Residential Solar is Growing Up

Last week Vivint Solar registered for its initial public offering. Valued at $200 million, this looks to be the latest in a series of success stories in the residential solar market. The Vivint announcement follows the very successful run in SolarCity stock since its IPO in late 2012. This spring OneRoof Solar went public on the TSX exchange in Canada, followed by Direct Energy’s acquisition of Astrum Solar this summer. Rumors of another, even large residential solar company filing for a public offering are swirling around the industry.

So what is driving all this investor interest? Solar is still a relatively immature industry. Less than 0.3% of electricity in the U.S. comes from solar generation and solar has been installed on less than 400,000 homes in the U.S. If a building or structure receives direct sunlight and uses electricity solar can be used to generate some of that structure’s electricity. The residential market potential is immense: there are more than 90 million single family homes in the U.S. and as many as 50 million more households in multi-family structures, along with several million more commercial and other non-residential structures. While solar may not work on every structure in the U.S., just a small wedge of this market is worth hundreds of billions of dollars.

The Vivint offering illustrates some of this promise. Growth has been nothing short of staggering, going from 2669 systems installed in 2012 to more than 8000 in the first six months of 2014. The success is cyclical - as the industry grows and taps in to new investors, the cost these companies pay for the money necessary to build and operate these thousands of rooftop solar systems drops, making solar even more competitive with the electricity that consumers buy from their utilities. This string of success stories also illustrates the very significant investor interest in solar (although to me it has really been Mosaic’s ability to crowd fund solar loans that puts an exclamation point on this passion for solar investment).

All this money coming into the residential solar space will demand even faster growth to support investor expectations. Vivint has been successful in part by redrawing the approach to customer acquisition, but look for more aggressive pricing and customer acquisition strategies over the coming months. This more aggressive approach to growth will put pressure on smaller installers which won’t be able to compete as effectively on price or customer acquisition, so expect some rapid consolidation in this part of the market. The need for growth will also lead to aggressive entries to new markets, giving rise to a new set of battles over net metering and how solar integrates with the existing grid. Vivint’s announcement is just part of a trend that will soon see solar become a major part of the American energy industry.