The residential solar industry is going through a pair of simultaneous changes that could alter the industry as we know it over the next decade.
Over the past 18 months, it's become clear that the long tail of solar installers is taking the industry back from a small number of large installers, driven by the shift from lease/PPA financing to cash and loan sales that are more equitable to small companies. And with national installers paring back on sales and marketing efforts, it's hard to see them regaining share in the near future.
On the horizon, we can also see energy storage emerging as a product that will likely be paired with solar as time-of-use rates and demand charges become more common. With that in mind, GTM Research's latest Energy Storage Monitor report predicts that residential energy storage will grow from almost nothing today to over 600 megawatts annually by 2021, most of it paired with solar.
So how will the energy storage business feed into the long tail of installers?
Pairing solar and energy storage isn't as simple as it seems
One of the reasons long-tail installers can be successful in residential solar is because they're installing fairly “dumb” components. Solar panels aren't exactly smart devices, and while inverters and energy meters are more complex in their interaction with the grid, they're reporting data about energy production more than dynamically controlling it.
Energy storage is a completely different beast. Whoever controls the energy storage system will need to be aware of time-of-use rates, demand charges and consumer preferences. Smart devices will also need to be taken into account, and all of this will need to be done at thousands of locations across multiple rate structures at different utilities. A battery paired with solar in the future will require an incredibly complex algorithm to operate efficiently, something that long-tail installers won't be equipped to develop themselves. That means there's a natural hole that energy storage companies will try to fill.
Everyone has their eyes on energy storage
This need to provide an energy storage solution to long-tail installers is a challenge everyone in the industry can see coming, and everyone wants a piece of the action. Solar panel manufacturer SunPower has been investing in energy storage for years and supported Tendril in part to invest in the data needed to operate energy storage systems efficiently. Tesla's Powerwall 2 is the brains of its solar-plus-storage product and includes an inverter to make installation easier. And Sunrun has launched BrightBox in Hawaii and California. And those are just the national installers (or national network of dealers in SunPower's case), which tend to view energy storage as a natural extension for their customers.
SolarEdge is trying to leverage its optimizer and inverter market share with a product called StorEdge. For now, the capabilities include backup power and self-consumption, but that will likely be expanded in the future. Enphase Energy introduced a scalable AC battery that marries with its microinverters. Like SolarEdge, it sees backup and self-consumption as its storage justification for now.
Then there are companies like Sonnen and Sunverge that are trying to build energy storage businesses alone or through partnerships, rather than tagging along with another part of the value chain.
This is a small list of companies eyeing energy storage, a concept that long-tail installers, not to mention customers, are still trying to get their heads around.
Whoever “owns the customer” will dominate energy storage
The companies named above range from solar manufacturers to standalone energy storage companies, and each one sees their role differently. An inverter company would argue that its technology is the most important piece of a solar installation, as it functions as the “brain” and is an obvious spot to bolt on energy storage. Panel manufacturers would point out that an inverter isn't needed without solar panels, and they're likely looking at designing fully engineered solutions that include solar panels, inverters and energy storage (think Tesla's integration of SolarCity).
I recently asked EnergySage CEO Vikram Aggarwal about how he sees energy storage in the long tail. EnergySage's recent 2016 Solar Installer Survey, which is focused on the long tail of installers, showed that energy storage is the No. 1 new offering planned for 2017, so there's a lot of interest. But how that rollout will happen is still uncertain. He told me, “Larger installers like Sunrun are starting to roll out lease/PPA-style products that include storage, but smaller installers will likely offer solar-plus-storage options via a cash/loan purchase in areas where the economics are reasonable.”
According to EnergySage's most recent Solar Marketplace Intel Report, 75 percent of these long-tail installers are using SolarEdge or Enphase inverters and will likely be using their monitoring systems as well. To customers, they're the interface they see when they monitor their solar system, so they're a logical place to add energy storage.
But Aggarwal is also seeing larger players entering the market as well. “There are a bunch of manufacturers that offer residential-scale storage options outside of the U.S. that are considering moving into the U.S. market in the next year or two — LG, Panasonic and Schneider Electric come to mind.” And as solar panel manufacturers, companies like LG and Panasonic may be looking at a more integrated solar-plus-storage offering as a way to capture more value in the market.
The integrated route is how SunPower CEO Tom Werner sees the market playing out as well. SunPower has been testing energy storage for years now and is building out the infrastructure needed to maximize value for behind-the-meter energy storage, which isn't a trivial task. Werner told me, “For the foreseeable future, it's a big guys game. It's not do-it-yourself [to] add a battery.”
The reason Werner sees big companies controlling the market has more to do with how an energy storage system will be designed and controlled behind the scenes more than who can effectively build a battery system. “It's really pretty complex because the value of a battery today is really backup, but in the future, it'll be selling energy back to the grid. Of course, that's a highly regulated market, so you need to understand the regulations, and the regulations evolve, and only the big [companies] can afford to keep on top of that. In addition, there are regulations on batteries in a house at this scale. Fire departments want safety requirements and certain permitting, and big companies can keep track of that kind of thing.”
Long-tail installers are going to have to lean on someone to build the algorithms to control energy storage in the future — and not all energy storage offerings will be created equal.
The question long-tail installers will have to answer
It's highly likely that the long tail of solar installers will gain market share in coming years, as well as that they will start offering energy storage as an add-on to solar systems. What's uncertain is who will provide the capabilities they need and allow them to scale in the market.
One possibility is that solar panel manufacturers push into the inverter and energy storage market with their own, or partner, solutions, and if customers see solar panel brands as a key to their buying decision, this makes sense. According to GTM Research's U.S. PV Leaderboard, SolarWorld, SunPower and LG Electronics held over half of the long-tail market share in the first three quarters of 2016, and that may be a position to build on.
Another argument would be that inverters are really the brains behind a solar system, and energy storage needs to be an extension of that brain to make financial sense. In that case, customers would make their buying decisions based on an inverter manufacturer (and interface), and select solar panels and batteries like commodity add-ons.
Batteries could also be a completely separate decision, a premise that Sonnen is building on today. Most of the company's batteries are currently installed in Germany, where self-consumption makes financial sense, but it's developing a U.S. business as well.
Getting the business model right will be key for long-tail installers getting into energy storage, and there's no easy answer as to which strategy will win. But they're in a powerful position because suppliers will be fighting tooth and nail for the chance to stake out a dominant position in the nascent energy storage market.
Disclosure: Travis Hoium owns shares of SunPower.
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