Home energy storage booms in the US

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.

In brief

Brent crude has risen above US$91 a barrel for the first time this year, as a result of mounting tensions in the Middle East. Iran’s supreme leader Ayatollah Ali Khamenei said on Wednesday that Israel "must be punished and it shall be" for an air strike on the Iranian consulate in Syria that killed 12 people. Israel, which has not claimed responsibility for the attack, threatened to strike back against Iran. Israel Katz, the country’s foreign minister, posted: “If Iran attacks from its territory, Israel will respond and attack in Iran.”

The Biden administration’s decision to pause new approvals for US LNG export projects was “not only wrong but also enormously naïve,” Jamie Dimon, chief executive of JPMorgan, has said. Writing recently in his annual letter to shareholders, he argued that the pause had been announced “to pacify those who believe that gas is bad and that oil and gas projects should simply be stopped”, and would impede the use of gas to replace coal. He also warned that US allies including Japan, South Korea and members of the EU might have to look elsewhere for their gas, “turning to Iran, Qatar, the United Arab Emirates or maybe even Russia”.

Ford has cut prices for some models of its F-150 Lightning electric truck by up to US$5,500, in another sign of the challenges in the EV market. The cuts, disclosed in a memo to dealers, reverse some of the price increases announced at the start of the year.

A total eclipse of the sun was visible from many parts of North America for the first time since 2017, giving generators and grid operators a chance to see how the electricity system responds to sharp but short-lived declines in solar output over a wide area. Wood Mackenzie’s analysts assessed the impact on power markets.

Other views

Can emissions taxes decarbonise the LNG industry? – Simon Flowers, Gavin Thompson and Massimo Di Odoardo

Ethylene: global carbon contributor – Catherine Tan, Shruthi Vangipuram and Siddhant Warrier

Four key issues GB electricity market reform must address – Peter Osbaldstone

How the MENA region and its NOCs are diversifying into new energies – Jom Madan

The US urgently needs a bigger grid. Here’s a fast solution – Brad Plumer

The role of carbon markets in transitions – The International Energy Forum

Friends with (metal) benefits – Kate Mackenzie and Tim Sahay

Green industrial strategy – Lachlan Carey

Decentralizing the electric grid – Ryan McEntush

Electric cars are saving Americans billions. Even people who don’t drive them – Joe Borras

2035 and beyond, the report: reconductoring

Quote of the week

“Crossing 1 Billion Tonnes in coal and lignite production marks a historic milestone for India, reflecting our commitment to ensuring a vibrant coal sector. This also ensures India's path towards Aatmanirbharta [self-reliance] in a vital sector.”

Narendra Modi, prime minister of India, celebrated the country’s surging coal production in a tweet. On Wood Mackenzie’s forecasts, India’s coal production will have risen by about 42% from 2019 to 2024. Over the same period, coal demand will have risen by about 27%. For more on energy in India and the country’s possible pathway to net zero emissions, take a look at our recent Horizons report: ‘Chance of a lifetime: Can India show the developing world a unique path to net zero?’

Chart of the week

This comes from Wood Mackenzie’s recent Horizons report: ‘Call of duties – How emission taxes on imports could transform the global LNG market’. It shows the greenhouse gas (GHG) emissions intensity of LNG from different sources around the world, with both averages and maximum and minimum values.

The most eye-catching feature of the chart is the relatively high GHG intensity of LNG from the US and Mexico. As the report points out: “With momentum growing for tighter European and US methane emissions regulation, US LNG projects will be motivated to act. And with the writing on the wall in the EU of future carbon taxes on imports, pre-FID projects have a clear rationale for increased investment to decarbonise their LNG supply.”

Read the full report for more detail on why and how this could happen.

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