What Does the Future of Residential Solar Look Like?

The solar industry in 2020 won't look much like the solar industry did in 2015. Only five years will have passed, but the way customers, utilities, and installers look at the business will be very different.

2015 was the last year Tesla's (NASDAQ: TSLA) SolarCity dominated the industry, using its financing prowess and scale to build THE dominant business in residential solar. Since then, Tesla has begun winding down SolarCity and national installers have lost market share to smaller rivals. Utilities have also fought back against rooftop solar by adding new fees and lowering the rate at which customers are compensated for exporting electricity to the grid. How companies adapt to these changes could determine their future.

Customers are taking control of their solar future

One of the biggest changes I think we'll continue to see in the next few years is customers choosing what they value in solar energy. Some will want the lowest cost, some will want the best technology product, leasing or buying solar systems will be a choice they'll want to make, and some customers may want to do everything they can to cut their ties with the grid by installing energy storage. Installers will have to adapt to that rather than telling the customer what they're getting, as SolarCity did for many years (SolarCity picked out most of its solar components itself, not customers).

In some ways, this transition is already happening. Vivint Solar (NYSE: VSLR) and Sunrun (NASDAQ: RUN) have begun offering loans and cash sales to go along with their traditional lease businesses. And both are also slowly rolling out energy storage products. These offerings will bring more choice to solar installations.

SunPower (NASDAQ: SPWR) has long offered lease, loan, and cash sales for its solar systems, and says it will launch an energy storage solution later this year. It also has a different model, selling through dealers rather than installing residential solar itself, leveraging regional installers.

Complete solutions will be key in the future

I don't think the boots on the ground installation part of rooftop solar installations is going to be a big differentiator for solar companies going forward. The industry will take a path similar to home construction or roofing today, with local contractors doing most of the work to install solar modules. The role of the large solar company will be to provide solutions and sales leads. And in that sense it's less clear who will take market share and create value for investors.

I think SunPower has a valuable solution with the world's most efficient solar panels, a digital sales platform for dealers, and an upcoming energy storage product. But it's only around 10%-20% of the residential solar market, and will always be a premium option.

Vivint Solar and Sunrun have long leaned on their national footprint to generate sales. But they need to start creating differentiation through products like energy storage and monitoring. If they aren't installing superior equipment, they'll be competing on cost alone against smaller installers, which won't be a good position to be in.

SolarEdge Technologies (NASDAQ: SEDG) -- which makes power optimizers, inverters, and monitoring products for rooftop solar -- is also in an interesting position. It provides a key product to residential solar installers, but doesn't control the sales process and is in a tenuous position in the market. Previous inverter companies like Power-One and Enphase Energy have had a hard time building a sustainable position without controlling the entire solution sold to customers. And it's unclear if customers really care which power optimizer or inverter ends up in their home as long as it works.

Residential solar market is still shaking out

Companies that can provide the right components to the residential solar market in the right package will have an opportunity to generate very profitable growth. But right now it's unclear who has the best strategy and who will offer the complete solutions that customers will demand, from solar modules to energy storage to monitoring and smart energy control. The next 6-12 months of product introductions will likely tell a lot about who has the vision to build the solutions the market needs.

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David Gardner owns shares of Tesla. Tom Gardner owns shares of Tesla. Travis Hoium owns shares of SunPower. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.