The home solar business is growing rapidly as thousands of homeowners install panels on their roofs to save money. The largest companies that install and finance home solar systems are reporting losses of hundreds of millions of dollars.
These losses are a ominous reminder of how difficult it can be to make money in an industry recognized by political and business leaders as a vital part of global efforts to combat climate change. Solving this problem could help determine whether the use of solar energy in residential areas is fast and widespread.
“There have been very few success stories,” said Vikram Aggarwal, founder and CEO of EnergySage, which helps consumers compare solar installers. “Virtually everyone who has tried this has failed. The street is littered with corpses. “
Sunrun and Sunnova, two of the country’s largest solar companies, combined lost $ 500 million in the first nine months of the year, and a total of $ 1.3 billion in cash was spent operating and purchasing solar systems. The companies and their supporters on Wall Street say the losses are because solar systems grow rapidly and require a lot of upfront investment, and because investors in the companies can use the losses to offset their tax liabilities. Still, residential solar energy is a highly competitive and expensive business, and Sunrun and Sunnova face hundreds of smaller competitors, many of whom have been making profits for years.
Right now, Wall Street investors are offering the companies’ shares with the belief that solar companies will be able to borrow cheap and cover their losses and cash outflows for some time. They also expect rapid sales growth as homeowners buy larger solar systems and home batteries to protect themselves from power outages and power electric vehicles. Investors also expect the new government in Biden to do more to promote renewable energy use through tax credits and other incentives.
“You will always be negative as you grow,” said Lynn Jurich, managing director of Sunrun, in an interview. Sunrun acquired Vivint, the country’s second largest residential solar installer, in July. This acquisition helped Sunrun’s shares rise over 400 percent in 2020. Sunnova’s shares rose over 300 percent.
The success of the two companies and of Tesla’s solar business, once the leading residential solar installer, is significant beyond the stock market. As these companies grow and achieve the same notoriety as Tesla for its luxury electric cars or Amazon for online shopping, they could help accelerate the move away from fossil fuels.
According to the Solar Energy Industries Association and Wood Mackenzie, a research and advisory firm, new home solar systems, based on their electricity capacity, are expected to grow 7 percent this year despite the coronavirus pandemic. Wood Mackenzie expects strong growth over the next five years.
“As a management team, we are having discussions about how much growth we can handle,” said W. John Berger, Managing Director of Sunnova, in an interview. “I will take this problem every day of the week because I had the other problem too,” he added.
Despite all this optimism, installing solar energy in homes is clearly not an easy business. Solar companies that are growing too fast often have problems, as SolarCity did before it was acquired by Tesla in 2016. Many others have filed for bankruptcy protection or ceased business in recent years.
Dozens of companies like SunEdison that attempted to acquire Vivint in 2016 grew incredibly quickly and stumbled abruptly. SunEdison filed for bankruptcy protection that same year. Hundreds of smaller household solar companies have also failed, according to EnergySage.
It’s not clear whether it makes economic sense to dominate the solar business with national operators like Sunrun and Sunnova. Hundreds of small installers in the US have already figured out how to make money from what they refer to as the type of home improvement business that local firms typically dominate.
“Solar is kind of magical technology, and it’s very enticing, and everyone wants to think it’s different from everything else,” said TR Ludwig, a co-founder of Brooklyn SolarWorks and a former Sunrun employee. “But apart from the funding, it’s really a construction project.”
His company buys solar panels through collectives of buyers in order to get lower prices. It doesn’t offer financing to customers like Sunrun or Sunnova, but that’s not a disadvantage, Ludwig said, given that many banks and credit unions are willing to provide solar loans.
March 3, 2021, 6:02 p.m. ET
Mr. Ludwig claims that the solar business is more like the heating, ventilation and air conditioning business, which is made up of local firms that install and maintain products from national or global manufacturers.
“As a small business you have to profit – you can’t go to the markets to get capital like the big companies can,” said Stephen Irvin, managing director of Amicus Solar Collective, Brooklyn SolarWorks and other small installers on panel purchase helps.
However, Wall Street analysts believe that because of their ability to borrow large amounts of money, Sunrun and Sunnova can offer cheaper financing and potentially generate higher profits.
“Size is becoming an obstacle to accessing others,” said Sophie Karp, an analyst at KeyBanc Capital Markets.
Wall Street analysts said corporate accounting may underestimate profitability. Like homeowners who buy solar panels, investors can get tax benefits. For example, investors in Sunrun’s business can use the losses there to lower their tax burdens. And when the losses borne by investors are excluded, the loss of the company is much less.
Analysts also say that Sunrun and Sunnova’s business will be profitable over time. They charge customers monthly to rent solar systems or to buy the electricity these systems generate. The idea is that over the life of a system – around 25 years – companies will earn much more monthly fees than they would for installing panels and batteries they would normally buy in factories in Asia.
“There’s good business here,” said Joseph Osha, a stock research analyst with JMP Securities. “The finances are extremely complex.”
It is undisputed that interest in solar energy seems to be growing due to the forces triggered by the pandemic.
As people have been spending more time at home, some have realized that solar panels can help them lower monthly energy bills while protecting them from power outages. The recent forest fires in the west and a record hurricane season in the east have increased interest in solar and battery systems.
Additionally, solar managers hope President-elect Joseph R. Biden Jr. will push for an increase in subsidies such as the federal tax credit, which ends December 31, 2023.
The Association of Solar Energy Industries is pushing the new administration to provide the same benefits for residential solar systems as it would for larger-scale solar energy, which would allow for a continued 10 percent tax credit after the current subsidies expire. The association also wants a tax credit for energy storage.
Industry officials also argue that they are working hard to cut costs so they can break even faster. Solar systems typically cost two or three times more in the US than in other industrialized nations like Australia, partly because US companies spend more time and money getting building permits and marketing.
The pandemic appears to have alleviated another major concern – that in a recession, many solar customers would stop making payments. There hasn’t been a surge in default settings that year, probably because most homeowners who install panels are doing reasonably well and haven’t been hit hard.
“Now we’ve been through a hell of a recession – and the payment performance has been phenomenal,” said Berger, the managing director of Sunnova. “The market digests it and says, ‘Wow, this is a lot less risky than we thought.'”
A year and a half ago, David Jacobs bought a solar system from Sunnova. Now that he’s starting his second full winter with the system, he’s relieved. He’d spent up to $ 800 a month on electricity over the winter, mostly to run the heating system in his home in Niantic, Conn.
“I got these outrageous utility bills,” said Mr. Jacobs, a 75-year-old retired civil engineer. “I said it wasn’t sustainable.”
Mr. Jacobs now makes two fixed monthly payments: $ 163 to Sunnova and $ 23 to his power company.
Solar industry organizations like Rewiring America, a group of engineers, entrepreneurs, and volunteers working on climate change, estimate that the typical American household could save up to $ 2,000 a year in energy bills by using solar energy.
Such savings would, of course, come at the expense of the electricity companies, many of whom have tried to slow or stop the growth of solar roofs.
Utility companies have stated that residential solar systems primarily help wealthy households who can afford to spend tens of thousands of dollars on panels and batteries. As a result, companies claim that middle-class and lower-income families have to bear much of the cost of maintaining the electricity grid.
The utility industry has sought to roll back government regulations and laws that allow homeowners to sell excess power from rooftop solar systems to the utility grid, including in California, the state that relies most on solar panels. Sunrun, Sunnova, and other solar companies are struggling to uphold the guidelines. These struggles could help determine whether large solar installers can become profitable businesses.