In Part I of this series, we tapped into our latest report and examined the three main parts of the residential solar development value chain (customer acquisition, installation, and financing) and three related ways to classify the market leaders.
Having such a fragmented process for closing a customer, installing the system, and providing financing can lead to inefficiencies and slow down the sales cycle. Because of this, the market has begun to consolidate across these areas as solar providers find that being vertically integrated can lower costs and maximize growth rates.
We can break down most of the recent M&A activity into a few categories.
1) Acquisition of lead generation and sales companies
As discussed in Part I, the ability to acquire customers cheaply and efficiently has proven to be a rare skill among installers. The fact that installers have had to turn to third-party originators is a testament to this challenge.
However, it’s also very expensive to pay for another company to close a customer. For this reason, one of the most common types of M&A deals over the past two years has been the acquisition of companies that are particularly good at sales. These include both originators (such as Paramount Solar, the phone sales company acquired by SolarCity in 2013) and lead generators (such as Clean Energy Experts, acquired by Sunrun this year). There is now a growing group of companies specializing in door-to-door sales (several founded by former Vivint employees) that are shaping up to be the next acquisition targets.
2) Vertical integration of installers and financiers
The next two M&A trends are the result of the struggle of partner-model financiers -- companies like SunPower that only finance systems but rely on local partners for installation. These companies must compete against each other to win the business of installer partners, which can sometimes mean taking margin hits. This competition has only intensified with a number of new loan providers entering the market using the same business model. Additionally, the installers compete with the dominant vertically integrated players, SolarCity and Vivint Solar.
Several partner-model financiers have decided that the best way to solve this problem is to acquire one of their installer partners. Sunrun and NRG Home Solar both made these acquisitions more than a year ago, and they are already proving successful. SunEdison is currently a minor player in the residential market, as NRG was before its acquisition of Roof Diagnostics Solar, but is acquiring Vivint Solar to provide an already large and growing residential pipeline to its YieldCo.
3) Consolidation of finance providers
This is the most recent trend that has emerged. Rather than acquiring an installer, another way to reduce competition between partner-model companies is to consolidate them. Clean Power Finance (CPF) and Kilowatt Financial (KWF) recently merged to create a new company, Elevate Power. In addition to combining the investor and installer networks of both companies, Elevate Power leverages CPF’s TPO platform as well as KWF’s energy-efficiency and solar loans.
Intense competition in the residential market will inevitably lead to more M&A activity as solar providers continue to face the challenges of customer acquisition and the partner financing model. The crowded loan landscape, filled with new companies trying to gain market share, is the next area to watch.
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Nicole Litvak is a senior solar analyst at GTM Research and the author of the recently released report, U.S. Residential Solar Financing 2015-2020. For more information, contact Zack Munsell at zmunsell@gtmresearch.com.