Residential Solar Confronts a Critical Year | Mint

Residential Solar Confronts a Critical Year

The amount rooftop solar systems can get for selling excess electricity back to the grid was reduced by California.
The amount rooftop solar systems can get for selling excess electricity back to the grid was reduced by California.

Summary

High rates and less-generous subsidies have pushed some rooftop solar companies into bankruptcy, and even survivors will have an uphill battle.

After years of fast and expensive growth, America’s residential solar companies are wilting under high interest rates and less favorable state incentives. Is it darkest before dawn for the survivors?

Sunlight Financial, a financing provider for rooftop solar systems, declared bankruptcy in October. SunPower, a rooftop solar and storage provider, in a December filing flagged the risk of defaulting on some of its debt and said there was “substantial doubt" about its ability to continue as a going concern. Last month, the company said it adopted a restructuring plan to cut operating costs, citing slower sales driven in part by interest rates. Solar micro-inverter company Enphase Energy said in a December filing that it will lay off about 10% of its workforce and stop manufacturing at certain locations to reduce operating costs. SolarEdge Technologies, another inverter provider, said last month that it would reduce its head count by 16% to “align its cost structure to current market dynamics."

High interest rates have been a double-whammy for the rooftop solar business: Not only do solar companies rely on debt to fund their installations, but customers also tend to finance their purchases. The average quoted interest rate on consumer solar loans is 6.58% so far this year, a steep climb from 2.45% in the first quarter of 2022, according to EnergySage, a marketplace that connects consumers with solar installers.

Making matters worse, California, the biggest market for home solar, last year reduced the amount that rooftop solar systems can get for selling excess electricity back to the grid. That effectively cut the value of solar export credits by about 75% on average, which means it now takes consumers 8-to-10 years to break even on a solar panel. That is about four years longer than it used to take, according to Zoë Gaston, solar analyst at Wood Mackenzie. While California’s new rules do shorten the payback period on solar-plus-storage systems, industry analysts said that market will take time to grow simply because batteries exceed many consumers’ budgets.

Conditions haven’t looked this dim for the sector in a while. Wood Mackenzie expects there to be 12% fewer U.S. residential solar installations in 2024 than 2023—the first annual contraction since 2017. BloombergNEF expects a slight uptick this year compared with 2023, but expects U.S. home solar installations to rise by just 5% a year between 2023 and 2030—a substantial slowdown from the 32% annual growth the sector saw on average between 2019 and 2022. Solar stocks are already reflecting a lot of pessimism: Installers Sunrun and Sunnova Energy have slumped about 30% over the past 12 months, while SunPower is down 77%. Solar inverter providers Enphase and SolarEdge are down 42% and 74%, respectively.

Is it time to go bargain hunting? While industrywide challenges can be a boon for survivors, the path to winner-takes-all success isn’t as obvious in this sector. Scale has indeed helped companies bring down their financing costs—for example, by enabling them to bundle loans and sell them to investors as asset-backed securities. But other costs, such as door-to-door marketing and maintaining local maintenance fleets, are by their nature local and sticky. Sunrun, the top installer by market share, saw its installation costs per watt rise 13% from 2017 to 2022. Its sales and marketing costs per watt more than doubled over that period.

Pol Lezcano, solar industry analyst at BloombergNEF, said he thinks the industry eventually needs to evolve to a market more similar to the one in Germany, where a typical residential solar system cost about $1.90 a watt in 2023, compared with $3 a watt in the U.S. In Germany, solar installers tend to be local contractors—say, electricians—that have relatively low overheads and don’t require steep marketing costs because they already have a Rolodex of local customers, Lezcano said.

Absent some dramatic casualties, though, the more likely scenario is that companies and their investors will reset their growth expectations. Installers probably need to “take a page from the oil and gas handbook" and start prioritizing cash flows instead of growth, according to Jordan Levy, equity analyst at Truist Securities. Wall Street analysts expect large installers such as Sunrun and Sunnova to burn cash well into the future, while expecting SunPower to generate moderate free cash flow this year.

Until these companies actually start delivering on those cash flows, it is difficult to see the rainbow at the end of this storm for rooftop solar.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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