https://www.bloomberg.com/view/articles/2018-06-15/bitcoin-greater-fools-and-the-big-short
California Puts Solar on the Roof and Up For Grabs
A mandate may not be the guaranteed boon to established companies investors think.
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If we could somehow capture all the energy expended on Twitter when California approved new rooftop solar standards, we’d solve our climate problems immediately.
The perpetual emotion machine has cranked up in response to the California Energy Commission passing a new building code that will, among other things, require most low-rise residential buildings constructed after 2019 to have built-in solar-power systems. Cue rows about whether this is cost-effective versus other climate-friendly measures; will swamp wholesale power markets; makes California’s eye-watering property pricier still; and other sore points.
They’re valid debates. Assuming this is a done deal, though, one obvious question is: Who profits? As my colleagues at Bloomberg New Energy Finance pointed out in a report published Friday, the stock market, as usual, thinks it has the drop on that:
Sun's Up
Solar stocks, especially those of the big residential-focused companies like Sunrun and Vivint, surged on news of the new California mandate
Source: Bloomberg
Large residential solar companies such as Sunrun Inc. look like obvious winners here. BNEF estimates the mandate could boost residential solar deployment in California in 2020 by 200 to 300 megawatts, or 23 to 34 percent — on top of a market already growing at more than 9 percent:
Energy Boost
California's new mandate provides an added boost to a residential solar market projected to grow quickly anyway
Source: Bloomberg New Energy Finance
Note: Mandate uplift as per upper end of BNEF's estimate of the impact of the new regulation. Data after 2016 are projections.
Builders might partner with established residential solar firms, effectively outsourcing the mandate to them. A homebuyer might pay the construction firm for the house and simultaneously contract with the solar partner for services such as long-term power-purchase agreements, maintenance and equipment guarantees. Financing could be done either through existing loan or lease products or, if preferable, rolled into the mortgage.
This seems to hold out the prospect of all-in unit costs for residential solar falling dramatically. As it stands, more than two-thirds of the cost of a typical rooftop system in California relates not to equipment but to such things as marketing, permitting and installation:
Electric Charge
The majority of the cost of installing household solar systems relates to labor and soft costs, not the hardware
Source: Bloomberg New Energy Finance
Note: Estimated costs for a residential fixed system in California.
Boosting installations should improve scale economies further, but it’s too soon to say it will automatically cut costs significantly. For example, customer acquisition costs — the bane of the solar-leasing business model — won’t just disappear. Instead, the construction firm will be the delivery channel for this class of customer and may well want to be compensated for that. Construction firms are old hands at squeezing sub-contractors; which makes sense given how much of the home-buying decision rests on weighing the simple math of price per square foot.
Indeed, the wider implication of the California mandate is that it accelerates an existing trend: commodification.
Solar panels, particularly those fixed to the roof of a house, aren’t exactly the stuff of the Jetsons. While advances in efficiency are still being made, today’s good-enough panels compete mostly on price — hence, President Donald Trump slapping tariffs on foreign-made ones.
Having panels mandated into the fabric of new homes makes them even more commonplace. That’s good for advocates of distributed renewable power, but perhaps more ambiguous if your company centers largely on designing and financing retro-fitted systems and handling tedious stuff like permitting.
This doesn’t mean the existing solar firms won't benefit from California’s mandate (or those of any other states that might follow). But it isn’t necessarily the lock last week’s big stock gains imply.
Rather, it throws a spotlight on an existing aspect of the distributed solar boom; namely, that the value lies less in the hardware and increasingly in the services, both current and potential, that come with it. These include relatively straightforward things such as long-term maintenance and guarantees, with the latter likely to be especially important as batteries are integrated into home systems. But they also could encompass such things as managing residential energy flows to optimize pricing; integrating electric vehicles; and even pooling assets in community-wide networks.
New value propositions are needed, given distributed solar power is depressing wholesale power prices during the day in California already. This erodes the incremental value of extra power from new installations under the current pricing structure, pushing more electrons onto a glutted mid-afternoon market.
New models are also needed because, for the majority of the new-home buying population, panels just aren’t as sexy as granite countertops. Savings on monthly power bills are fine as far as they go. But construction firms will likely struggle to build a compelling proposition around them for most of their target customers.
Bundling energy services in with more compelling mod-cons such as Wi-Fi, security and other “smart home” stuff offers another potential model. But it’s unclear, for now, how much value homebuyers would place on such accoutrements and who is best placed to sell them. Building developers? Solar firms? Big Tech?
California’s new mandate tees up a huge experiment in brands and services potentially picking up the slack as residential solar’s commodification accelerates. It’s far from clear who will win.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
