On July 6, San Francisco-based Sunrun, the biggest residential solar power company in the US, acquired one of its main rivals, Vivint Solar, in an all-stock deal worth $3.2 billion. It’s the biggest consolidation in the solar industry’s history, posing a threat to Tesla, the number-two competitor for rooftop panels.
In a statement, the companies emphasized that the move was motivated by the opportunity to cut costs—up to $90 million per year—by merging offices, squeezing out supply chain inefficiencies, and curbing redundant R&D. But it may also be an effort to stay ahead of a subtle but important shift in the US residential solar market: Today, most customers buy their own panels, rather than leasing them.
In the early days of rooftop solar, panels were too expensive for many homeowners to buy outright. A typical home solar setup in 2010 could cost more than $50,000—hard to justify for anyone but diehard environmentalists. So to make the purchase more palatable, companies like Sunrun and Vivint began to offer various kinds of leases.
Homeowners could pay a monthly rate to lease the panels. Or they could let the company fully own the panels, and instead just buy the electricity they produced. Either way, leases offered lower upfront cost to homeowners and a steady flow of cash to companies (Tesla has also focused on leasing, a model it adopted when it acquired Solar City in 2016).
But in recent years, the cost of solar has plummeted. The same home system now could cost less than $18,000, with several thousand more shaved off by federal tax credits (which, in a lease, accrue to the company, not the homeowner). These days, most homeowners think it makes more sense to buy.
In the first quarter of this year, direct sales made up 76% of the US residential solar market, said Tara Narayanan, a solar analyst at BloombergNEF, compared to 39% in Q1 2016. In other words, even though the overall solar market is booming (notwithstanding a hit from the pandemic), Sunrun and Vivint were competing for a shrinking slice of the pie, she said.
That transition could gather more momentum in the next few years as the federal solar tax credit gradually phases down to zero, as it is set to do by 2022. Companies have been passing the tax credit on to their customers in the form of lower lease rates; without it, leases will be even less competitive with ownership.
For Sunrun, Narayanan said, the acquisition is also a way to compete for another emerging corner of the solar market: distributed battery storage. The idea is to lease big home batteries to solar customers, using their excess capacity to hold and distribute power to the broader grid. In that vision of the future, a big solar company like Sunrun might look less like a hawker of panels and more like a new breed of electric utility.