, in the national market.
Sustainable growth of the Big Three paints a clearer picture
Though less exposed to the national installers than other major state markets, the top three solar players still account for a significant share of the market in California. And their efforts to prioritize profitability and pull back in less economically attractive markets has been noticeable.
According to GTM Research's U.S. PV Leaderboard, the top three national installers have, in aggregate, accounted for a third of the state’s installations, as recently as Q1 2016. But as these players make a concerted effort to shift to a more sustainable growth strategy, their collective installations and overall market share have either declined or remained flat.
In California, SolarCity’s installation decline has been the most noticeable as the company has been more aggressively pursuing product diversification toward cash and loan sales. In addition, the share of third-party ownership has dropped from nearly 50 percent in Q1 2016 to less than 35 percent in Q1 2017.
Installers across the competitive landscape are facing issues of market saturation and customer fatigue, but national installers appear to be the most exposed to customer acquisition challenges, as low-cost sales channels (i.e., referrals) are difficult, if not impossible, to replicate at scale.
And while the long tail’s overall installations have fallen year-over-year, the quarterly rate of decline has been much less severe than in the case of the top three. The market is not without its structural challenges -- including the increasing difficulties of customer acquisition -- but much of the state’s recent downturn can be pegged to the performance of national players.
The market will rebound, but slowly
Looking forward to the rest of 2017, annual installations in California are expected to fall for the first time ever, while Northeast states are expected to be generally flat. GTM Research forecasts approximately 2 percent growth for the national residential solar market in 2017, which is down considerably from 20 percent annual growth in 2016.
Across the U.S., installers need to create demand for rooftop solar beyond the early adopters that have driven the market to date, whether through new customer demographics or expanding operations into emerging geographies that have a higher relative portion of early adopter customers.
For example, Utah, South Carolina and Texas all saw eye-popping installation growth in 2016, which is expected to continue in 2017. And as of last week, Nevada, which restored net metering, may help to partially offset major market decline going forward.
But California’s impact on the national market cannot be understated. Even at its lowest share of the market, the state accounts for over a third of national installations. What happens in California resonates throughout the country.
With other major markets just as susceptible to national installers pulling back in unprofitable regions and devoting more resources to emerging geographies, gone are the days of explosive double-digit growth.
Welcome to the era of sub-15 percent annual growth. This is the new normal for residential solar.
Austin Perea is a solar market analyst at GTM Research.
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