A Deeper Look into the Fragmented Residential Solar Market

(Today’s post is co-authored with Alex Chun, who just received his MBA at Haas and is an alumnus of our Cleantech to Market class.  Alex is the Business Intelligence Manager at Sungevity.)

Who sells residential solar photovoltaic systems (PV) in California? How many companies operate in this market?  What fraction of the market is controlled by the largest companies? How is this changing over time? In today’s post we look at data from the California Solar Initiative (CSI) to better understand the structure of this market.

Since 2007, 1.9GW of residential solar PV capacity have been installed under the California Solar Initiative. One of the truly laudable features of the CSI program is that data from the program has always been made publicly available. This has given market participants an unprecedented view into the market and spurred innovative research like the paper Severin Borenstein blogged about two weeks ago. For today’s post, we used the CSI data to look at the spectrum of companies working in this market.

Market Share by Company, Top 30 Companies 2013top30

We first looked at market share by company in 2013. The first thing that becomes apparent when looking closer at the CSI data is the high degree of fragmentation in this market. The largest firm, SolarCity, sold almost 18% of all installations in 2013, but after that market share falls precipitously. The top five companies together account for only about 40% of the market and beyond Solar City and Verengo at 9%, no other company comes close to having a double-digit market share.

Also notable is the long right tail. This is apparent among the top-30 sellers and can also be seen in the figure below which shows market share for all companies including those outside the top 30. The rainbow of tiny vertical slices shows that beyond the top five, this is a market made up of small companies, each with only a tiny market share.

Market Share by Company, All Companies 2013all

Before we go any deeper, an important caveat is that the CSI data include only those installations for which the household received a CSI subsidy. If you installed solar PV and received the Federal tax credit, but not the state subsidy, then you are not in the CSI data. This was not a large category a couple of years ago because most solar PV customers in PG&E, SDG&E, and SCE opted to participate, but the subsidy amounts have decreased over time and in 2013 the CSI covered only 22% of all new California residential solar installations. Data from Greentech Media suggest that the CSI data are approximately representative of the broader market, for example with similar market share for the top-five companies. Moreover, in 2012 the CSI covered 48% of all new California installations, and results (here) are very similar. Nevertheless, you have to be very careful interpreting these data, particularly because the fraction of the market covered by CSI has decreased so much over time.

The Long Right Tail

We next constructed a figure to look at installation volume by company. In 2013, there were a total of 840 companies who installed systems that received CSI rebates and the median volume installed was 21KW per company.  A typical system is about 4KW, so the median company installed only about 5 systems during the entire year. Even the third quartile company installed only 79KW.

Distribution of Installer 2013 KW Volumevolume

Solar City, in contrast, installed 28,000KW, approximately 1000 times the median volume. Solar City, Verengo Solar, and REC Solar look like outliers when compared with the rest of the market. The line at the bottom represents the median, 25th, and 75th percentiles. With this scale, three-quarters of the companies in the market are nearly imperceptible at the bottom of the figure, underscoring the fact that while there were 840 companies competing in the market, most of them were operating at a tiny fraction of the scale of the biggest players.

Market Consolidation Since 2010

While the market remains highly fragmented with large numbers of small installers, the CSI data show that over the past three years there has been a considerable amount of consolidation.

Installer Count Over Timeovertime

Between 2007 and 2010, the number of companies in the market increased by about 200 per year. It then peaked at 1,050 in 2010. Since 2010, however, the number of companies has decreased every year with an overall ~25% drop from 2010-2013.  While it is possible that this pattern is driven by the decreasing coverage of the CSI data, the evidence is suggestive of a consolidating market.

We also looked at the breakdown of new entrants versus surviving companies. The green line below shows the fraction of companies each year who were not in the market during the previous year. From 2008-2010, nearly 50% of the companies in the market were not in the market during the previous year. This is a remarkably high level of entry and reflects that this is a rapidly growing market. Since 2011, this “churn” has decreased somewhat with only about 30% new entrants each year.

New Entrants vs Previous Year Survivorssurvivor

The figure also shows the number of new and surviving companies in the market each year. Starting in 2010, the number of survivors (companies who were in the market the previous year) started to flatten out at around 600. Meanwhile, the number of new companies entering the market decreased significantly in 2011 and appears to have further decreased in 2013.

Long-Term Market Structure

It is too soon to say, but we may be headed toward a more consolidated solar PV market with fewer companies controlling larger market shares. In his Business Strategy class, Haas Professor Ned Augenblick discusses the five factors that lead to a sustainable strategic advantage. One of us took this class recently and can still remember all five:

  • Network Effects
  • Switching Costs
  • Restricted Access to Resources
  • Economies of Scale
  • Economies of Scope

Companies in the residential solar market do not benefit from any of the first three factors. Consumers do not receive an additional benefit from going solar from the same company as other people in their network. Sales in the residential solar market are a one-time sale, thus preventing any switching costs, and there is no restricted resource that would give companies in this market a sustained strategic advantage. To the contrary, the large number of smaller companies in this sector suggests that barriers to entry are minimal.

In the absence of these sustainable strategic advantages, the solar market does not have the winner-take-all dynamics that will drive it naturally to an oligopoly market in the same way as, for example, the cell phone OS market. Thus, consolidation will be driven solely by economies of scale and economies of scope. Where potentially there could be economies of scale is in the “soft” costs like marketing, customer acquisition, permitting, and inspections. Companies are hoping that the larger they become, the more they will be able to spread these costs across customers. Moreover, economies of scope could become important as companies take advantage of their growing customer bases to sell related products and services.

For market observers, understanding these underlying economics and market trends is important because it provides an idea of where the market is going and what the long-term market structure will be. For companies operating in the space, however, it’s even more critical.  Understanding the scale necessary to capitalize on economies of scale and scope and hitting this volume can be the difference between surviving and exiting the market. The CSI data doesn’t have all the answers, but it does suggest that the market has been consolidating over the last couple of years. If economies of scale and scope end up being important, then we would expect to continue to see smaller companies exit the market and the remaining companies increase their share of the pie.

About Lucas Davis

Lucas Davis is an Associate Professor of Economic Analysis and Policy at the Haas School of Business at the University of California, Berkeley. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.
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3 Responses to A Deeper Look into the Fragmented Residential Solar Market

  1. Lucas – thanks for a well researched and thought out article. I agree on long term prospects for market concentration but am wondering how much influence vertical integration with technological convergence (energy storage/distribution resources) may have on re-shaping the probability of additional concentration.

  2. Michael Carnall says:

    Lucas, nice exposition of the data. I do think you ignore one factor in consolidation, reputation effects. Residential PV installers are, one way or another, disrupting the waterproof barrier of the customers roof. That entails a non-trivial risk of severe damage if it is not done properly. With the long intervals between rains in California, a faulty installation might not show up for more than six months. Using an installer that has a long record of fault free installations reduces the risk that faults will exist and increases the probability that they will be repaired if they do exist.
    The risk of faulty installation also might raise the cost of new entrants since customers should require third party insurance to provide the same level of confidence a well established installer provides at no additional cost.

  3. mcubedecon says:

    One interesting dimension that may emerge is related to economies of scope. Installers are already offering packages with EV charging. Another feature might be the installation of on-site batteries. These installers may then aggregate “smart EVs” and batteries to serve storage and demand response services. The economies of scope then transform into network effects that could lead to consolidation.

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