The residential solar market in the United States has seen a steady evolution. A few years ago, residential solar installations were viewed as something of a novelty given the large difference between the cost of solar electricity and grid power. However, a sharp decline in panel and system prices over the last two years has made solar a compelling alternative to conventional energy sources, helping homeowners reduce their dependence on utility companies. According to the Solar Energy Industries Association (SEIA), the residential solar market grew by around 48% year over year in Q2 2012. Although the residential market still accounts for a small part of the overall U.S. solar market, we believe that it could see strong growth going forward, thanks to improved financing schemes, participation from home builders as well as the possibility that retail electricity prices could rise going forward.
In this article, we look at some of the factors influencing the growth of the residential solar power market in the United States and why we believe that SunPower (NASDAQ:SPWR) stands to be one of the biggest beneficiaries.
Why Residential Solar Is Becoming Increasingly Attractive
Solar Generation Costs Falling, Conventional Could Rise: As of 2012, the power generated from residential solar power systems cost an average of between $0.12 per kilowatt hour (kWh) to $0.30 kWh (depending on the region) in the United States and prices are likely to be still lower this year, given the falling systems prices.  The average retail price of electricity in the U.S as of June 2013 stood at close to $0.13 per kWh, with prices across states ranging from between $0.09 per kWh to around $0.37 per kWh, implying that solar has reached grid parity in some cases. While solar power is especially attractive for states with abundant sunshine and high electricity costs and such as California and Hawaii, we believe that the relatively low system prices and a potential increase in residential electricity rates by utility companies could help to boost residential solar installations in other states as well. Utility companies are facing an increase in generation costs, particularly for fossil fuels, as more stringent environmental norms come into place.
Falling Systems Prices, Builders Offering Solar As An Option: Average installed solar systems prices in the United States fell by around 11.5% over the past year to around $4.81 per watt (as of Q2 2013) with systems prices in some states touching as low as $4 per watt.  Assuming that the average home in the United States requires about 4 kW of capacity, it would translate to average system prices of less than $20,000. Given the fact that the median new home price in the U.S. stands at around $257,200, it would cost the typical home buyer an additional 7% to 8% to include a solar power system.  Many home builders are also beginning to take interest in adding solar power systems to their new developments. This works well for both customers and builders since it costs about 20% less to install solar power systems at the time of construction rather than after a home is built. At least six out of 10 of the largest U.S. builders now provide an option for solar power panels in their projects.
Financing Is Improving: Financing for solar power systems is also becoming more streamlined. While new homeowners can choose to include the costs of solar systems to their mortgages, many customers have also been opting to lease rather than buy solar systems. According to the SIEA, more than 65% of new residential installations over the past year in California and 85% of new installations in Arizona were third-party owned systems. Leasing makes solar power more accessible to customers since it allows them to stagger their payments and not have to worry about maintenance related issues.
Incentives At The State And Federal Levels: While the incentives for the U.S. residential market are not as generous as those offered in countries such as Japan, we believe that they are quite attractive nevertheless. At the federal level, the government offers an investment tax credit (ITC) which gives installers a 30% tax credit for solar systems on residential properties. Additionally, there are incentives at the state level as well. For instance, net energy metering allows owners of residential solar systems to sell excess electricity that they generate back to the grid rates that are close to the full retail rate.
Plenty Of Room To Grow
Around 494 MW of solar power was installed in homes across the United States in 2012. Assuming a capacity of around 4 KW per system, this would mean that just about 123,500 residential systems were installed in the country last year. This is a relatively small number given that there are over 110 million occupied housing units in the United States. ((American Housing Survey))
While existing homeowners will continue to install solar panels at an increasing pace, we believe that new home owners will prove to be a key target demographic for residential solar given the relatively small add-on cost to the price of a new home. The housing market in the United States has shown a recovery in recent times with new home sales largely remaining above 440,000 units (seasonally adjusted annual rates) over the first six months of this year although sales dipped in July due to an increase in mortgage rates.  However, we believe that the outlook could remain bright given the relatively strong economy. As home sales rise and solar technology improves, we believe that it could bode well for residential solar installations.
SunPower Will Be One Of The Biggest Beneficiaries Of Growing Residential Installations
Among the solar companies that we cover, we believe that SunPower stands to benefit the most from growth in the U.S. residential solar market. The company is already the market leader in the residential solar space in the U.S. and its product portfolio is perhaps the best suited for the roof top market. SunPower’s monocrystalline panels offer the highest efficiency in the industry and occupy less roof space for a given system size compared to thin-film and polycrystalline panels. Although SunPower’s panels are more expensive compared to polycrystalline panels, we believe that the difference will not be significant in the context of the overall system price, since panel costs now account for less than 20% of the solar power systems price. SunPower also has a strong presence in the booming residential solar lease market. The company has a total of about 18,000 active leases making it one of the country’s largest solar lessors. The firm also recently secured additional funding of around $150 million for its leasing program.
The residential market is relatively more stable for solar companies from a revenue standpoint since it involves selling several small solar systems throughout the year unlike the utility scale businesses which is driven by large contracts. The residential market is also important for high-end solar products such as SunPower’s X-series panels which are likely to offer better margins.
We have a price estimate of around $25 for SunPower, which is slightly above the current market price.Notes: