While 2016 is expected to eclipse the 10-gigawatt annual mark for the first time ever, and by a wide margin, three trends are expected to shape the near-term U.S. solar market outlook. Looking ahead to 2017, each of these trends raises challenging questions that will shape to the extent to which utility, non-residential, and residential solar will grow (or fall) over the next few years.
Despite dirt-cheap PPA pricing, the utility PV segment is struggling to reboot procurement
Despite PPA pricing consistently ranging between $35 and $60 per megawatt-hour, the uptick in new utility offtakers has only partly countered the demand rollback from utilities that over-procured in the past couple of years. Most notably, California’s investor-owned utilities have already procured enough renewables to meet their RPS obligations through the end of this decade.
In turn, new development has increasingly focused on distinct sub-segments, for example, utilities with viable contracts offered via the Public Utility Regulatory Policies Act (PURPA). Another segment to watch is retail customers seeking offsite wholesale PPAs. Corporate customers have already procured more than 1.5 gigawatts (DC) of offsite wholesale solar for post-2016 installation dates. And in California, community-choice aggregation is gaining momentum, with an addressable market of more than 3 gigawatts (DC) through 2020 based on current and announced CCA programs.
Commercial solar’s still struggling to scale onsite development, so demand is pivoting to offsite solutions
FIGURE: Share of Annual Commercial Solar Installations — Onsite vs. Offsite*
*Offsite includes community solar, virtual NEM, and offsite wholesale projects. Since offsite wholesale projects sell power directly into a wholesale electricity market, or to a utility and which then resells it via a green tariff, the percentages calculated in this figure include installations classified as utility PV.
As mentioned, large corporate customers have ramped up procurement of offsite wholesale solar projects, which are currently accounted for in the utility PV segment. This demand has largely come from Fortune 500 customers with large industrial loads or aggressive, near-term renewable energy procurement targets. By year’s end, GTM Research expects more than 800 megawatts (DC) of offsite wholesale solar to come on-line, growing fourfold over 2015.
On top of that, investment-grade commercial and municipal customers continue to serve as anchor subscribers to most community solar installations. Altogether, community solar is expected to add more than 200 megawatts (DC) on an annual basis in 2016, growing fourfold over last year. In turn, for the first time ever, more than half of annual solar PV capacity involving non-residential customers will come from offsite projects (i.e., virtual NEM, community solar and wholesale solar).
However, onsite development is expected to resume its position as the primary driver of development, given demand pull-in for offsite wholesale PPAs prior to the federal ITC extension. In the long term, large corporate customers’ demand for solar-plus-storage versus offsite wholesale PPAs will play a critical role in shaping the breakdown between onsite and offsite development.
As customer adoption ramps up in major state markets, it’s becoming harder and costlier to scale residential solar
FIGURE: Year-Over-Year Residential PV Installation Growth Rates: CA, NY, MA and AZ
In a number of major state markets, residential solar growth rates are slowing down. The reasons behind this slowdown all center on one question: How does residential solar scale when early-adopter customers begin to deplete?
Most notably, this question is being tested in residential solar’s largest state market, California. Conversations with installers confirm that it’s becoming harder and costlier to land new leads and to convert those leads into sales. As the funnel of early-adopter leads reduces, three trends within the competitive landscape compound this market fundamentals challenge.
First, a phenomenon termed “customer fatigue” has come up as a challenge in neighborhoods where homeowners are flooded with door-to-door sales pitches. Second, demand for cash sales and loans over leases and PPAs has picked up more quickly than expected, and portions of the installer landscape are still playing catchup in serving this change in demand. Third, publicly traded residential solar companies have struggled to continue growing while simultaneously seeking to become profitable.
To be clear, GTM Research does not expect all of the above trends to be permanent problems; rather, they are signs of a segment figuring out how to grow in a maturing customer environment. Over the remainder of this decade, continued cost reductions will position nearly all states in the U.S. to move past grid parity for residential solar under current policy conditions. But scaling that demand in major and emerging state markets will not only hinge on the policy outlook (i.e., NEM and rate reform outcomes). Equally important, a reboot in growth rates will rely on evolving sales strategies that lower the cost of customer acquisition, and continued proliferation of consumer loans to serve the change in customer demand.