We wrapped our arms around California’s new Building Energy Efficiency standards in Installment I of the Countdown to 2020. In this installment, we take a closer look at how these 80,000 annual additions to the solar pipeline (based on historical averages) will more broadly impact the California solar market.
Regulations are seen as burdensome to business because they force changes in operations and profit margins. They restrict. Hoops to jump through. The inclusion of solar within the California Energy Commission’s 2019 Building Energy Efficiency Standards might feel this way to homebuilders. One more thing to do. One more cost that could hurt a sale. Maybe permitting and interconnection delays cause additional headaches.
On the other hand, this mandate instantly puts homebuilders in a position to install the lowest cost PV systems in the country and control a huge portion of the California residential solar market by 2030. Maybe an overstatement, but it’s a scenario that’s in play.
The new construct
To understand the opportunity, consider the findings of the “Cost-Reduction Roadmap for Residential Solar Photovoltaics, 2017-2030” technical report from the National Renewable Energy Laboratory (NREL) released in January 2018. The goal of this NREL report was to figure out how residential solar systems could hit the lofty target of 5 cents per kWh by 2030 set by the U.S. Department of Energy’s Solar Energy Technologies Office. The report highlighted these as the main areas of potential cost reduction:
- Market maturation
- Business model integration
- Product innovation
- Economies of scale
Within those categories are a range of possibilities, and in the report, NREL analysts modeled two bookend pathways: a “less aggressive” new construction model and a “visionary” model. The less aggressive pathway assumes PV installers will be installing traditional racked and mounted PV modules and will be loosely affiliated with homebuilders, installing solar on at least 25 percent of the homes in a typical subdivision. NREL sees this new construction pathway hitting $1.62 per Watt and 7.2 cents per kWh by 2030. The visionary pathway assumes a low-cost roofing/PV product that is integrated into all home designs, leading to $1.10 per Watt. That would be 59 percent lower than the 2017 Q1 benchmark and is the only pathway NREL can foresee hitting 5 cents per kWh.
Well, starting in 2020, California is already set to outpace the less aggressive pathway by requiring all new homes to include a solar componenent (versus 25 percent). Even if California’s new build sector still only achieves the less aggressive pathway pricing, it still dwarfs the 2017 Q1 benchmark of 15.1 cents per kWh.
The reason of course is — say it with me — soft costs, which are reduced by 65 percent in a new construction solar model (the cost of sales and marketing alone in the residential solar retrofit market is about 17 percent of a system’s costs according to Wood Mackenzie). Even the best case scenarios for module and inverter improvements and hardware cost reductions in NREL’s analysis don’t achieve more than a 9 percent cost reduction on the way to 2030. Here’s further explanation from the report, co-authored by researchers Kristen Ardani, Jeffrey J. Cook, Ran Fu and Robert Margolis:
“Sales and marketing costs are reduced in the new construction visionary pathway because installing PV on every new home in a development eliminates customer acquisition costs that are currently typical for a retrofitted PV system, such as sales calls, site visits, customer outreach and bid/pro-forma preparation … Installing PV on new homes provides additional savings via design and engineering standardization. Including standard PV system designs and sizes for each home floor plan reduces upfront engineering and design costs that would be incurred when completing a retrofitted PV installation of any kind.”
The here and now
That NREL analysis was a map to hit 5 cents per kWh by 2030, but we aren’t even in 2020 yet. So, what can solar installers expect right off the bat?
“We would expect to see decreases in the financing and permitting costs due to the many similar systems being installed in one area, potentially with bulk financing agreements covering all systems,” says Benjamin Davis, policy associate with the California Solar and Storage Association (CALSSA). “New homes designed with solar in mind should also help decrease the time of designing and installing the systems as the roofs and wiring of the home will allow for more streamlined approaches.”
“We will likely see more lower pricing in these new build market systems as customer acquisition costs will be lower,” says Allison Mond, senior solar analyst at Wood Mackenzie Power and Renewables. “This could also lead to lower system costs overall [including in the retrofit market] as residential solar becomes more prevalent.”
But will all of these great cost savings in the homebuilding segment help solar installers? Mond sees the new build mandate as “neutral” for long-tail installers when you weigh all of the factors, saying “while the new home build market is likely to be won by the national installers, it should lead to easier sales and increase demand overall, which will benefit the whole industry.”
“We don’t see this creating a need for more solar installation companies,” says Vikram Aggarwal, CEO of EnergySage, a network of pre-screened solar installers across the country (that plans to tailor its solution to meet the needs of California’s homebuilders). “Instead, existing installers will have the opportunity to partner with homebuilders and fill any openings in the calendar with new, subcontracted work. Savvy solar installers will establish long-term relationships with homebuilders in their area and become their go-to subcontractor for the solar component of the job.”
Like Mond, he sees large homebuilders relying on the scale and resources of larger solar companies while smaller homebuilders are more likely to partner with long-tail solar installers.
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The size divide
National installers already make up 30 percent of the residential installations in California while sporting much higher CAC (about 70 cents per W compared to 40 cents per W for long-tail solar installers). Not only will that CAC number drop because of new home business, but the larger homebuilders they are likely to work with present even more potential for cost reductions and efficiency gains within the new home solar channel.
Looking at the NREL analysis again, a portion of the homebuilder’s potential pricing advantage (versus a roofer) comes through the economies of scale realized when integrating PV into the permitting process for an entire subdivision (although the researchers admit this could be one assumption of the analysis that could fall short due to construction timelines, project sizes and workforce management). These potential economies of scale would most benefit the largest homebuilders, which will likely be working with the largest national solar installers.
“Those homebuilders that construct comparatively few homes [20 or fewer annually], are unlikely to experience the same process efficiencies as those that construct hundreds of homes,” the NREL report states. “In addition, potential permitting challenges and delays associated with deploying PV on new homes could result in additional costs that offset the savings benefits of economies of scale.”
Putting the retro in retrofit
As this new construction solar market develops and as these innovations in business models and technology emerge, will the traditional retrofit solar installers without key homebuilder partnerships be unable to compete?
“I think the new build mandate will have at least a modest impact on the retrofit market,” says Daniel Marino, chief commercial officer, BayWa r.e. Solar Systems. “First, there is a direct impact that if a retrofit is part of a ‘substantial’ remodel it may require solar starting in 2020. The definition of ‘substantial’ will determine how many homeowners are impacted by this aspect of the mandate.”
In the immediate, Davis definitely does not expect to see an impact on the number of retrofit projects. “Some businesses may choose to focus more on new homes than retrofit, but the demand for retrofit solar is so high and marketing is so competitive that those homes will continue to be served by other businesses. It is all part of the responsive and shifting nature of the solar business.”
“The mandate will have countervailing effects,” Aggarwal says. “On one hand, it takes new homebuyers out of the solar shopping market. On the other, it raises awareness and generates peer effects, which has been proven to increase consumer demand for solar.”
Plus, while homebuilders are driving CAC into oblivion, solar installers can coast behind them to gain their own soft cost reductions on the retrofit side. Mond tells us the California solar mandate is likely to increase demand in the retrofit market as further market penetration will make customer acquisition easier.
Marino agrees: “This could drive a peer pressure effect where everyone feels like they want to be a part of this movement. Even for homeowners who are less inclined to retrofit, they may feel pressure to do so if they are selling their house in markets where buyers are comparing new construction with solar against resales. On the whole, I think the mandate is an exciting new chapter in our industry’s evolution and I’m looking forward to seeing how it plays out.”
Economies of scale, competition and an increased number of installations have helped drive down the cost of solar over the past decade. The 2019 Building Energy Efficiency Standards will add about 800 MW of additional solar capacity from 2020 to 2023 — 200 MW per year on average. This is more than a 23 percent increase from the 858 MW of residential solar deployed on mostly existing homes in 2017. So, could a new build market drive component costs down further?
“Increased volume for existing distributors and manufacturers can certainly allow companies to spread overhead over a larger inventory, so there may be a marginal decrease in pricing but we expect that effect to be small,” Davis says.
Marino doesn’t think it is likely that prices will move as a direct result of the mandate, noting that the predicted increase in demand is a relatively small number relative to overall projections. There is also a sentiment that component prices don’t have much further to fall. However, a solar market that is driven more by homebuilders, roofers and, most importantly, the priorities of their customers, could shift the direction of the components used within these installations.
“We may see certain trends emerge, like a higher adoption of rail-less mounting solutions that may be viewed as faster to install and better suited for a new build,” Marino says. “Microinverters and optimizers currently make up the vast majority of residential installations in the U.S. Given their simplicity and monitoring tools. I expect they will continue to be very appealing for new homes. That said, I also expect the homebuilder market to be even more price sensitive than the retrofit market, and that could play well for string inverters to take back some share since they can provide lower costs per system and provide an easy way to standardize on array and system size.”
Then there is the question of quality. The type of homebuilder and the end-homebuyer involved will have an impact on the type of PV systems that are deployed and maybe the product innovations that are pursued. There are two prevailing paths being predicted in the new build market right now: One of homebuilders pursuing the most basic, low-cost systems to appease the mandate and keep their costs as low as possible, and another where homebuilders use this opportunity to rethink designs and build more robust, energy conscious smart homes.
“It depends on the home that’s being built and who the developer envisions as the target buyer,” Aggarwal notes. “If these homes are targeted at price-sensitive buyers, then yes, builders will look to leverage the cheapest way to fulfill the mandate. This likely means a simple-to-install solar kit with low-cost equipment will be used. However, for upper middle class and luxury homes, this is a new opportunity for builders to differentiate themselves by incorporating higher-end equipment for distributed generation, battery storage and home energy management.”
CALSSA, which played a big role in drafting these requirements, does not expect this policy to have an impact on system quality, although the reason why still seems to prove the same point, that new builds might lean toward the most price-conscious options available.
“The rule was written to have flexibility in the approaches to comply with the solar requirement because it was clear that the homebuilders needed to be responsive to the homebuyers in what they want for their home,” Davis says. “This will be true for the solar on their roof as well. Just as with appliances inside the home, some homebuyers want high-end appliances and some have lower expectations. Most of the new solar homes market will be very straightforward, with the cost of solar wrapped into the mortgage or solar leases accompanying the home purchase.”
While there is a lot of innovation and integration that needs to be figured out among the homebuilder and solar communities, the California solar mandate all but guarantees that it will happen because the market now demands it.
“Solar companies are innovators by nature, and it will be fascinating to watch new models of financing and ownership,” Davis says.
Some of this still feels like 2019 thinking. Today’s components might not reduce much more in price, but will we still be installing today’s components in a few years? That NREL visionary pathway does assume aggressive reductions in hardware and soft costs driven by new technologies, services and business models.
Putting our 2020-colored glasses back on to see the world in which solar is the norm for new homes, a future emerges that is more focused on solar roofs and other BIPV innovations. We will look at this possibility in our next installment.
The Countdown to 2020 series is sponsored by QuickBolt.
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