The Age of the Cashflow Positive Residential Solar Providers

The residential solar market came of age in the late 2000s and gained market traction between 2010 and 2015, when Sunrun (founded in 2007) and SolarCity (founded in 2006, now part of Tesla) introduced solar leases, dramatically reducing the initial payment required to install solar. Decreasing solar system costs and the California Solar Initiative made solar affordable to a wide range of households and commercial and industrial energy customers.

Solar Leases Have Been Preferred

Between 2010 and 2015, solar leases became the preferred option for the residential market, as they allowed people to install solar without any upfront cost. There were no solar-specific loans in the market that could be used to reduce upfront cost. At its peak in 2013, about 75% of new residential solar installations in California were via solar leases or power purchase agreements.

While solar leases revolutionized the residential solar market by making it accessible to almost any household, they created capital hungry companies that needed to raise capital constantly to fuel their growth. During this time, cost capital decreased extensively due to the low US federal interest rate. SolarCity was one of the companies exploiting bonds secured by its solar assets. Using green bonds, SolarCity managed to reduce its cost of funding from 4.8% in its first issuance of 2014 to 4.0% in October 2014.

Access to capital become more difficult for the solar industry in 2016 after the collapse of SunEdison, pushing the remaining players into restructuring their businesses to weed out their need for fresh capital and become cashflow positive. As I wrote in a blog about Sunrun and Vivint Solar a few months ago, Sunrun was the first to achieve this, on November 2017, followed by Vivint Solar in early 2018.

The news that Tesla’s solar business (SolarCity) became cashflow positive came buried within Tesla’s 3Q 2018 report, along the news that their solar business had started to grow again.

What’s Next for Residential Solar Providers?

Becoming cashflow positive is perhaps the most important milestone that residential solar providers have achieved so far. It gives them freedom to choose their future strategy instead of relying on the will of investors.

If they are cashflow positive, companies can choose between having capital-heavy or capital-light strategies. For example, Sunrun has continued to pursue capital-heavy solar leases while Vivint Solar has shifted its portfolio toward solar loans, therefore transferring the need to raise capital to their customers and financial partners.

This strategy freedom opens a new era for residential solar in the US. With freedom in their hands, they can go back to doing what they do best—delivering business model innovations. Sunrun’s smart use of residential batteries to provide grid services shows that they are already working on that. These three companies have survived difficult times over the last decade by continuously searching for untapped value so it is expected that they continue to do so, making them formidable distributed energy resources players in the energy transition.