Alexis de Tocqueville, the French diplomat and famous observer of America, noted in 1840 that in democratic countries such as the US, a citizen’s independence “fills him with self-reliance and pride amongst his equals”.
That same spirit might have been expected to help make the US a global leader in residential solar power, with homeowners wanting to reduce their reliance on the grid. In fact, however, the US has lagged far behind many countries, including Australia, the Netherlands and Germany, in terms of rooftop solar adoption. And in the past year or so, conditions for residential solar in the US have become even tougher.
The industry has been hit by a double blow, in the shape of higher interest rates and regulatory changes in California, the country’s largest market. US installations of residential solar rose last year, as buyers scrambled to get systems fitted before California’s new rules took effect, but Wood Mackenzie’s forecasts project a 13% decline this year. We expect a recovery next year, but in our base case installations are still lower in 2025 than in 2023.
However, some positive trends in the industry suggest it is moving on to healthier foundations. In particular, the rise in sales of home energy storage systems alongside residential solar in California is improving both its economics and its impact on emissions.
Residential solar starts off with a disadvantage in the US because costs are significantly higher than in some other countries. Wood Mackenzie estimates that the average cash price of a residential solar system in the US this year will be about US$3.25 per watt, of which 30% can be recovered through the Investment Tax Credit. That compares with an average cost in Australia, the global leader in residential solar adoption, of just 95 Australian cents (62 US cents) per watt, including incentives, as reported by the Solar Choice price comparison site.
There are several reasons for the disparity. Unlike the US, Australia allows tariff-free imports of low-cost modules from China. The permitting process for homeowners to be allowed to install solar is more complex in the US, and the cost of customer acquisition, including sales and marketing, is much higher. That cost rose to a new record high of 85 US cents per watt installed in the first half of 2023.
Various new services have been launched with the aim of reducing these “soft costs” of residential solar, including EnergySage, Bodhi and SolarApp+, which is funded by the US Department of Energy. However, those services do not yet seem to be having much of an impact. We expect customer acquisition costs to start falling next year, helped by companies being able to spread their marketing costs across more customers, but the decline will take time.
That starting disadvantage for residential solar in the US has been exacerbated by two newer developments: the rise in interest rates and the move away from net metering in California.
Higher interest rates have raised the cost of the loans and bond issues that are used to finance solar systems. Data from EnergySage, the solar marketplace platform, show the average quoted solar loan APR more than doubled from 2.5% in the third quarter of 2022 to 6.1% in the third quarter of 2023. Zoe Gaston, Wood Mackenzie’s principal analyst for US distributed solar, estimates that financing could raise the average all-in cost of a system in the US by at least $1 per watt above the average cash price.
In Wood Mackenzie’s latest ‘US Residential Solar Finance Update’ report, Gaston notes that there has been a shift in the market away from loans and towards third-party ownership models, using leases or power purchase agreements, which are usually backed by bond finance. But the companies that offer third-party ownership have been squeezed by the higher cost of debt. Since the start of 2023, Sunrun’s shares have dropped by about 50%, Sunnova’s by about 75%, and SunPower’s by about 85%.
Meanwhile, the California market, which accounted for about 34% of US residential solar installations in 2022, was hit by the shift away from net metering that took effect in April last year. Under the old system, which customers with residential solar installed before the change can still use, they get a credit off their bills equivalent to the retail rate for every kilowatt hour they export to the grid.
The new system, known as the Net Billing Tariff (NBT), ties those credits much more closely to the actual value of that power. At some times of year, in the middle of the day, when solar generation is at its highest, the net load on California’s grid can be zero. Adding more solar power at those times is pointless, and can force operators to curtail output to protect the grid. Net billing tackles that problem by giving customers much lower credits, and occasionally no credit at all, for the power they export at those peak times.
This shift, from net metering to net billing, makes residential solar much less financially attractive. We expect residential solar installations in California to fall 40% this year to about 1.37 gigawatts, down from 2.28 GW in 2023. California will account for the great majority of the 13% decline for the US as a whole in 2024.
However, there are some clear positives in the new rules, despite the immediate impact on the industry. Incentives for investment in solar now reflect much more accurately the value of new capacity to the grid. And because the price of power varies more by time of day, there is an increased incentive for customers to invest in home battery storage systems to shift their consumption.
Under the old rules, typical payback periods for residential solar in California were five to seven years. Under net billing, they will be significantly longer: up to about 11 years, Wood Mackenzie estimated in 2022. But the payback of solar-plus-storage installations could be significantly shorter. We calculated that a solar-plus-storage installation for a Southern California Edison customer could pay back in 7.5 years, three years faster than the 10.7-year payback period for installing solar on its own.
Those incentives have led to surging demand for domestic battery storage, and companies have been moving to meet that demand. Sunrun, for example, last year launched a solar-plus-storage package called Shift, specifically targeted to maximise value under California’s new rules.
Max Issokson, a Wood Mackenzie analyst covering distributed solar, this week published new research showing that attachment rates of battery storage to solar installations in the US jumped during the course of 2023, driven by strong growth in California. The number of solar-plus-storage systems installed in the US in the fourth quarter of 2023 was up 46% from the same period of 2022. The growth is set to continue: Wood Mackenzie forecasts that this year, 60% of all residential solar installations in California will have storage attached, lifting the US average attachment rate from 14% in 2023 to 25% in 2024.
The dream of going “off-grid” completely is still impractical for most. But market trends including growing threats to the grid from disasters such as wildfires, rising electricity prices, the tax credits available under the Inflation Reduction Act, and the falling cost of lithium-ion batteries, are set to sustain customer interest in residential energy storage systems. It won’t exactly mean independence for electricity consumers, but it will mean an increasing degree of self-reliance.
Wood Mackenzie is supporting improved energy access and energy security in Puerto Rico through our partnership with the non-profit Let’s Share the Sun. You can read more about their work in this piece from my colleague Luke Lewandowski.
