Rooftop solar has great economics, but rooftop solar companies keep going bankrupt. Find out why and what we are doing about it.
Rooftop solar is a critical tool to reduce emissions and we want to accelerate it.
IN THIS ISSUE
Rooftop solar is critical as it reduces emissions and, as seen below, helps incentivize power grid load management at the household level.
Rooftop solar is profitable and has only improved as solar panel efficiencies increase. Unless you move in the next couple of years, a rooftop solar investment compares well against the projected returns for almost every asset class, and we’ve benchmarked them here.
Rooftop solar companies have been going bankrupt as they struggle, which conflicts with the above. Over 100 residential solar companies declared bankruptcy in the US last year alone, more than the previous three years combined. At a time when solar economics are only getting better, how is this happening? The math on customer acquisition doesn’t make sense, and we dig into this below. This should concern everyone who cares about the environment.
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THE COMPLEX DYNAMICS OF ROOFTOP SOLAR
Rooftop solar is fantastic. It reduces emissions and can also be deployed rapidly without the land use concerns of large-scale solar farms. Creating additional solar power without any impact on ecosystems is a dream for environmentalists. These benefits are widely known. One of the ones that often isn’t discussed is the ability to incentivize efficient power usage at the household level. Most people know that using power simultaneously (evenings) will have a larger carbon footprint, but there often isn’t a carrot or a stick associated with change. You can see in the California power grid below that as evening approaches, demand spikes. With solar not producing, most grids meet this incremental demand with fossil fuels. This chart looks similar across power grids but is certainly starker in regions where you can see the benefits of renewables during the day. Moving demand to the middle of the day removes some of those emissions, and the fastest way to do that is to have people incentivized directly.
"Show me the incentive, and I will show you the outcome” is a classic line from Charlie Munger that rings true here. If power is free during the day for a household, and they were the ones who made that decision, they are very likely to take advantage of it. There is always talk about changing incentives for an entire grid, but just imagine how long that takes (agencies, stakeholders with competing priorities, government involvement, etc.). Once someone has installed rooftop solar, though, they are suddenly very aware that if they use solar power during the day (appliances, etc.), it’s suddenly free compared to the evening.
The broader societal benefits above are clear, but the personal benefits have improved, too. The average payback across different solar providers and regions is currently 6 to 12 years (avoiding predatory financing is a way to tip this in your favor, which we will discuss more in the future). If we compare that against the expected asset class returns from GMO (normalizing for inflation), then you can see that rooftop solar competes with the top expected returns and is still in the middle of the pack if you are planning to sell in 9 years (slightly above average time to change homes). That’s a pretty good trade right now if you know that other things keep you in your home. Part of this is because current higher valuations across other asset classes make forward returns for solar look more appealing, but that doesn’t mean it’s not fair/likely if those other markets have already pulled forward returns.
Zillow and others have also pointed to data that suggests rooftop solar can increase the value of a home by ~4%, which would be slightly higher than our estimates for the ascribed value above. Regardless, it means there are a couple of ways to win.
With all these benefits, why have there been rooftop solar bankruptcies and customer lawsuits? The second problem is the result of the first, and that is that customer acquisition costs are too high for the rooftop solar industry.
It’s expensive to find customers, and then when you finally do, there is still a percentage that says, “no, this is way too expensive.” If you think of that simple problem, you can do two things. Find more customers for lower cost (easier said than done) or make sure that when you find customers, they don’t say no. Financial engineering was the solution to this, and a lot of loans were provided that made installations look cheaper at the onset but weren’t actually helpful in the long term. It even went so far as fraud by some sales teams which has hurt adoption and the environment (ironically, the fraudulent loans ended up in asset-backed securities deemed climate-friendly and helping the world). This was an upsetting practice and has luckily declined, but the poor reviews and experiences remain. These aggressive sales and financing tactics then increase customer acquisition costs further as now the responsible providers have to explain how they are different than the companies that acted poorly. “It is genuinely hard for these national businesses to maintain profitability—if you want to grow, you have to spend a lot of money on customer acquisition,” says Michelle Davis, Head of Global Solar at Wood Mackenzie.
People working on environmental solutions are often optimists. They need to be by nature, and publicly they want to be, for fear that it will hurt the broader movement if they don’t show constant momentum. This is an unfair bar, as anyone who has built anything knows there are constant highs and lows, and the problems you face simply let you learn and improve. So let’s understand why the acquisition cost is high, so that we can start providing solutions with our community.
Imagine you were playing a random carnival game where your ball could fall into one of 6 holes.
If 5 of the 6 were terrible, that would feel like pretty poor odds, and you’d probably have to pay a lot to get what you want. Acquiring a rooftop solar customer is actually pretty similar. Some people don’t want rooftop solar at all. Amongst those that want it, several items might prevent them, including everything from financial constraints to house design. In fact it looks a lot like the below.
We are working on a few ways to solve several of these problems in the long term. Our current hypothesis are below and would love feedback on which of our ideas are the worst.
Solutions We Want To Provide
Software exists to quickly evaluate your house/location for solar and we want to get that into people’s hands. This will then let them self-select for rooftop solar (certain companies provide discounts/savings if customers approach them since it saves the high marketing costs we discussed, benefitting them and the customer).
We are reviewing companies so that we feel comfortable recommending providers. Trust is critical to us and saves customers time.
Financing solutions separate from the sales process can often be better for households, which will improve payback economics/adoption.
In the meantime, we are offering free advertising for rooftop solar companies for ten weeks before the end of 2024. The companies will need to meet our review of service standards, but other than that, it’s simple and free. We are looking forward to highlighting solar providers for everyone shortly!
IN PARTNERSHIP WITH ROSE & MCCLARTY
A big part of lowering emissions is providing energy efficiently. The firms responsible must constantly tell their story to clients and stakeholders. Rose & McClarty assists them with copywriting, content strategy, social media, and content writing.
Learn more and get in touch with their team using the link below.
150+ JOBS
It’s that simple - we collect job listings to help accelerate the sector. If we can provide intros to companies that are partners, we would be happy to do so. Feel free to reach out to check.
Manager, Sustainability ESG, Deloitte
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(150 remaining jobs are listed on our terrible website to stay within email limits)
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