It could have been the unusually wet winter, but it's more likely a combination of seasonal factors and market fundamentals that resulted in a slow start to the year for residential solar in California.
New residential solar capacity in the state fell by 22 percent from the fourth quarter of 2016 to the first quarter of 2017, according to the forthcoming Q2 2017 U.S. Solar Market Insight report from GTM Research and the Solar Energy Industries Association (SEIA).
The decline is even more pronounced on a year-over-year basis, dropping by 31 percent from 284 megawatts (DC) in the first quarter of 2016, to 196 megawatts (DC) in the first quarter of 2017
Because California makes up the lion’s share of the U.S. residential solar market (roughly 45 percent), a market contraction in the Golden State affects the industry’s performance nationwide. The slow-down isn’t limited to California, however. New York and Massachusetts also saw new residential solar capacity additions decline, both for the quarter and year-over-year.
Overall, residential solar capacity additions in the U.S. declined 11 percent from the fourth quarter of 2016 to the first quarter of 2017. Year-over-year, new residential solar capacity dropped by 17 percent nationwide — which is significant.
Installers told GTM Research analysts that California’s rainy winter slowed build-out times and triggered a quarterly downturn. But that’s not the only factor. Major residential solar installers — SolarCity and Vivint in particular — are also shifting their strategies to focus more on profit and less on rapid growth, said Austin Perea, solar market analyst at GTM Research. They’re devoting fewer resources to making sales in regions that are not as lucrative, which is true for California, as well as other mature state markets (join GTM Squared to watch the live stream for Solar Summit, where analysts delve further into the latest market research).
FIGURE: Quarterly Residential Solar Installed Capacity
As we’ve reported, the long tail of solar installers is taking revenge and regaining marketshare from the major players. But Perea said these smaller installers are not immune from the market shifts that we’re seeing take place.
“The long tail really benefits from the marketing and sales efforts of larger players; they bring awareness and consumer education to the solar pitch,” he said. “We’re hearing from installers that it’s a double-edged sword that SolarCity is pulling back, because it’s also noticeable they’re reducing marketing spend, which has an impact on how aware [the long tail’s] potential customer base is of solar.”
The rising cost of customer acquisition and customer fatigue from having their doors knocked on are issues that all installers must contend with. The lowest hanging fruit of customers have been picked, which means the industry needs to innovate in order to remain healthy.
To that end, SolarCity recently announced it’s ending its door-to-door sales practice and plans to begin selling solar through Tesla’s retail outlets. The viability of retail solar sales in stores and mall kiosks is definitely a trend to watch, said Perea. Solar software could also be a game changer, as industry stakeholders discussed this week at GTM’s Solar Software Summit. Right now, though, there are no clear cut solutions.
“Customer acquisition costs are the highest component of an installation,” said Perea. “But nobody has really cracked the code on the customer acquisition side.”
Forecast: flat or limited growth
GTM/SEIA’s residential solar forecast shows a gradual slowing of the market in the near-term as companies grapple with the acquisition cost issue and major installers reboot their business strategies. The long tail of installers will take marketshare the larger players left behind, but it’s not going to be enough to grow the market overall.
The bright spot is that solar is starting to take off in emerging state markets. New Jersey, South Carolina, Texas and Utah are seeing strong sales thanks to good market fundamentals and policy incentives. Pennsylvania and Florida, two relatively untapped solar markets, are also seeing an uptick in home solar sales, although new capacity additions number in the tens of megawatts per quarter, which is tiny from a California perspective.
“In the same way long tail of installers are not going to be able to make up for the pull back from major installers, emerging state markets are not going to entirely offset the slowdown in major state markets,” said Perea.
“If the non-cyclical issues that impacted Q1 in California continue out into the year, there is a case where we could have a flat or limited growth year on the residential side nationally,” he added.
It’s safe to say the days 70 percent annual growth in home solar are over — at least for now. But it’s important to remember that this isn’t a death knell for the residential industry, said Perea. In many ways, this shift is about ensuring long-term sustainability.
“It’s a maturing industry,” he said. “At the outset, it’s daunting not to seeing the same level of growth, and folks translate that into seeing the industry as less robust, when it’s really shifting to a more mature phase of growth.”
Plus, there is still growth out there. The Q2 2017 Solar Market Insight report found that non-residential solar capacity — which includes commercial and industrial, public and community solar — grew by 30 percent year-over-year. Minnesota’s performance was particularly strong, with 45 megawatts (DC) of community solar coming online in the first quarter of 2017, building on 48 megawatts (DC) of new community solar capacity in the fourth quarter of 2016.
This growth has been a long time coming. The promise of community solar in Minnesota was stalled for roughly two years by policy and technical issues. Now it’s a bright spot of the solar market. According to a separate recent GTM Research report, the emergence of community solar around the country is on the cusp of becoming a “mainstream driver” of overall U.S. solar market growth.