United States – Renewable Energy Sources – US Solar Growth Slows, But Opportunity Is Knocking: 5 Ways to Open the Door

Residential solar has long been considered the easiest path to accelerating the energy transition, given low project and financing costs and strong tax incentives (e.g., IRAs). Installations grew rapidly from 2020 to 2023 (see Figure 2).

The U.S. solar market, however, has experienced a new round of stress over the past year. Venture capital investment is down about 80% compared with the same period in 2023, and corporate fundraising is down 4%.

Homeowners in some jurisdictions are facing reduced subsidies despite rising capital costs, creating financial challenges when considering home solar installations. Meanwhile, higher financing, labor and customer acquisition costs are putting pressure on companies trying to sell to them. These factors are putting pressure, while the Inflation Reduction Act encourages companies to move production of key components to the U.S.

Some of the uncertainty surrounding solar companies has been resolved, at least with respect to whether rooftop solar installations qualify for the domestic share premium under the Inflation Reduction Act: In mid-May, the Treasury Department and the Internal Revenue Service released additional guidance on the domestic share premium.

It is worth noting that ground-mounted and rooftop photovoltaic (PV) systems have been confirmed to be covered by the current IRS Continuity Safe Harbor and eligible for the domestic content credit. This benefits domestic manufacturers and owners of many recently installed systems.

The new guidance introduces a simpler method for homeowners to determine the Domestic Cost Percentage and then credit eligibility. Instead of relying on direct costs from component manufacturers, taxpayers can take advantage of a new safe harbor that includes predefined classifications and cost percentages for components in the calculations. This clarification reduces the burden on solar taxpayers to collect data directly from manufacturers, allowing for easier verification and confirmation of eligibility in the hopes of stimulating consumer demand for renewable energy.

The pace of installation growth may be slowing, but home solar is still an important piece of the decarbonization puzzle. Solar photovoltaics is one of the most mature renewable energy technologies, more cost-effective than new alternatives (even without subsidies). Moreover, given that so many U.S. roofs lack panels, the case for home solar, per dollar invested, is sound from a policy perspective.

Understanding the background and drivers of market changes can help investors capitalize on changes—and potentially changed valuations—whether through consolidation or capital increases, as well as identify risks that need to be mitigated (e.g., helping investment companies improve performance).

Business Model and Structured Finance Issues

Much of the blame for the weakening growth prospects for the residential solar sector can be attributed to economic instability, trade conflicts that affect the availability and price of solar panels, and inflation.

But in addition to experiencing reduced or stagnant customer demand, residential solar companies are grappling with industry-specific issues. Business models that rely on self-financing growth, and therefore growth at all cost levels, have weighed on the performance of domestic financiers and installers. Growth plans based on a 33% CAGR achieved over the past four years, for example, have become overly ambitious in an era when growth rates could fall to 7%.

The residential solar market is competitive, and to keep up with projected systems, players have sought to expand as aggressively as customer enrollment allows. Geographic scaling often results in installers and financiers entering into partnerships with local installers and customer acquisition service providers, while establishing multiple layers of management to oversee it. These layers not only compress margins, but also create fixed costs during periods of low demand, burdening domestic G&A.

Similarly, many companies that have decided to scale their operations have done so inefficiently, relying on processes, controls and management tools that were better suited to their previously smaller size.

The residential solar market has shifted towards consumer leasing schemes to enable efficient monetisation of the all-important tax breaks. However, higher interest rates have impacted consumer demand as well as the business models of installers and financiers.

In this environment and in the pursuit of further growth, installers will be tempted to expand their offerings to riskier customer segments. The resulting ABS securitizations of these systems, however, should attract less favorable terms from underwriters and investors. Traditional customer acquisition and pricing strategies are more important than ever in this more stringent interest rate and monetization environment.

This backdrop could increase stress across the sector’s value chain. Business model issues for installers and investors, combined with moderating customer demand, could also result in reduced demand for residential-oriented installation equipment, such as inverters or racking equipment. This stress environment across the industry could depress valuations and limit access to capital for some, while creating opportunities for others.

Opportunities to Survive a Difficult Market

Even as the skies grow increasingly cloudy, there is ample opportunity for companies in the U.S. solar market to improve performance. Companies in this space should focus on inputs and levers that enable them to maintain a lean presence, effectively manage liquidity and cash, and realistic forecasts until cash flow margins reliably improve.

AlixPartners actively supports players in this sector. There are five factors that can improve operations for key players in the value chain:

1. Design an effective go-to-market strategy

Installed costs have nearly doubled in the past year, while Lifetime Value/Customer Acquisition cost ratios are deteriorating rapidly. An effective go-to-market strategy is essential in an unforgiving business climate.

• Improve the accuracy of customer segmentation—or re-segmentation. Reassess the most profitable segments to prioritize and consider existing lower or unprofitable parts of the market.




• Balancing a high-touch sales reach with a lower-cost, entry-level approach




• Leverage machine learning for precise pricing and optimized revenue-margin trade-off assessment and prioritization




• Design offers to increase cross-selling

2. Optimization of general and administrative costs

The fixed operating costs associated with an organization that is geographically broad may have higher G&A costs and be less competitive compared to smaller, local competitors. This is due in part to the multiple levels of management within the organization that must oversee different geographies, as well as the intermediaries and dealers involved in the customer acquisition and service delivery stages.

• Bring management closer to your customers, reducing costs and enabling more flexible service offerings




• Improve point-of-sale reporting to senior management, streamline costs and improve resource allocation and planning




• Reduce unnecessary layers of management to create a cohesive team that responds to customer needs with lower operating margins




• Automate and simplify internal processes and workflows to reflect best practices in a maturing market




• Evaluate the relationship model with local, competitive installers or service providers versus dealers

3. Tighten your cash management

With expectations of longer periods of reduced cash flow, more rigorous working capital management is necessary, especially when access to external funds is limited.

• Rationalizing capex- and balance sheet-based offerings such as service contracts or securitization-backed leases




• Explore alternative sources of capital, including asset sales (i.e. loan and lease portfolios)




• Increase control of credit databases and cash on hand, and combine this with the optimization of receivables and payables




• Accurately assess and implement working capital gaps in lead forecasting

4. Develop a solid business plan

A solid business plan is the foundation for addressing significant weaknesses while also supporting potential mergers and acquisitions and capital raising.

• Review financial, planning and analysis processes to account for changes in taxation, customer revenue, social applications and sales/lease metrics




• Refine the business plan and make related structural changes to contracts, bid development, pricing, and profitability analyses as needed

5. Identify consolidation opportunities

Shrinking access to public capital, given the size of the dominant players in residential solar, will lead to consolidation. Unease in this space will expose underperforming companies, and attractive, dying valuations will lead to asset and corporate deals.

• Acquisitions for scale will only exacerbate profitability problems for the buyer, who must exert effort to manage liquidity. Targets chosen for channel, regional or supply chain efficiency increase the likelihood that the transaction will be accretive




• There is unlikely to be an opportunity to acquire assets in the near future, as providers of monetized assets will typically be vulnerable to takeover by established lenders




• Corporate deals can happen in the current economic climate, but financing is likely to be difficult to obtain. A successful transaction will require ruthless post-merger integration and cost cutting to gain any efficiencies from the merger

The content of this article is intended to provide a general guide to the subject. You should seek specialist advice regarding your specific circumstances.