Will rising interest rates curb the dominance of the US residential solar loan market?
The loan segment has seen 59% year-over-year growth but rate volatility and the passage of the Inflation Reduction Act (IRA) will shake up the residential solar market mix
Principal Analyst, US Distributed Solar
Principal Analyst, US Distributed Solar
Zoë Gaston is a Principal Analyst on the US Distributed Solar team.
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The US residential solar market set its fifth consecutive record for both customer additions and quarterly installations in Q2 of this year. Volatile retail rates in an inflationary environment are driving residential solar demand to new levels in both the third-party ownership and customer ownership segments. Although loans have dominated in recent history, the passage of the IRA and continuing interest rate increases threaten this trend.
Our latest US residential solar finance update explores the latest developments. The report highlights trends and forecasts of the third-party ownership (leases and power purchase agreements) and customer ownership (cash and loan purchases) markets. Fill in the form to access a complimentary extract and read on for some key highlights.
The loan segment of the US residential solar market will grow 37% year-over-year in 2022
The loan market will continue to drive the overall residential solar market to record levels in the near-term. Increasing retail rates continue to make loans attractive compared to customers’ utility bills, despite increased pricing due to higher interest rates. This will contribute to the loan segment’s record market share levels, expected to reach 68% in 2022.
The third-party ownership (TPO) market also saw significant growth in H1 2022, at 28% year-over-year. However, loans more than doubled this growth rate, at 59% year-over-year, demonstrating their immense popularity. As loans continue to outpace TPO growth, the TPO segment reached its lowest quarterly market share at 19% in Q2 2022, despite hitting its highest H1 volume since 2016.
Loan volumes will continue to grow in the near-term, but the third-party ownership (TPO) segment will win back share starting in 2023
The residential solar market is expected to take a hit next year following the implementation of California’s NEM 3.0 program (the next iteration of net energy metering reform). Our forecasts assume implementation of the California Public Utilities Commission’s Proposed Decision from December 2021 regarding NEM 3.0, which will cause a 5% contraction at the national level for residential solar. Although this proposal is unlikely to be implemented, our forecasts provide a floor for California’s market in lieu of a more updated proposal. Given this assumption, there will be a contraction in the loan market of 6% and in the TPO market of 3%.
There will be an advantage for TPO pricing in the California market in 2023 due to the availability of the new ITC bonus adders thanks to the passage of the IRA. This pricing advantage will partially offset the contraction in the TPO space. The TPO segment will begin increasing share in 2023, with the strongest uptick occurring in 2024 – 2026 once TPO providers learn how to best take advantage of the adders.
GoodLeap retained its title as top financier and loan provider, capturing 28% of the entire residential market and 41% loan market share in H1 2022
GoodLeap grew its volumes in H1 2022 by a whopping 65% year-over-year, increasing market share and retaining its title as top loan provider. Sunrun also maintained its position as the largest TPO provider, growing its volumes 12%. Sunrun commanded a 61% TPO market share in H1 2022, only slightly less than H1 2021.
Overall, the residential solar financier landscape continues to consolidate. The top five players financed 73% of the entire residential market in H1 2022, up from 69% in H1 2021. The top three loan providers (GoodLeap, Mosaic and Sunlight Financial) captured 76% of the loan market while the top two TPO providers (Sunrun and Sunnova) took 77% of the TPO market in H1 2022.
For the loan segment, the market share for small loan providers declined again in H1 2022 as the larger players experienced record growth.
Rising interest and utility rates are shaping loan and TPO product offerings across the market
As interest rates rise, many loan providers have removed zero and low APR products from their offerings and increased dealer fees this year. Although many companies have implemented price increases, higher retail rates have provided a cushion, allowing customers to continue realizing monthly savings, contributing to the loan segment’s popularity.
Similarly, many TPO providers reported multiple price increases this year as interest rates rise and inflation persists. Sunnova, SunPower and Sunrun attributed their ability to raise prices without compromising demand to high retail rates. Along with the expected growth in the TPO segment, high interest rates and dealer fees will challenge the loan segment. We expect this elevated pricing to take a toll on the customer-ownership segment longer-term.
Get a closer look at our US residential solar finance update. Fill in the form at the top of the page for a complimentary extract.