by Stephen Lacey
May 21, 2018

America's rooftop solar market has entered a new era defined by customer ownership and local installation.

Starting in 2012, third-party leases and power-purchase agreements dominated residential solar — at one point making up nearly three-quarters of installations. As better loan products hit the market and solar costs fell, that number slid downward. Last year, third-party ownership accounted for 41 percent of all rooftop solar installed. This year, it'll likely fall to 38 percent. Customers want to own their systems.

Tesla's de-emphasis of solar was a major reason for the market change. Vivint's shift to loans also had a big role. Meanwhile, local installers are finding it easier to partner with loan providers. The result: the continued rise of the solar long tail.

Today, two-thirds of the market is dominated by regional or local installation companies, as documented in GTM Research's 2018 residential solar finance update

GTM predicted this shift back in 2016, but the trend accelerated rapidly after Tesla dismantled SolarCity's business model.

"The biggest driver to date can be pinned exactly to what Solar City or Tesla — and to a lesser extent, Vivint — are doing in the market. Both companies' installation businesses struggled a bit in 2017, and they're also both moving away from the third-party ownership model and partnering with loan providers to sell those products instead. That's the single biggest factor driving the market today," explained Allison Mond, GTM Research's residential solar finance guru.

Meanwhile, leading solar states are reaching saturation. Financing options may be diversifying, but customer acquisition remains a problem in leading markets. Residential solar deployment fell 17 percent last year, and installers are looking for new ways to find customers.

So how is all of this impacting business models?

In our extended conversation below, Mond explains what the shift away from third-party financing tells us about the health of the rooftop solar business. 

Stephen Lacey: Shifting to loans must be an interesting culture change within those larger companies.

Allison Mond: Definitely. It has taken time for salespeople to learn how to sell the loan product. It's not so difficult for some newer salespeople from other lending businesses, whether it's real estate or cars, but it's definitely been quite a transition for these companies, and I think they've struggled.

A lot of companies are struggling to acquire customers cheaply. Some are abandoning door-to-door sales. Others are focusing on community events. Most installers obviously want to grow their referral base. There was a bit of customer fatigue in some markets in the early part of 2017, and it just created a really expensive environment to operate in.

Stephen: How have you seen companies respond? 

Allison: I think different companies are responding in different ways. If you look at the top of the market, Tesla is changing both product offerings and customer-acquisition strategies. In early 2017, we know that Tesla stopped doing door-to-door sales all together. It doesn't really fit with the Tesla brand anymore.

They're trying to sell within their Tesla stores along with cars. It doesn't seem to be working. Every quarter, their installation volumes are slipping. In addition to that, Tesla is changing its business model. Instead of just trying to sell those leases and PPAs, they really want to sell loan or cash sales. They need that cash upfront as they eye profitability. Of course, they're very far away from that point.

When you look at the long tail, a lot of those companies have been investing in the last year — hiring sales and marketing managers, and they're actually starting to track customer acquisition for the first time. Maybe they had some spreadsheet, but they didn't really understand what it meant, and now they're really starting to get it under control.

Stephen: Some installers are now branching out into other home contracting services. They're thinking about operations and maintenance services as well, so there are add-ons that businesses are starting to experiment with.

Allison: Yeah, definitely. I think that's become important in the past year because so many of these companies, whether it's an installer or financier, have found it difficult to make money in the industry right now, largely because of issues with customer acquisition. They're able to expand into additional product verticals, which have a little bit higher margins — energy efficiency, home improvement, energy storage, are other new products that these companies are figuring out how to sell and how to finance.

Operations and maintenance is a really interesting one; not many loan players are offering it at the moment. I definitely believe that by the end of the year, we're going to see a couple of those companies add this to their product offering, and then every other solar lender is going to have to jump on board.

Stephen: On the residential side, independent retailers said that they want to give leading installers a run for their money, but they pulled out of the business because customer acquisition costs were high. NRG and Direct Energy being two major ones. These companies both said they would still utilize their existing relationships with retail customers to funnel leads. Has that materialized in any way?

Allison: Not really. They might be doing a bit of lead generation, but it hasn't had a real material impact. Lead generation is the hard part of residential solar. That's the part of customer acquisition that companies are struggling with. NRG Home Solar and  Direct Energy left the residential installation business for that reason.

Stephen: I'm going to make an obvious observation: This stuff is really hard. 

Allison: Yeah, residential solar, in particular, is a really hard business to be in right now. I think the products are pretty good. Consumers are able to save a good amount of money, but there's so much competition — whether as an installer or financier — it's just really hard for these companies to grow and do so profitably. Most of them are not profitable, especially the larger companies.

We've already seen the TPO market consolidate over the past couple years. Now we're seeing something similar play out in the loan space. That market is incredibly competitive. We've got a dozen or more pretty large players in this space all trying to undercut each other and gain partners just by having the lowest price possible. That's really hard, especially with interest rates rising. They're still offering solar loans at 2.99 percent. How are they making money on this? I don't know, and quite frankly, I don't think they are.

We've just heard that Spruce is no longer going to be lending or offering its PACE product in the market. I think that's just the beginning. I think we're going to see a real slowdown of growth for a lot of these companies.

Stephen: Do you think we've reached a state of maturity yet? 

Allison: For the most part, no. I think we'll have reached maturity when most companies operating within the industry are doing so profitably, and have figured out a business model that works for them.

I think this is similar to other tech industries. Many companies out of Silicon Valley...are not profitable. Solar is the same way. If you measure maturity just by the number of offerings out there, the number of companies in the space, then sure, maybe it's a mature market. If you're talking about who's actually figured it out, then I think we have a long way to go.

Most solar lenders have decent tech platforms that have to plug into other pieces in the business. But there are still a lot of lenders in the space, credit unions for instance, that are partnering with installers to offer solar loans. I keep hearing that credit unions are great because they're a little bit cheaper than some of these solar lending companies, but all of the paperwork is done by hand. It can take a couple of days, but even if it's a few hours — that's really too much.

Do installers go with a credit union who can offer lower rates or do they go with a more advanced solar lending company where there's no hassle, credit approval is instantaneous and you can really close the deal right there? That's another element of maturity.

Want to get even deeper? Read Allison's residential solar finance report.