The business of solar and the next 'long tail'
In the last couple of months, Sungevity filed for Chapter 11, NRG completely disbanded its NRG Home Solar subsidiary, a variety of solar module manufacturers file for bankruptcy and Solar City walked away from the door-to-door sales model.
Then, it was announced earlier this week that Lyndon Rive, formerly CEO of Solar City and one of the true founding fathers of residential solar, is walking away, not only from Tesla but from the industry entirely.
These are the indicators that would suggest a smoking wreckage of an industry. Yet in my mind, the brilliant light that is the trillion-dollar market opportunity that home solar represents continues to shine brightly. It just seems tantalizingly out of reach of the industry players who a few years back were prescient enough to seize first-mover advantage.
This is what I am trying to figure out.
Since the Solar City situation is decidedly opaque now that the industry's market leader is ensconced within Tesla, let's focus on Sungevity as a case in point.
In November, Sungevity — with a straight face — was seeking a capital infusion at a several-hundred-million-dollar equity valuation. That effort did not succeed, some involved said at the time, because of "Trump Shock."
While Trump's surprise win obviously did not help, from that point forward it took only three months for Sungevity to unravel points to a truer, more basic indicator: a cash-starved business model.
Another body blow
Sungevity, with something less than 2 percent market share nationwide, was not a critical player even in the context of the nascent home solar industry, but its Chapter 11 filing dealt another body blow to the credibility of the distributed solar industry in the eyes of Wall Street. But it is not at all clear to me that its surviving brethren at the top of the home solar market-share charts are doing anything other than continuing to drive towards that same cliff.
The home solar industry has the potential to be a classic, and lucrative, product-driven service business. Everyone knows this, but it hasn't happened. I think this is because of the burden imposed on the incumbents by the way home solar traditionally has been marketed and sold, and the way it has been financed — legacies that today encumber the incumbents and overcome the natural benefits usually associated with first-mover status.
Residential solar is an industry constituted of thinly capitalized entrepreneurial start-ups, selling a front-end-loaded capital intensive product, while typically securing not a dime of proceeds from the customer at the point of sale.
How financially stable and commercially scaleable can such an industry be?
The beauty of capitalism is that into any commercial opportunity vacuum, new entrants will jump. That is why, notwithstanding the evident weakness of the industry's current leading players, we seem poised on the brink of a period where new life is breathed into the sector from new entrants and rising regional players.
Three critical disciplines
For prospective new entrants, the industry is not difficult to understand. It consists of three critical disciplines: customer acquisition; asset financing; and procurement/installation. The new entrants, I believe, largely will come from businesses that abut one of those disciplines.
The challenge new entrants face is whether to horizontally integrate or outsource the disciplines outside their wheelhouse. But as they focus on how to implement their market entry, they also run the risk of falling, as we did with NRG Home Solar, into the cash-sucking business model of the incumbents.
More immediate than the new entrants is the rise of the "superregionals" — companies that have kept their overhead low and stayed focused on being close to their customers and their regulators in a few geographically contiguous markets. This "revenge of the long tail" phenomenon has been enabled, according to Andrew Beebe, in his excellent Feb. 1 article posted in Medium, by the "democratization" of home solar financing.
I agree with Andrew, so far as he goes, but equal access to third-party financing only neutralizes what previously had been a competitive advantage of the national players. It does not bestow a competitive advantage on the superregionals. If nothing else changes, whether led by the surviving national players or by the rising superregionals, the industry will just continue its march towards complete commoditization of its product and the financially ruinous pure price competition associated with it.
Whether it be the long-expected solar-plus-storage or solar-plus-EV charging/secondary storage, or solar-plus-efficiency in the form of new roof insulation (insolation plus insulation — get it?) or a system that combines solar electric production with home heating/cooling or — my favorite — a wickedly good customer-interfacing home-energy management system that integrates and optimizes all of the above, a profitable future depends on the home solar industry's offering more of what the energy consumer wants and marketing, pricing and financing its product/service mix more intelligently.
We better do this soon before the industry runs out of Lyndon Rives to lead it.