The residential solar market is flipping in favor of cash and loan sales in 2017, after years of leases and power-purchase agreements dominating the landscape. But it’s not just the financing portion of the pie that’s evolving.
Third-party-financed home solar systems have fallen out of favor, largely driven by cheaper overall prices, the fact that countless smaller installers are now offering loans and because solar PV is proliferating in new U.S. markets, where third-party financing is unavailable. The evolution is raising opportunities and challenges for how to provide services for solar systems, and their owners, in the coming decades.
“There was an assumption installers would service every system they installed, because that was the only viable option in the early days,” said Greg Sellers, VP of residential services at SunSystem Technology.
As the long tail of solar companies grew at an impressive clip of 36 percent in 2016, and as many leading residential installers have experienced slowed growth or imploded, the issue of servicing has started to increase in prominence. Many smaller installers are laser-focused on growing their installations, which often means not wanting to take the risk of long-term liability that comes with a 20-year warranty. At the same time, some finance companies are asking installers for a higher level of servicing, but the installers also want to focus on financing, and not managing the servicing of systems.
“A ton of money has been put into selling solar more efficiently,” said Chris Doyle, CCO of Dividend Finance, which differentiated its loan and PACE products with production and service agreements that parallel the financing term. Dividend says more than half of its installer partners do less than $10 million in annual sales.
Furthermore, even when installers are available to provide maintenance and warranty services, leading financing companies have recognized this is an imperfect solution, because most installers do not maintain dedicated service departments that can respond in a timely fashion, and most residential service calls are not the result of workmanship defects.
Installers may not want to service systems themselves, but they do want strong customer referrals, which means they need customers who are happy with the speed and manner in which any issue is resolved. In many cases, the warranty from the panel manufacturer is simply not enough.
While everyone wants happy solar customers and to see the market flourish, servicing innovation has not evolved at the same pace as sales and financing innovation. Earlier this year, for example, Barry Cinnamon told GTM that maintenance is beginning to eat up a larger portion of his time and business, because for those who invested in solar 10 to 15 years ago, those systems need to be upgraded or replaced. He estimated the cost of just getting a truck and technician to someone’s house is at least $200.
Of course, outside of California and Silicon Valley in particular, where Cinnamon Solar is headquartered, the average age of a residential solar system in the U.S. is usually much younger. More than 82 percent of all U.S. PV systems operating today were installed in the past five years, according to GTM Research.
To effectively service systems from California to Missouri to North Carolina to Massachusetts, scale is needed -- as is more innovation in servicing options for customers.
Cutting costs in half by 2020
SunSystem estimates it can halve the cost of servicing a solar system, bringing it down to an average of approximately $100 per truck roll by 2020, from at least $200 today. Some of that means innovation in how systems are serviced, and some of it will stem from better technology and remote troubleshooting capabilities.
SunSystem says many of the service agreements it has with financiers require a fixed time period from when a problem is reported to when it must be fixed and reported on, such as 10 or 30 days. But for issues that aren’t affecting the system’s performance acutely, there could be some wiggle room for a service provider, like SunSystem, to plan that service call for when it’s already in the area for another job. SunSystem estimates it can cut costs by 25 to 50 percent if a service call can happen within 30 days, instead of 10, for non-urgent matters.
“Not every issue is equal in terms of its need for servicing,” said Sellers. That’s not just a platitude, but rather an observation driven by insight SunSystem has gained as it collects data on the systems it is contracted to monitor and service across every major solar market in the U.S. As data scales, it can help not only SunSystem, but also financiers and installers, to evolve warranties and service plans to be more comprehensive and give the customer more choice.
A more holistic approach could incentivize service companies or installers doing their own servicing to include extras such as proactive maintenance once they’re onsite or seasonal panel cleaning in regions where it affects performance. With more and more data being collected on the nature of solar servicing on a portfolio level, it should also allow market players like SunSystem to better define what can be addressed remotely, such as many connection issues.
Sellers said that SunSystem services an average of at least three systems per day per technician, but would like to scale that to five. He added that sub-$100 truck rolls are common in other industries such as cable and telecom. SunSystem technicians are also given an iPhone, which they use with SunSystem’s purpose-built software to complete reporting on location, rather than doing so later when they’re back in the truck or at the office. “There are huge inefficiencies if they have to go back to the office,” added Sellers.
A new service offering, akin to AAA
As with everything else in the solar industry, the journey toward a more comprehensive service plan is not linear.
Dividend, for example, is shifting from a 20-year warranty on all systems to an optional prepaid service agreement that has evolved from its previous iteration. The new service contract, which will be managed by SunSystem, will be available as part of Dividend’s Empower 2.0 loan starting in July.
The new product from Dividend is an attempt to think more comprehensively, and practically, about what works in the market. The warranty used to have a component for the roof itself, but that was incredibly tricky given the diversity of housing stock in the U.S. It also wasn’t something that seemed to be of high value to customers. The original production guarantee has evolved into a monitoring guarantee. There was also a provision that prepayment of the loan would void the warranty, but now that’s been nixed, as Dividend found the provision was more disruptive to the sale of the system compared to how many customers actually prepaid their loan.
“This is going to be like AAA,” Doyle said of Dividend’s new service offering, comparing it to the auto membership club. The new service contract is likely just the beginning, especially as solar customers think about what they want in systems as they upgrade a few decades into owning solar.
“We’re moving from powertrain to bumper-to-bumper,” said Doyle, extending the car analogy. “Our partners love selling on value-added services such as service agreement, quality of system installation and equipment technology. It’s healthy for the market.”
Getting to investment-grade
The changes in financing are feeding into the need for an evolution in solar servicing -- in all sectors of the market. But these new long-term service agreements will have repercussions for financing as well. “For us to get the proper capital market recognition, the industry needs investment-grade warranties,” said Doyle, who noted that such warranties don’t really exist in the solar market today. Doyle said he hopes servicing contractors like SunSystem can build the types of products at scale that can be considered investment-grade.
“Extended service plans provide the trifecta of value -- the homeowner through peace of mind, the finance company through enhanced asset management, and the capital markets for additional loss prevention,” said Doyle.
A long-term servicing contract backed by data from large portfolios of customers will be key to move further toward investment-grade products in the residential sector. “For many lenders, the solar system represents the lender’s primary collateral related to the loan,” said Christian Payne, executive chairman of SunSystem. The avoided cost of the electric bill is also an important component of the fundamental underwriting of a loan.
So when a system underperforms, customers are saddled with a loan payment for a system that’s not working as it should, a larger utility bill than they had anticipated, and the added cost of fixing the system if they don’t have a comprehensive service agreement. “These factors conspire ultimately to reduced credit quality and a higher likelihood of late payment or default,” said Payne.
Then, of course, there is the reality that residential solar customers will continue to become more sophisticated. Those who might have been burned by voided warranties from installers or equipment manufacturers, or just poor service experiences in the past, may be more careful in the questions they ask when they shop around a second time.
Also, a majority of residential solar customers will own their systems outright in the decades to come, which opens up another set of issues for servicing. The market could then evolve into more of a B2C marketplace, rather than the B2B market that solar servicing is today, but that is dependent on what happens in the next decade.
“The solar industry’s ability to provide robust services to people who own their system will significantly impact future growth,” said Sellers.