Residential solar has grown significantly over the past few years, especially in the developed nations. The residential solar segment has grown from being nearly nonexistent to one of the most promising industry segments today. In fact, U.S. residential solar is slated to overtake U.S. utility solar in little under two years time, after which residential solar will completely dominate the U.S. solar industry. While the residential markets on the international stage are not predicted to overtake the utility markets anytime soon, the international trend still appears to be in residential solar's favor.
Whether or not this trend will continue into the mid/long-term future will have enormous implications on the entire solar industry. The answer to this will determine which solar companies have the most future potential, be it residential or utility-centric solar companies. While current solar companies are generally becoming more diversified in terms of business segment involvement, the current leading solar companies are still disproportionately focused on single segments. As such, residential solar companies such as SolarCity (SCTY) and utility-scale solar companies such as First Solar (NASDAQ:FSLR) have different growth potentials.
Despite utility-scale solar's current dominance, residential solar is poised to catch up in a few years time.
There is a raging debate about residential solar's long-term place in the energy landscape. While many argue that the economics of residential solar will never be able to compete with those of utility-scale solar due to issues of scale, the reality is much more nuanced. While it is true that residential solar does not have the scale to compete with utility-scale solar in terms of on-site energy generation costs, residential solar does not have to deal with the costs of building/maintaining an extensive electric grid.
The weighting of these different advantages will determine the theoretical cost-effectiveness of residential solar and utility-scale solar. So far, most of the research indicates that distributed generation (residential solar is a form of distributed generation) has a theoretical cost-advantage over centralized generation (utility-scale solar) despite the higher proportion of soft-costs. This only makes sense given the enormous costs associated with building electric grids, which has seen trillions of dollars worth of investments in the U.S. alone. In addition, the transmission and distribution costs associated with utility-scale generation further erases any advantages gained from larger scale.
The one major downside for residential solar is the lack of reliable energy storage. Utility-scale solar does not suffer from this problem as it is linked to a centralized grid with extensive backup power generation, mainly in the form of fossil fuels (fossil fuels act as natural forms energy storage). As such, much of residential solar's prospects are directly linked to how rapidly energy storage technology can progress. So far, home energy storage technologies are nowhere near mature enough to cost-effectively play a large role in residential solar.
The Current Landscape
Despite residential solar's theoretical cost advantages over utility-scale solar, the home storage issue has been a major roadblock for residential solar. Because of this, residential solar companies such as SolarCity have often been forced to pay excessive fee's by the utilities, and have wasted significant amounts of time/effort fighting over issues such as net metering rights, etc. Such issues, which are directly caused by residential solar's reliance on the utility grids, have not allowed the residential segment to realize its full potential. As such, utility-scale solar dominance may linger on for much longer despite its theoretical disadvantage against residential solar.
Utility-scale solar has the advantage of being part of the utilities' centralized grids, which means that utilities do not have any incentive to push back against utility-scale solar. In fact, utilities have even embraced utility-scale solar given the various government solar subsidies (which makes utility-scale projects profitable in many cases) and the boost in PR that solar generation brings. Despite utility-scale solar's advantage of being embraced by the centralized utilities, residential solar is surging for many reasons.
First, increasing regulatory support for residential solar is emerging. This is great news for residential solar companies since solar surcharge and net metering policies are ultimately determined by the regulatory commissions as opposed to the centralized utilities themselves. While there still is a chance of the utilities influencing the regulatory commissions through objectionable means, this nonetheless means that the centralized utilities do not have free-reign to quash residential solar adoption (which presents a direct conflict of interests for centralized utilities).
In addition, the rapid advancements of storage technologies looks to be inevitable, especially with the rise of electric vehicles. The more cost-effective that home energy storage becomes, the less reliant residential solar companies will become on the centralized utilities. If such trends continue to play out into the long-term future, residential solar companies such SolarCity or Vivint Solar (NYSE:VSLR) may hold a significant advantage over utility-scale solar companies such as First Solar, SunEdison (SUNE), or the vast majority of the current leading solar companies.
An expensive electric grid will theoretically not be needed in the case of residential solar. Unfortunately for residential solar companies, energy storage is not yet cost-effective enough to make this a reality.
Implications On Solar Industry Segments
Residential solar looks to be the long-term winner given the current trends in the regulatory environment and energy storage industry. Given these factors at play (in addition to the large theoretical cost advantage of residential solar over utility-scale solar), residential companies like SolarCity have the most potential in the solar industry. While the leading utility-scale solar companies are also promising given that the vast majority of them are also solar manufacturers, residential solar companies seem to have greater overall promise.
If distributed forms of generation eventually monopolize the energy industry, residential solar companies will essentially be some of the largest energy companies in the world. Given that solar PV is the only truly viable form of distributed generation today, the residential solar industry has much to gain. Utility-scale solar companies will have more than enough time to adapt to the changing circumstances, but will be inferior to residential solar companies in terms of future upside potential.
Of course, there are significant risks in betting entirely on either residential solar companies or utility-scale solar companies. Given that long-term future trends are not entirely predictable, residential solar's eventual dominance in the solar industry is far from guaranteed. A more conservative investment approach would be to diversify across the solar industry with a heavier weighting towards residential solar companies. Despite such uncertainly, it is safe to say that residential solar more likely has an edge in the long-term given its inherent theoretical advantages and the current industry trends.
While utility-scale solar's days of dominance seem to be limited, residential solar has rapidly become a significant segment of the solar industry. Despite the fact that leading residential solar companies such as SolarCity are still losing money, much of this is attributed to these companies incredibly fast-paced growth and heavy up-front investment business model. While such a risky business model certainly takes away from these companies valuations, they still appear to make superior investment choices to utility-scale solar companies.
Disclosure: The author is long SCTY.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.