Rooftop solar remains marginal in America

AMERICANS LOVE the concept of rooftop solar, according to opinion polls. Well they might. Large solar farms may be the most cost-efficient way to harvest energy from the sun, but the case for homeowners to put panels on their roofs looks compelling. Panels do not belch carbon dioxide. Electricity is generated where it is consumed, easing the strain on transmission lines and power plants. President Donald Trump may have slapped tariffs on imported solar panels earlier this year, but the average price of a residential solar-power system is less than half its level in 2010.

This combination of greenness and cheapness has allure. Paul McMaster, a homeowner in Florida, has leased solar panels from a company called Sunrun since the summer. In August Mr McMaster’s electricity bill was about $100. By October it was $15. In 2017 rooftop solar installations in America, measured by gigawatts of capacity, were nearly ten times what they were in 2010.

Nevertheless, Mr McMaster remains unusual. Home solar panels still generate less than 1% of America’s total electricity. Although nearly 2m homes now have panels on top, recent growth has been anaemic. Wood Mackenzie Power and Renewables, an energy consultancy, expects rooftop-solar installations to be flat in 2018. Installations will rise in only two of America’s biggest ten solar markets. That would still be progress, in relative terms, for in 2017 volumes sank by 15% (see chart).

Supporters of rooftop solar are well-accustomed to ups and downs. President Jimmy Carter, keen to promote alternative energy after the Arab oil embargo, installed solar panels on the White House in 1979. His successor, Ronald Reagan, removed them seven years later and gutted Mr Carter’s solar budget. Even so, today’s stuttering progress is striking. Two factors lie behind it: regulatory uncertainty and the unreliable business models of solar firms.

Start with regulation. At first sight, this seems to be solar’s friend. In December, for example, officials in California upheld a mandate to require rooftop panels on new homes from 2020, boosting demand. Generous subsidies, including a 30% federal tax credit, add to solar’s attractiveness. Under a policy called net metering, a utility has to pay a homeowner retail rates for any extra energy generated, which, as in the case of the McMasters, can substantially lower a household’s monthly bill.

Yet these subsidies are also responsible for ebbs and flows in demand. Uncertainty about how tax reform would affect solar projects weighed on growth earlier this year, says Michael Weinstein of Credit Suisse, a bank.

More generally, the rules governing the way rooftop solar is regulated are in flux. Its appeal has long varied from state to state, based on electricity rates (the higher the rate, the greater the value of rooftop solar), as well as subsidies and the availability of sunshine. This variation may become still more exaggerated. In the three months to October, 45 states and Washington, DC, considered policy and rate changes for rooftop solar, according to the NC Clean Energy Technology Centre in Raleigh, North Carolina. These included changes that would depress residential solar.

A critical question is how to price power produced at home. It used to be that electricity flowed in one direction, from utility-owned power plants to customers, who simply paid more for consuming more energy. But Mr McMaster and his shrinking electricity bill are a utility’s nightmare. Power giants shoulder fixed costs for maintaining the grid but, under net metering, earn less from customers with solar panels. So utilities say they must raise fees for customers, disproportionately hurting people without panels—which could prompt more people to use solar.

As more customers pair solar panels with batteries, they will be able to store the electricity they generate, rather than selling it back to utilities. But David Frankel of McKinsey, a consultancy, points out that most households would still connect to the grid “as a giant battery backup, essentially”. Utilities’ fixed costs would remain. And in the long term, the less overall demand there is for utilities’ electricity, the less need there is for big infrastructure investments, for which regulated utilities have historically received a rate of return guaranteed by state commissions.

If net metering is imperfect, there is little agreement on what should replace it. “Everyone is still experimenting,” says Mr Frankel. In some states, such as New York, regulators are considering new ways to value the electricity that rooftop panels generate, as part of efforts to modernise the grid. California is moving more customers to “time of use” rates, which rise with demand. That will encourage more customers to invest in batteries, so they can save their solar power to use at peak hours.

In other states, utilities have lobbied for changes that may suffocate rooftop solar. Kansas, for instance, in September approved new fees for customers with solar panels on their roofs; a utility in Montana has proposed something similar. “A lot of these debates are about trying to block competition,” argues Lynn Jurich, Sunrun’s chief executive.

Navigating this shifting landscape would be hard for the most robust business model. But the solar industry has struggled to produce profits reliably at scale. In 2014 SolarCity, chaired by Elon Musk, was America’s largest installer of home solar. It and Vivint Solar, its closest competitor, spent to expand quickly. But even as they sought dominance, success still depended on local factors, including electricity rates, sunshine, state incentives and installation fees. The cost of a home solar system can vary by up to 20%, depending on inputs such as permitting costs. America has over 18,000 local jurisdictions; permitting rules vary greatly among them.

Most important, selling solar systems is labour-intensive. Salesmen knock on doors and explain complex contracts. All together, service and other “soft” costs are nearly 70% of a home solar system’s price.

By around 2016 investors were losing patience with meagre profits and mountainous debt. That year Tesla, another of Mr Musk’s firms, bought SolarCity (prompting some Tesla shareholders to charge that Mr Musk and other directors misled investors for their own benefit). After the acquisition Mr Musk boasted, at a Hollywood film set, of solar modules made to resemble roof shingles. Yet production of these has been limited and installations of existing panels have plunged. To improve cashflow, Tesla now mostly sells panels at stores instead of leasing them door-to-door.

Vivint Solar, backed by Blackstone, a private-equity firm, has brought in a new chief executive, David Bywater. He has redirected sales staff to the most promising markets, such as California. “At the end of the day you have to be a rational economic actor,” says Mr Bywater. He is pursuing more modest but profitable growth. The market nodded approvingly for much of the year—until November 30th, when Vivint said that a vehicle controlled by Blackstone would sell 8m shares at a discount, sending the firm’s stock price plunging.

Sunrun is now America’s top installer, with about 15% of the market. Unlike Tesla, its strategy is still centred around leasing panels, and it has remained disciplined about spending, says Stephen Byrd of Morgan Stanley, a bank. Ms Jurich has tried to overcome the variability inherent in rooftop solar—software can incorporate local permitting rules, for instance, and lower design costs.

But challenges of scale and profitability remain, argues Cory Honeyman of Wood Mackenzie Power and Renewables, particularly as firms try to court customers beyond early adopters. Pressure to lower sales costs will intensify, as the deadline approaches for the expiration of the federal tax credit for residential projects in 2022.

The falling cost of batteries may be the thing that propels the industry forward. Mr McMaster is now leasing not just panels from Sunrun, but a battery as well. That helps him use solar power at night or when a power line goes out—all too often, in storm-prone Florida. Ms Jurich expects virtually all of Sunrun’s installations to include batteries in five years. “Batteries will make solar irresistible to a lot of people,” argues Mr Weinstein. Until then, expect conditions to remain variable.

Correction (December 18th 2018). This article was changed to make clear that Tesla still leases some panels. Moreover, the chart used the incorrect unit for American residential solar-panel capacity. It is MW not GWh. This has been updated. Apologies. 

This post was originally posted at https://www.economist.com/business/2018/12/22/rooftop-solar-remains-marginal-in-america.

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