by Emma Foehringer Merchant
January 27, 2020

In the solar industry, emerging states have become the ones to watch. The industry's historic focus on states such as California and Massachusetts, while not entirely waning, is giving way to newer entrants in both distributed and large-scale solar. 

Emerging state markets took several of the top spots in the most recent 2019 residential solar rankings. On the utility-scale side, where the U.S. project pipeline is now larger than its ever been, Florida topped California as the biggest market for projects currently underway — only to be overtaken later in the year by Texas. 

Growing geographic diversification is a telltale sign of the maturation of the American solar industry as it rolls into a new decade. 

To be sure, the market still faces significant challenges — uncertain federal policy, the step-down of the Investment Tax Credit, and varying degrees of acceptance from investor-owned utilities, to name a few. Growth is looking more certain, but it's not guaranteed. 

In a new series for Squared, I’ll examine conditions in the most exciting emerging state markets.

We'll kick off with Texas, where the utility-scale market is set for a huge boom over the next four years.

The next step from California

California is where the large-scale solar market grew up and blossomed in the U.S., and Texas shares several of the key attributes that drove California's success.

The Lone Star State doesn't have the same aggressive policymaking approach to energy and climate change, but even more than California, it benefits from abundant land as well as excellent solar resources. Add in Texas' dynamic power market, which fosters competition, and the conditions are ripe for a solar surge.

For many developers looking for the next big market, Texas is an obvious next step from California.

And it's not just about big projects; Texas’ distributed market is growing as well, ranking among the top five state markets in Q3 and anticipated to have seen a record 2019 when the final numbers are in.

“Because Texas is such a large electricity market, solar is still a small absolute component of the grid," said Charlie Hemmeline, executive director at the Texas Solar Power Association, an industry group.

"We’re at just over 1 percent of electricity generated in Texas last year,” Hemmeline said. “So [solar is] still emerging, but a lot has happened, and we’ve had a lot of growth in the last year."

FOMO on rooftop solar

Looking at the fundamentals of Texas’ residential electricity market, solar isn’t a guaranteed winner. The state has some of the lowest power prices in the country, coming in at about $0.12 per kilowatt-hour (compared to upward of $0.19 in California), and it has no statewide net-metering policy.   

Historically, low retail power prices have been the market's main barrier, said Kyle Frazier, local solar sales director at Austin-based Freedom Solar.

“If I look at the things that impede us from selling more solar, state policy is not the at the top of the list,” said Frazier.

But power prices won’t necessarily stay low forever, and Frazier said some customers are realizing the potential benefits of locking in their power prices. “While I do think it’ll get cheaper to generate energy, it’ll get more expensive to move it,” he said. 

“People are getting wiser that the fuel charge is going to be a small part of the cost of delivering a kilowatt-hour in the future. It’s going to be grid infrastructure and cybersecurity and all of these other things…that are going to start getting calculated into cost.” 

“Even though it’s maybe a breakeven for them today, they know two or three years from now, as power [prices] continue to go up, they’ll come out ahead. It is a financial motivator,” he added. 

Retail renewable energy providers, which are common in Texas' deregulated market, are increasingly offering virtual net metering with their solar products. Hemmeline sees a future when those players can connect customer's peak production during the day to wholesale value; that may mean bidding into the market or attaching value to demand reduction.

Huge sales growth between August and October last year was linked to "fear of missing out," Frazier said, as customers looked to snap up federal and state incentives before they expire or run out. 

Freedom Solar installed about double its average monthly capacity during those months, he said. A year after opening its satellite Houston office, the company is moving to a larger facility and hiring 15 more employees in early 2020.

Public safety power shutoffs in California also got customers talking. Though Frazier rejects any likelihood of large, utility-led power shutoffs impacting Texans, disasters made worse by climate change might have an impact.

“Texas is very susceptible to natural disasters,” said Frazier. “People were talking about it — in fact, we were.” 

Wood Mackenzie forecasts Texas' residential installations will continue creeping up through the phase-down of the ITC, hitting 139 megawatts in 2021 due to demand pull-in, before a one-year lull in 2022 as the ITC level drops to 10 percent. Analysts expect the market to rebalance to a growth state in 2023. 

Big solar moving onto wind's turf in Texas

By WoodMac’s tracking, Texas now ranks as the nation's top utility-scale market, with 14 gigawatts slated for installation in the next four years. 

Solar developers have jammed the interconnection queue for the Electric Reliability Council of Texas, Texas’ grid manager. In ERCOT's December 2019 interconnection report, solar accounts for 67.8 gigawatts out of 111.7 gigawatts of proposed generation capacity. 

Those numbers aren’t a final indicator of how much solar will get installed — among more projects that are further along on the development timeline, solar accounts for just 5.5 gigawatts, while wind accounts for 7.8 gigawatts. But it underscores the surging interest from solar developers in the state.  

Among renewables, wind has long been the traditional winner in Texas. Because of the the state’s energy-only, deregulated wholesale market, the reason is simple: economics.

“Texas is the most liquid sort of basic wholesale market that we have in the country,” said Colin Smith, a senior solar analyst at WoodMac. “Wind became cheap first.” 

That's led to nearly 24 gigawatts of wind and just 2.2 gigawatts of solar installed by the end of 2019, according to ERCOT. Nearly 20 percent of ERCOT's 2019 power came from wind. But that trend is shifting, according to Smith.

“You can only build so much wind before it will start cannibalizing its own demand and...causing congestion issues,” said Smith. “We’ve seen [that] in Texas.” 

U.S. utility fixed-tilt prices in Q3 2019 were 13 percent lower than a year prior, reaching historic lows, WoodMac says. That’s left an opening for solar, especially as technology prices have dropped. 

“Nowadays, we’re clearly in an economically driven market for utility-scale solar,” said Sean Kiernan, senior vice president at 8minute Solar Energy, which announced its first Texas deal last year.

Solar production aligns more closely with demand profiles than wind does in Texas, producing more during the day, while wind is more blustery in the mornings and at night. Peak pricing at $9,000 per megawatt-hour this summer affirmed that there’s money to be made for generators that can produce when demand is high. 

Many of the country's leading solar developers have taken notice. Cypress Creek Renewables, 8minute Solar Energy, Apex Clean Energy, Recurrent Energy and Intersect Power all announced high-profile deals in Texas in 2019. 

“We believe pretty wholeheartedly that deep, liquid power markets, like the ones in ERCOT, are really attractive for solar,” said Sheldon Kimber, CEO at California-based Intersect Power.

Kimber, a founder at Recurrent Energy, started Intersect Power in 2016, bringing some of his old team aboard. Intersect’s 3-gigawatt pipeline is split roughly evenly between California and Texas — markets where huge scale is a viable option for solar projects.

“We may branch out into MISO, PJM, some of these other emerging markets,” Kimber said. “But for now, we focus on where the sun is good, the land is available and the power markets are accessible.” 

Those same attributes are also appealing to corporate and industrial customers. With 2.1 gigawatts of capacity, Texas saw the most corporate solar deals of any state in 2019. Hemmeline points to high-profile companies like McDonald's, Target and Honda as indicators of the trend.

Even merchant solar projects — which can be a tricky proposition because developers have to carry all the risk — are cropping up in Texas. 

Some of those trends will be more sustained than others, but Hemmeline said as the state adds more solar, the resource continues to demonstrate its importance on the grid.

ERCOT has a goal of 13.75 percent for its reserve margin, the amount of electricity generators can produce above what’s immediately needed. When power prices spiked this summer, that margin dropped to about 9 percent. The grid operator forecasts just under 11 percent of cushion this summer. But with solar additions, Hemmeline said that margin should jump to more than 18 percent by summer 2021.  

“Solar has really evolved from a nice-to-have…to being, in aggregate, a positive contribution to the state as a whole in terms of reliability,” he said.