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Home solar surging, but big firms struggle to profit

by PETER EAVIS AND IVAN PENN THE NEW YORK TIMES | January 8, 2021 at 2:06 a.m.

The home solar business is growing fast as thousands of homeowners install panels on their roofs to save money. Yet the biggest companies that install and finance home solar systems are reporting hundreds of millions of dollars in losses.

Those losses are an ominous reminder of how hard it can be to make money in an industry widely viewed by political leaders and business executives as an important part of the global effort to address climate change. Solving this problem could help determine whether the use of residential solar power continues growing quickly and is widely adopted.

"There have been very few success stories," said Vikram Aggarwal, founder and chief executive of EnergySage, which helps consumers compare solar installers. "Practically everyone who has tried this has failed. The road is littered with dead bodies."

Sunrun and Sunnova, two of the nation's biggest home solar companies, lost a combined $500 million in the first nine months of 2020, and their operations and purchases of solar systems collectively used up $1.3 billion in cash.

The companies and their Wall Street supporters say the losses are occurring because solar installations are growing rapidly and require a lot of upfront investment, and because investors in the companies get to use the losses to offset their tax liabilities. Still, residential solar is a fiercely competitive and expensive business, and Sunrun and Sunnova must contend with hundreds of smaller rivals, many of which have been turning a profit for years.

For now, Wall Street investors are bidding up the companies' stocks in the belief that solar companies will be able to borrow cheaply and cover their losses and cash outflows for some time. They also expect sales to continue growing quickly as homeowners buy larger solar systems and home batteries to protect themselves from blackouts and to power electric vehicles. Investors are also expecting the incoming Biden administration to do more to spur the use of renewable energy through tax credits and other incentives.

"You are always going to be negative if you are growing," said Lynn Jurich, chief executive of Sunrun. Sunrun acquired Vivint, which was the country's second-biggest residential solar installer, in a deal announced in July. That acquisition helped push Sunrun's stock up more than 400% in 2020. Sunnova's stock was up more than 300%.

The success of the two companies and Tesla's solar business, once the leading residential solar installer, matters beyond the stock market. If these companies grow and gain the same sort of name recognition that Tesla did for its luxury electric cars, or Amazon did for online shopping, they could help accelerate a shift away from fossil fuels.

New home solar installations, measured by their power capacity, are expected to grow 7% this year despite the coronavirus pandemic, according to the Solar Energy Industries Association and Wood Mackenzie, a research and consulting firm. Wood Mackenzie expects strong growth over the next five years.

"We're having discussions as a management team about how much growth we can handle," said W. John Berger, chief executive of Sunnova. "I'll take that problem any day of the week, because I've had the other problem as well," he added.

But for all that optimism, installing solar in homes is clearly not an easy business. Solar companies that grow too fast often struggle, as SolarCity did before Tesla acquired it in 2016. Many others have sought bankruptcy protection or have gone out of business in recent years.

Dozens of companies like SunEdison, which tried to acquire Vivint in 2016, grew incredibly fast and abruptly stumbled. SunEdison sought bankruptcy protection that same year. Hundreds of smaller residential solar businesses have also failed, according to EnergySage.

It is not clear if it makes economic sense for the solar business to be dominated by national operators like Sunrun and Sunnova. Hundreds of small installers around the United States have already figured out how to make money from what they describe as the kind of home improvement business that local firms typically dominate.

But Wall Street analysts contend that Sunrun's and Sunnova's ability to borrow lots of money should allow them to offer cheaper financing and potentially earn bigger profits.

"Size becomes a barrier to entry to others," said Sophie Karp, an analyst at KeyBanc Capital Markets.

Wall Street analysts said the companies' accounting could understate profitability. Like homeowners who buy solar panels, investors can gain tax advantages. Investors in Sunrun's business, for instance, can use the losses there to reduce their tax bills. And when the losses borne by the investors are excluded, the company's loss is much smaller.

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