Solar, Utility Integration

Has Solar Market Fragmentation Continued in 2011?

In March this year, we pointed out that there was a dramatically increasing number of installers and an increasingly fragmented installation market – all signs of market growth and health. This trend, we argued, was positive for the American solar industry and the American economy to help drive down costs, create local jobs, and stimulate local wealth creation.

This article is a follow-up and continuation of our original discussion on market fragmentation published in March 2011 in Renewable Energy World titled “The U.S. PV Market: A Tale of David vs. Goliath?” In taking stock of the current market trends and re-analyzing the data, we wanted to see what had changed. What new trends are emerging? What does this suggest about the U.S. solar market?

In the wake of the Solyndra bankruptcy many pundits are questioning the health and viability of the U.S. solar market and “green jobs.” While this unfortunate bankruptcy may be indicative of the challenges faced by U.S. manufacturers, it only captures one aspect of the solar industry. Two additional facets to consider are innovation (R&D) and installation.

The Residential Market

We should anticipate that most solar jobs will be in installations, as it has in more mature solar markets like Germany and Italy. The solar installation sector is a barometer of market strength because it holds the lowest barriers to entry and capital intensity within the industry. As a result, the performance of this sector in terms of MW installed, but also the level of fragmentation, serves as a proxy for market attractiveness and foreshadows trends in the solar market as a whole.

The solar integration sector experienced steady market fragmentation from 2008 to 2010. Though companies like SunPower and SolarCity continued to grow, these leaders lost overall market share as smaller local installers steadily proliferated. This was a clear trend visible in California, the nation’s largest solar market, captured in the California Solar Initiative (CSI) database.

However, this fragmentation trend has not continued in 2011. In the residential installation segment, the “Top Ten” installers have recaptured some market share, and the number of active companies has decreased. We can only speculate on reasons behind this change. 

The “Top Ten” players have likely executed well on their strategies. Negative factors affecting small installers may include the current economic environment dampening demand, a lack of access to lease models provided by tax equity investors or commercial lenders, and poor economies of scale. Obviously there are other barriers, such as complex tax policies and essentially non-existent rebates in the State of California. Regardless of the causes, the change in trend provokes the question – what would be preferable from an overall market perspective? While we congratulate the “Top Ten” on their success, do we as an industry want to see a few champion companies dominate? 

A further look into the CSI data helps formulate an opinion. Some commentators might imagine that the success of the “Top Ten” players would bring some benefits that a fragmented market would not. In theory, larger more efficient companies should benefit from economies of scale, lower costs of capital, and better execution. This efficiency could then be passed on to the customer in the form of a lower cost of installation and arguably the market should grow as a result.

Curiously, when analyzing the installed cost per watt data in the CSI database, the opposite appears to be true. The “Top Ten” installation companies do not appear to have a markedly lower cost. In fact, notable leaders including SolarCity (~$7.92/Wp), Sungevity ($8.59/Wp), and Galkos Construction ($11.18/Wp) have some of the higher average installed costs in the database.

Not surprisingly, all of these players offer solar leases to residential customers. These figures compare to the $4.37/Wp for self-installed systems and $6.62/Wp on average for all installers outside of the “Top Ten”.  Moreover, as the “Top Ten” in 2011 have taken market share, they do not appear to have contributed to market growth. The California residential market appears to be stagnant with 92 MW installed in 2010 and only 71 installed through September 20th. This compares to robust growth from 2008-2010 as new installers entered the market in large numbers.

The Commercial Market

In the commercial segment of the CSI database, we see new entrants pushing into the space, further fragmentation, and market growth. Here both the growth of the market and the number of new entrants is remarkable. The whole market seems to have woken from a three-year slumber, and the commercial segment in California is finally growing again. Whereas the commercial market had been stagnant in 2008-2010 at ~75 MW, by September 20, 2011 the market volume had already reached ~124 MW.

Meanwhile, the number of active companies has exploded from 64 in 2008 to 245 in 2011. We believe this is an indicator of a healthy and vibrant market. It is always difficult to discern the direction of causality in instances of correlation, but it is our observation that fragmentation and market growth are correlated. In regards to costs and market efficiency, here again we strangely see that the market leaders, namely SolarCity ($8.05/Wp) and Chevron ($6.73/Wp) have a markedly higher average installed cost than the average of players outside of the “Top Ten” ($5.26/Wp).

What Does It Mean?

Though the CSI data may not give a complete picture, these figures call into question whether California market leaders are indeed making the market more efficient and creating value for their customers or using a privileged position to maximize tax benefits and increase their margins. 

This data leads us to believe that a fragmented local solar installation industry will create the most jobs, the most efficient market, and the most value for the country — not to mention a better use of scare tax-payer dollars. Given that objective, how do you achieve that? An analysis of the 2011 numbers by segment presents a few ideas. 

In 2011 we see stagnant growth in the residential market. This is accompanied by a reduced number of active companies and a related increase in market share by the “Top 10.” This suggests that small local installers, many from related industries like roofing and HVAC, come in and out of the solar industry as market conditions vary. To make those companies commit to solar and thus commit to adding more jobs, we need to create the conditions for continued and steady market growth.

While attending the ACORE REFF West conference last week, many industry leaders agreed that the key to unlocking the U.S. solar market’s potential is to create fertile ground for demand. Once there is sufficient demand, the industry will grow to meet that demand. Unfortunately many state-level incentives are under scrutiny and the federal cash grant is due to expire, potentially weakening market demand.

Moreover, as many installers point out, the continued regulatory burdens and lack of financing options for homeowners and commercial-scale installations prevent the market from reaching its potential. Federal and state governments can help alleviate these impediments to growth. Unlike the Solyndra example, government can be effective at promoting the industry by fostering demand, thus creating an environment where small businesses can prosper.

At pvXchange we aim to serve small businesses. We allow buyers and sellers to place offers and requests, resulting in quick and effective shopping and purchasing. Currently serving over 8,300 solar component manufacturers, distributors, project developers and integrators, pvXchange is in the business of supporting the growth of solar on both the local and national levels.

The data used for this analysis comes from the CSI database. We are aware of the discrepancies in the data and have taken care to address some of these issues. While the data is far from perfect, we believe the imperfections do not drastically alter the general trends. To analyze market shares we have taken the name of the company performing the actual installation.