Blue Skies Ahead For The U.S. Residential Solar PV Market

by: Livio Filice


U.S. Residential Solar PV Market is breaking records.

Third Party Ownership Leasing Program is changing solar.

Companies that may benefit from the industries growth.

2013 was another strong year for the U.S. Residential Solar PV market. A Record number of installations, lower system costs and innovative financing models were the main factors for the ongoing growth in the industry. This has been reflected in the shares of solar module manufacturers such as Canadian Solar Inc. (NASDAQ:CSIQ), whose share price increased significantly over the past 12 months. Companies such as SolarCity Corp. (SCTY), who offer Third Party Ownership Leasing Programs (RTPO), have also seen their stock perform exceptionally well.

The decreasing cost of solar PV modules has been a leading factor for mass adoption of solar power in the residential space. The module manufacturing industry experienced a major boom and bust, followed by a shakeout that started in 2008 and ended in 2012. Significant state-level investments in China led to a huge increase to over 500 Chinese companies producing modules, silicon, wafers, and cells. The Chinese investments caused an overcapacity in production, which negatively affected the majority of manufacturers in the space and non-Chinese manufacturers were quickly pushed out of the industry. A lot of weaker Chinese companies fell to price pressures, flooding the market with an abundant amount of exceptionally low priced inventory. After four years of decline, global module prices have since stabilized.

Residential Third Party Ownership (RTPO) programs have recently emerged in the solar PV industry and are growing in popularity because they allow homeowners to get into solar energy with "no money down." RTPO financing of solar energy takes place through two models: Power Purchase Agreements (PPAs) and solar leases. Based on available industry information, more than 50% of new residential solar capacity in California, Arizona, Colorado, and Massachusetts is being driven by a RTPO program, which is also gaining recognition in emerging solar states. It is estimated that the market for RTPO will grow from $1.3 billion in 2012 to $5.7 billion in 2016.

The quarterly SEIA/GTM Research U.S. Solar Market Insight Report shows the major trends in the U.S. solar industry. Several notable points include:

  • From Q3 2012 to Q3 2013, residential system prices fell 9.7% percent, from $5.22/W to $4.72/W. Quarter after quarter, installed costs declined by 2%. Installed prices came down in most major residential markets including California, Arizona, and New Jersey.
  • The residential market continues to see the most rapid growth of any segment in the U.S. solar market. Through Q3, residential PV installations were up 49% year-over-year and we anticipate further expansion to 52% by the end of Q4. As we have noted in the past, the economics of residential solar are highly attractive in a number of states today (most notably California, Hawaii, and Arizona), but challenges to net energy metering regulations present a looming threat to the market. Though the debate over net metering will certainly continue for years, the recent outcomes from several states are promising.
  • It remains clear that this (2013) will be a banner year for solar in the United States. Installations have already surpassed the 10 GW cumulative mark and, by the end of the year, more than 400,000 individual solar projects will be operating across the country. We forecast that, by year's end, installations will have grown 27% relative to 2012, with an even more impressive 52% growth rate in the residential sector alone.

For investors who are looking to play the booming U.S. solar residential space, only two of the top five residential installers are publicly listed: SolarCity and Real Goods Solar (NASDAQ:RGSE). SolarCity provides significant exposure with its RTPO program. It is reported that SolarCity's market share is now around 32% of the U.S. residential PV market. Real Goods Solar serves commercial, residential, and utility customers in key U.S. solar states.

Enphase Energy Inc. (NASDAQ:ENPH), the global leader in micro-inverters, will directly benefit from a growing number of U.S. residential installations, as their technology offers the greatest advantages in lower power rated systems such as residential installations.

SunPower Corporation (NASDAQ:SPWR) offers direct exposure to the U.S. Residential market through their Residential and Commercial Segment (R&C). R&C is focused on solar equipment sales to the residential and small commercial markets through its third-party global dealer network, as well as direct sales and EPC and O&M services in the United States and Europe for rooftop and ground-mounted solar power systems for new homes, commercial, and public sectors. In the U.S., SunPower Corp. maintains the strongest network of loyal dealers.

Other investment options include the hardware suppliers, such as PV modules and inverters, which convert electricity from DC to AC. Top module manufacturers include Canadian Solar Inc., Trina Solar Ltd. (NYSE:TSL), and JinkoSolar Holding Co., Ltd. (NYSE:JKS). Solar PV, as a whole, still represents a small portion of the U.S. energy mix with significant upside potential, which should be of interest for long-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.