As we hit the halfway point in our Countdown to 2020, the residential solar market in the here and now is showing signs of stability. The residential solar market grew 7 percent in 2018 following a 15 percent market contraction in 2017, according to the U.S. Solar Market Insight 2018 Year-in-Review Report from Wood Mackenzie Power & Renewables and the Solar Energy Industries Association (SEIA). That’s five consecutive quarters of modest growth with Q4 2018 being the largest quarter for residential solar in two years.
- Installment I: The role solar plays in California’s new building efficiency standards
- Installment II: Constructing a new solar pathway
Of course, California’s new build solar mandate that we are obsessing over in this six-part series plays a part in that — a stroke of government influence that guarantees “an additional gigawatt of residential demand from 2020-2024E.”
“With a pivot toward more efficient sales channels, both national and regional installers exceeded expectations in California and Nevada, which drove the lion’s share of residential growth in 2018,” states Austin Perea, senior solar analyst at Wood Mackenzie Power & Renewables.
Perea doesn’t see this as a random blip though, noting signs of structural market stability being built across the country, such as the diminishing influence of net metering. Up until now, any changes to NEM or rate structures would have created “demand pull-in,” but despite anticipated changes to incentives and NEM in 2019 to 2020, the major Northeast markets collectively saw no growth in installation volumes. As stated in the report:
“This suggests that while changes to NEM policy and other incentives have greatly impacted growth in years past, 2018 marks a year of market maturation. While strong NEM policy remains an essential foundation for rooftop solar adoption, future growth across legacy markets will require technology and business-model innovation to tap into new customer demographics.”
This is a great segue into Installment III of the Countdown to 2020, our year-long news series covering all the implications of the California Energy Commission’s solar mandate. We started by examining the language of the Building Energy Efficiency standards (Installment I). Then, we explored the direct impact of this rule on homebuilders and new home PV systems (Installment II). Now, we ripple out further to explore those “technology and business-model innovations” that could ride this wave beyond California’s borders.
The Roof is on Fire
In Installment II, we relied on results of the National Renewable Energy Laboratory’s “Cost-Reduction Roadmap for Residential Solar Photovoltaics, 2017-2030” technical report to understand new home PV pricing possibilities. The report pegged new home solar as the No. 1 pathway to the lowest cost residential PV at 5 cents per kWh. The No. 2 pathway was roof replacement, which NREL analysts pegged in a range from 8.1 cents per kWh to 5.5 cents per kWh. That most aggressive outcome is 0.5 cents per kWh more than the most aggressive new home solar pricing pathway, but what roof replacement PV loses on potential pricing per system, it gains back by not needing an entire new home to be built with it.
The potential for solar within the $30 billion residential roofing industry is mind-blowing. NREL estimates there will be 3.8 million roof replacements in California between 2017 and 2030, conservatively 1.21 GW of potential annual capacity (2.44 GW if you want to get aggressive). Here are some roof replacement + PV system pricing reduction ranges calculated by NREL:
- Labor cost reduction of 28 to 50 percent in cents per Watt versus the Q1 2017 benchmark
- Structural BOS cost reduction of 64 percent in cents per Watt versus the Q1 2017 benchmark
- Customer acquisition cost reductions of 24 to 74 percent versus the Q1 2017 benchmark
Roofing companies have the potential to turn legacy customer lists and their steady roof replacement inquiries instantly into a pile of solid solar customer leads.
Clearly, if it was this easy for roofing companies to tack on solar installation services, they’d have done it by now. Solar technology isn’t exactly plug and play (although it is getting close), and the solar sales process is a different beast than roof replacement sales. There are obstacles to be sure, but heading into California’s 2020 world, roofing companies bundling solar installations into their product offering seems like a no-brainer. Do leaders in the segment agree? Are we headed down this pathway?
Would you like solar with that?
GAF is one of the largest roofing suppliers in America, with over 6,000 GAF-certified roofers across the country — many of whom are already partnered with similarly sized homebuilders. The company debuted its own roof-integrated solar mounting system in 2017, DecoTech, and is now dramatically expanding its solar product and service offering via a new sister company, GAF Energy, to make a dent in supply chain, customer acquisition, labor and permitting costs.
“If you look at solar, soft costs are a greater percentage of the overall costs than the hardware,” says Martin DeBono, president of GAF Energy. “We determined that to get the scale to make a meaningful impact, we had to attack both, so at GAF Energy we have a full organization whose focus is to make every roof a solar roof. It’s not just about the product but the complete experience for the homeowner to get solar on a roof, commissioned and generating energy.”
The big production homebuilders operate at such scale that they need a complete solution for solar from the likes of Sunrun and SunPower. The GAF Energys of the world on the other hand are building out services for the mid-tier, long-tail contractors.
“The production builders have so much purchasing power, they drive our parts down really low in solar by placing large RFPs to start a pricing competition,” DeBono says. “But with the services we are now offering, we will be much more valuable to mid-market and smaller players. On the completion of install, we will provide electrical services and PTO services [permission to operate]. Contractors won’t want to deal with the utilities if they don’t have that expertise, so we will provide that.”
David Jenkins, director of development with Beacon Roofing, a $7 billion roofing and building supplier with more than 100,000 individual customer accounts across the United States and Canada, thinks roofing contractors already established in any market can meet and drive this demand much quicker than national solar installers (with the help of Beacon, of course).
“The pitch of Sunrun and SunPower is ‘hey builder, let us take all of the difficult solar stuff off your hands,’” says Jenkins, who sees Beacon making this business model possible for solar and roofing contractors of all sizes. “We kit the system for them and deliver it to the jobsite, and we help them drive down the cost of a standardized solar array that they can scale and keep consistent within a new construction community. We’re going to be the go-to solution for custom homebuilders and folks that want to have a say in how they specify the solar that’s going on their homes.”
These are the types of business model innovations NREL was factoring into its pricing outlook. Beacon launched its solar division back in 2008 to carry leading brands in solar products just as it does roofing and building supplies. The solar division is now primarily focused on long-tail residential installers and roofing companies, and Jenkins tells us they are expanding their service offerings like GAF Energy with stuff like logistics, just-in-time delivery, credit and cash flow support.
“Because of our scale and presence in these markets we can benefit when a new solar market gets stronger and suddenly starts growing rapidly whether it’s Florida or Illinois or any state with a new interest,” Jenkins says.
Both DeBono and Jenkins note that the solar sales disconnect is a very real barrier, but both Beacon and GAF Energy have built tools to simplify things. GAF Energy plans to remove that friction by appealing to homeowners at the same time they are getting a new roof with the help of a quick estimating and design tool for both homeowners and roofers.
“We’re going after people who want a new roof with a would-you-like-fries-with-that approach,” DeBono says. “We need to be sure our customers are prepared to have that conversation, and our roofing partners are ready to have that conversation, so that’s what we’re rolling out right now.”
Solar installers should seriously explore making use of the roof replacement pathway too, either through channel partnerships or by offering in-house roof replacement services. Gary Liardon, president and COO at PetersenDean Roofing & Solar, tells us they are driving a blend of the two industries.
“We have invested in cross training that will provide for efficiencies in new construction installations where the roofer and PV installer will divide tasks,” he says.
In the State of California, PetersenDean employs its own install teams and self-performs the work, but on a national level it has a combination approach using both direct employees and preferred installation subcontractors.
Beacon’s new 3D+ platform, pitched as an “Amazon-like purchasing portal for B2B contractors” is a slick new tool for estimating a roof replacement job and could be a perfect entry point for solar installers looking to grow their customer list. Contractors can order and get delivery of the solar materials and roofing materials that they need at their warehouse or jobsite. With its Pro+ product, contractors can automate customized order workflows, get access to live pricing, send material orders directly to their Beacon Roofing Supply location and track deliveries from theirsmartphone.
“Having homeowner-facing salespeople is one of your highest costs in the solar business, and when you can increase your closing ratio by several percentage points and can sell a roof and not turn away those potential projects, that’s where you get the dramatic return on investment — at the contractor level,” Jenkins says. “We’ve got pros trained on how to coach installers to improve their roofing business, or if you’re in the trade and want to get into roofing, we have excellent people and tools to do that.”
DeBono also believes, no matter the tools used, customer interest in solar has hit a tipping point, which is really what’s causing all of these new divisions and software tools to launch in the first place.
“The big change I’ve seen among homeowners and consumers is the awareness of their impact on the environment and their desire to actually do something,” DeBono says. “As long as I’ve been in solar people have always been aware of the benefits of solar, but now we are seeing the expansion of that potential customer base.”
One other thing to consider as the years roll is the combination of more efficient homes and no sell-back shrinking the average residential solar system size right along with solar installer margins.
“With TOU rates, our analysis shows, for most customers in California, a smaller system provides a higher ROI,” DeBono says. “Contractors used to 7-kW systems will be selling 4 or 5 kW. I think they will need other offerings for their customers to maintain their same business.
“Think of it this way,” he continues. “All roofs will be this way in 20 years. So, there will be a conflict at some point because the largest roofing companies in the world will be doing this. Solar installers have the skills to do [roof replacements], and it could be an additional amount of business. If you’re only going to install solar, your life can be dictated by policy and tax code and things outside of your control. But if you have a business that’s both roofing and solar, it certainly mitigates the risk and there’s a hell of a lot more demand.”
New homes requiring solar. The largest roofing and building materials distribution companies launching whole new divisions to serve solar sales. Everyone we talk to says there will be plenty of solar business to keep everyone busy, but we can’t shake the feeling that the business of the retrofit solar installer in California will shift much more dramatically than people expect, dictated by the approach of long-established homebuilder and roofing channels.
One thing all of these new product procurement and installation service channels lack is a plan for dealing with PV systems post-installation. They can make a PV system as easy to install as a roof, but the PV itself, its combination with storage and its ever-growing importance within smart homes will require a much greater level of service throughout its lifetime.
Therein lies a key for today’s solar installers to stay an integral part of home energy in 2020 and beyond. We will explore the opportunity for storage, monitoring and smart home services in our next installments.
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