The U.S. solar industry has grown accustomed to record-breaking growth. New capacity additions have increased every year since record keeping began. Last year, the U.S. market installed 14.8 gigawatts of solar PV -- nearly doubling the capacity installed the year prior. In 2016, solar also became the top-ranked source of new electric generating capacity for the first time ever.

This year, things look different -- particularly for the residential solar segment.

The U.S. residential PV sector grew 1 percent from the first quarter to the second quarter of 2017, according to the latest U.S. Solar Market Insight report from Wood Mackenzie, Limited and the Solar Energy Industries Association (SEIA). The industry installed 563 megawatts of residential solar in Q2. But while this represents a slight uptick quarter-over-quarter, it represents a 17 percent decline year-over-year, which comes on the heels of a sluggish Q1.

GTM Research, a Wood Mackenzie company, is now forecasting residential PV will experience its first down year ever. The U.S. home solar segment is expected to shrink by 3 percent this year. GTM previously forecast flat or limited growth in 2017.

The news is not all bad. Overall, the U.S. market installed 2,387 megawatts (DC) of solar PV in the second quarter of 2017 -- which marks an 8 percent increase year-over-year, and the largest second quarter ever. “This report shows once again that solar is on the rise and will continue to add to its share of electricity generation,” said Abigail Ross Hopper, SEIA’s president and CEO, in a statement.

But looking only at industry-wide performance hides the growing pains within the residential segment.

“Residential solar is just not seeing growth rates as high as in the past -- which is fine; it’s what happens when an industry matures, but it’s no longer fair to frame it as though rooftop solar is explosive,” said Austin Perea, GTM Research solar analyst and lead author of the new U.S. Solar Market Insight report. In recent years, the residential sector has led the PV market in terms of growth. Today, that’s simply no longer the case.

FIGURE: U.S. Quarterly PV Installations, Q1 2012-Q2 2017

Major state markets slow down

The decline is primarily due to weakness across major state markets, including California and several states in the Northeast, which are feeling the effects of a pullback from national providers. Tesla’s SolarCity and Vivint Solar in particular have been reorienting their strategies to optimize profitability over growth, according to Perea. The two companies have been scaling back operations in certain key geographies and transitioning to a direct ownership model, which has resulted in lower overall sales volumes.

Because of their disproportionate size relative to the rest of the residential market, slower growth rates at SolarCity and Vivint have a meaningful impact on the broader residential segment.

California was the first state to see a slowdown in the residential sector this year, which was due in part to bad winter weather, but also because national installers have been devoting less resources to making sales in saturated regions. Northeast markets started to feel the impact of that strategic shift more recently.

Last quarter, New York, Maryland and Massachusetts saw installation volumes fall between 15 and 60 percent year-over-year. SolarCity had a particularly slow second quarter in the Bay State, with growth down more than 75 percent from the same period in 2016.

After last quarter’s performance, GTM Research has revised down its residential PV forecasts for New York, Maryland and Massachusetts. New Jersey’s market is still expected to grow this year, however, while growth in Connecticut’s residential market is expected to be flat.

New markets for rooftop PV are opening up across the country, thanks to cost reductions and favorable policies. But growth in these states -- such as Texas, Utah and Florida -- is not robust enough to offset the declines in established areas, Perea said.

Business models shift

Vivint leadership has acknowledged that the company is experiencing slower growth, partially because it’s retraining staff to sell loans and not only leases. The company is currently aiming to have 30 percent of its sales be direct ownership by the end of 2017, up from 19 percent at the start of this year.

SolarCity relaunched its loan offering last summer, after its original loan product failed to gain traction. Since then, the nation’s largest residential solar installer was acquired by Tesla, and announced that it is quitting the practice of door-to-door sales and transitioning to selling solar through Tesla stores. As a result of these changes, “residential solar deployment will be impacted over the short term but is expected to resume growing in Q4 compared to Q3,” according to Tesla’s latest earnings report.

The portion of Tesla solar customers who elected to purchase rather than lease a solar system grew to 37 percent of deployments in the second quarter of this year, up from 6 percent a year ago. As its conventional solar business shifts, Tesla is also focused on ramping up production of its solar roof -- which some believe is the key to bringing home solar to the masses, although that remains to be seen.

Customer acquisition costs remain stubbornly high across all solar market segments, but the issue is especially pronounced among large residential solar players, said GTM’s Perea. How easy or hard it is to win customers factors heavily into the residential solar segment’s overall performance. In major state markets, there’s a sense of customer fatigue -- people have been getting their doors knocked on for years and are generally familiar with the solar sales pitch, Perea said. For whatever reason, these customers have decided not to make the investment.

“The low-hanging fruit has been picked, and installers need to figure out how to crack that code -- how to reduce the cost of customer acquisition and find meaningful growth,” Perea said.

Justin Baca, vice president of markets and research at SEIA, acknowledged that customer acquisition costs are a challenge, but was optimistic that the solar industry would succeed at bringing them down.

“Someone is going to figure it out, and they’re going to get bigger faster,” he said, in an interview at Solar Power International on Sunday night. “There are probably other trades we can also learn from -- the roofing industry, for one. We don’t hear about customer acquisition being a huge portion of their cost structure. Our industry is still figuring it out.”

Baca also took a generally positive view of the residential solar industry’s performance last quarter.

“What we’re seeing in the residential market isn’t a big downturn, it’s more of a leveling out,” he said. “We can’t expect the industry to grow 20 to 50 percent per year indefinitely. Those growth rates are great, but something less is still very good by traditional industry standards.”

Utility-scale solar continues to be the bedrock

Meanwhile, other segments of the solar industry have fared relatively well so far this year. In the second quarter of 2017, non-residential solar grew 31 percent year-over-year, with 437 megawatts installed. Growth was driven in large part by favorable time-of-use rates in California and expiring incentives in Massachusetts. The non-residential market in New York also experienced its largest quarter on record with the completion of several remote net-metered projects.

Non-residential PV is expected to grow 9 percent this year, following a record-shattering 58 percent growth in 2016. Continued growth in 2017 is due in part to the growing adoption of community solar, which remains on track to add more than 400 megawatts (DC) this year -- nearly doubling community solar installations from 2016.

The utility-scale segment “continues to serve as the bedrock of the U.S. solar market,” according to the report. A total of 1.4 gigawatts (DC) of utility PV projects came on-line in the second quarter of 2017, accounting for 58 percent of all PV capacity installed during the three-month period. Q2 represents the seventh consecutive quarter in which utility PV added more than 1 gigawatt of new capacity.

The threat of losing the solar Investment Tax Credit (ITC) was a big part of the reason why 2016 was such a strong year for U.S. solar. Developers rushed to take advantage of the incentive before it was scheduled to expire, which caused the utility-scale solar market to more than double. Today, the market is recalibrating.

GTM Research expects the overall U.S. solar market to shrink year-over-year in 2017 and 2018 before rebounding in 2019, due in large part to trends in utility PV procurement. With the extension of the ITC and project spillover from 2016, GTM Research continues to forecast a strong 8.1 gigawatts (DC) of utility-scale solar PV will be deployed in 2017. The market is expected to take a more noticeable downturn next year, with 6.5 gigawatts (DC) deployed for in 2018.

But growth won’t lag for long. The combination of competitive pricing, new procurement plans and developers looking again to benefit from the 30 percent ITC before the incentive steps down prompted GTM Research to increase its 2019 forecast for utility-scale PV by 14 percent to 9.0 gigawatts (DC). The return to growth in 2019 will come from the expansion of new state markets, and as both distributed and utility solar reach tipping points in terms of economic attractiveness.

More than 75 percent of the current utility-scale pipeline is slated to come from voluntary procurement -- or projects driven by cost-competitiveness with natural-gas alternatives rather than renewable energy mandates. For residential PV, more than 30 states are forecast to have surpassed grid parity by 2019, based on current rate structures.

U.S. solar installers will still have to innovate around customer acquisition and push into new markets in order to see more record-breaking growth. The industry will also have to hope for low or no tariffs in the Suniva/SolarWorld Section 201 trade case. If the International Trade Commission approves a minimum price of 78 cents per watt on modules, GTM Research estimates it could reduce U.S. solar demand by 50 percent cumulatively over the next five years.

Without tariffs, total installed U.S. solar PV capacity is expected to nearly triple over the next five years. By 2022, more than 16 gigawatts of solar PV capacity will be installed annually. Residential solar stands to make up a significant portion of the overall market, if installers can overcome the business challenges they face today.

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