Sunrun’s Vivint Acquisition Creates the Leader in an Evolving Residential Solar Market
By Brentan Alexander, PhD; Chief Science Officer & Chief Commercial Officer
Sunrun’s nearly $1.5 billion all-stock acquisition of Vivint Solar, announced today and expected to close later this year, creates an undisputed king in the residential solar space. The combined company, valued at over $9 billion, will control over 15% of the residential solar market. Its closest competitor, Tesla, claims just 6% of the market; its solar business entered free fall after it acquired the one-time leader SolarCity despite its troubling financial outlook (which led to shareholder lawsuits). Sunnova, another competitor that went public just over a year ago, is valued at only $1.6 billion, a fraction of Sunrun today. A combined Sunrun and Vivint represents the largest consolidation in the residential solar market to date and sets up Sunrun to lead the sector as it grows and matures.
The Search for New Roofs
The residential solar business model requires finding vast numbers of new customers looking to put solar on their roofs, compelled by the promises of utility bill savings. Installers expend significant resources on sales and marketing teams that, in many cases, go door-to-door to sign up new customers. Now with most early-adopters off the market, companies are hungrily hunting for new customers. But some approaches to customer acquisition have floundered. For example, when Tesla moved to an online-only approach and abandoned targeted sales activities, its market share collapsed.
For the past half-decade, growth has been enabled by the rapid fall in prices for solar equipment combined with rising utility rates. As prices dropped, houses that previously presented uneconomic value propositions suddenly became attractive solar targets. Although those trends continue, the impending roll off of the residential solar investment tax credit (ITC), valued at 26% this year and scheduled to drop to 22% next year and 0% the year after, threatens to push business in the wrong direction. The ITC roll off essentially adds cost to the system, tightening margins. COVID-19 hasn’t helped: Tax equity that can monetize the ITC has become harder to find with the large uncertainty in corporate profits.
For many years, Sunrun and its competitors pushed consumers towards a lease option, wherein the solar company would finance the cost of the equipment and guarantee an electricity rate for decades, usually 20 years. Homeowners would get power with little to nothing upfront, and all maintenance would be handled by the lease provider. The industry has been shifting in recent years as more homeowners have sought to buy systems outright and capture more of the value created by their systems. To avoid being squeezed, Sunrun and others have responded to these changes by offering financing options to buyers and signing up customers for service contracts to maintain their systems.
It’s a cutthroat business that favors those with more efficient customer acquisition strategies and access to cheap capital. Sunrun’s appetite for Vivint seems squarely aimed at improving their standing on both fronts, boosting margins and allowing Sunrun to outrun competition. Sunrun estimates that the combined company will realize $90 million in “cost synergies,” lowering the cost of customer acquisition. Further, Sunrun Executive Chairman Ed Fenster noted on an informational call that they expect the combined company to more effectively and efficiently raise capital to support their operations. Offering leases and financing options depends on access to low cost capital (and tax equity while the ITC remains in place), and the larger Sunrun should have an easier time finding cash.
An Evolving Revenue Model
This Sunrun deal also sets up well for the long-game: At some point many years out, there won’t be enough open roofs with sufficient solar resources to justify further solar deployments, and costs to acquire new customers will jump. As a result, Sunrun’s grid services business is likely to grow in importance. By building to ensure there are gigawatts of distributed solar and storage under management, Sunrun will be positioned to control storage systems and supply electricity to the grid on command, a valuable grid management service.
Sunrun (and its competitors) have rushed to enable this market by offering battery storage options for customers as part of the solar system pitch. Rolling “public safety” outages in California and the Coronavirus pandemic have helped whet customer appetite for resilient systems. Unlike a standalone solar system, battery storage devices require another level of oversight and control. When should the battery by charged and discharged to maximize customer benefit and unit life? How can a customer ensure their storage device is ready to supply electricity to the grid in times of high demand?
The packaging of distributed assets into so-called “virtual power plants” has only started recently and is still in its infancy; startups focused on algorithms to dispatch these assets abound. Sunrun has already started to dip its toe into this game. They announced their first wholesale contract with a grid operator in early 2019, are now working to utilize their assets in California to replace a gas-powered spinning reserve power plant in Oakland, and recently reported $50 million in near-/final contracted revenues associated with grid services (although a small fraction of the top-line, to be sure).
Competing in the grid services game requires scale. The more assets you have to manage, the more power you can pump on or off the grid, and the more value you can capture from grid services. Which brings Sunrun back to their current primary business: customer acquisition. The more customers Sunrun acquires today, the more they enable their grid business tomorrow.
Navigating the Rough Patch
The last six months have been a wild ride for the residential solar space. Business during the first quarter of 2020 was up for Sunrun, with year-over-year installations growing 13 percent. By the end of March, things had cratered along with the economy: business was down 40 percent. Sunrun and its competitors, heavily dependent on in-person marketing techniques, began furloughing or laying-off workers and preparing for a very different future. 72,000 jobs were lost across the sector as a result. Online sales systems were spun-up on the fly and contactless acquisition processes were rolled out. Business has ticked back up recently, but is still far below the levels projected at the start of the year. Estimates are that demand will be lower than pre-pandemic levels for the foreseeable future.
Vivint was especially reliant on door-to-door sales methods to grow its business, a model ill-suited for the current moment. However, Sunrun’s acquisition of Vivint is as much about surviving the current moment as it is about prepping for the future. Although some relief may come from Congress, where House Democrats have raised the prospect of an ITC extension, Sunrun is preparing for an uncertain future in which the old rules of customer engagement are essentially against the law. By combining forces, Sunrun and Vivint get a larger megaphone from which to advertise digitally, and the ability to scale up targeted in-person marketing across a variety of distribution channels when lockdowns ease.
For now, both Sunrun and Vivint are sounding a confident note, highlighting their combined strength and painting an optimistic future together. Wall Street (not always the best judge of things) seems to agree, with both Sunrun and Vivint stock up considerably today given the news. Tesla, Sunnova, and others are surely taking note. When the transaction closes, the larger Sunrun will be the undisputed leader in residential solar, evermore ready to rise.
Originally published at https://newenergyrisk.com on July 13, 2020.