Underdogs Have Puncher's Chance to Upend SolarCity's Dominance
In the residential solar market, it seems like there's SolarCity and everyone else and with a 32% market share in the U.S. that's close to the case. But the industry is still so early in its maturity that SolarCity's dominance doesn't mean it's game over for competitors; they're just playing catchup when it comes to infrastructure and market share.
We've seen SunPower make major inroads with its dealer network, installing 44 MW of residential solar in the fourth quarter to 70 MW at SolarCity.
But there's noise quietly building among a few smaller players that are consolidating in an effort to challenge SolarCity's residential solar dominance. Let's take a look at those moves and where the market is headed.
Consolidation is the name of the game
In just the last few months, consolidation has taken place at a rapid rate in residential solar. RGS Energy bought Syndicated Solar and Mercury Energy last year and announced yesterday that it's buying Sunetric in Hawaii, which had $38 million in revenue last year.
Sunrun recently bought REC Solar's residential business and reportedly struck a partnership deal with Sungevity to finance projects.
The other big deal was NRG Energy's acquisition of Roof Diagnostics Solar, the eighth-largest installer in the country.
Given the success of SolarCity and the advantages that come with scale, it's not surprising that consolidation is taking place in residential solar.
How competitors are attacking SolarCity
What's interesting about the downstream solar space is that companies are going about making sales in different ways. SolarCity has built most of its success on the $0 down lease model and with securitization has low-cost financing. So, competitors are trying to compete with cash sales and loans.
SunPower sold 70% of its projects for cash in the fourth quarter and is offering more loan products through banking partners. RGS Energy us also building a model that doesn't care whether you lease, pay cash, or get a loan.
Right now, the leasing model is winning, but I think that will shift long term. It's easy to see why a lease is attractive if your options are a $0 down lease or paying $30,000 for a system. But as costs fall and systems are installed for closer to $10,000, it's more attractive to pay cash. Banks are also finding ways to offer loans on lower-cost systems, helped by the history the industry has already built with leasing systems.
As larger players emerge and more financing options open up, it's the cost of the system that will matter and competition will heat up.
Can smaller players win?
When it comes to solar leases, SolarCity is the dominant player and I don't see that changing long term. So, for RGS Energy, Sunrun, NRG Energy, or any other competitor to take share, they'll have to offer lower lease costs or cash sales. They may not be the high-margin business SolarCity is building with leases but going to consumers with a broad portfolio of products and financing options will be a great way to grow in solar. The next year or two will tell if consolidation and broader offerings can take market share, but I give these new, larger competitors a puncher's chance to outpace industry growth over the next five years.
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The article Underdogs Have Puncher's Chance to Upend SolarCity's Dominance originally appeared on Fool.com.Travis Hoium manages an account that owns shares of SunPower and personally owns shares of RGS Energy and SunPower and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool recommends and owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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