Solar Installer Sunrun is Creating a Planet “Run by the Sun”
A look at how Sunrun takes advantage of the U.S. regulatory environment for solar energy
Sunrun is a residential solar installer that has been taking advantage of opportunities created by the sustainable energy movement. Since its founding in 2007, the company has offered homeowners clean, solar energy at a significant discount to traditional utility energy. How are they able to do this? In part, by taking advantage of a regulatory environment that offers significant financial incentives for solar panel installation. Therefore, any significant changes in this regulatory environment could seriously impact the company’s bottom line.
Sunrun, which went public in 2015, proclaims itself the pioneer of the so-called “solar as a service” model. Suppose you own a home in California, Arizona, or one of the other 14 U.S. states that Sunrun currently operates in. Electricity rates are rising, and Sunrun offers you the opportunity to save up to 20% on your energy bill without any up-front cost. Not only will they send you a free quote, they will design a customized solar solution for your home, and take care of everything from installation, to submitting permits, to working with your city. What’s more, there is no upfront cost, and you can lock in a fixed electricity rate for up to 20 years. So, it sounds like Sunrun is creating a lot of value for their customers, which number nearly 100,000[1], but how are they able to offer all of this to consumers at such a low price?
Sunrun benefits from favorable regulatory policies at the federal, state and local level. The biggest benefit is the federal solar Investment Tax Credit (ITC), which is a 30% tax credit for solar systems on residential and commercial properties. It allows investors in solar energy property to claim a tax credit worth 30% of the amount of their investment in solar property against their taxable income. Per the Solar Energy Information Association (SEIA), the credit has helped solar installation grow 1600 percent since it was implemented in 2006. In 2020, the credit steps down to 26%; in 2021, to 22%; and after 2023, the residential credit will be 0% while the commercial credit will be fixed at 10%. [2]
Other regulatory benefits favoring solar panel installation include net metering, solar renewable energy certificates and other state-level incentives. Net metering allows homeowners to offset electricity purchased from a utility by the amount of excess solar energy produced and sold to the utility. A substantial majority of states have net metering policies. In addition, certain states have implemented other incentives for solar capacity additions. [3]
Maintaining strong relationships with regulatory bodies is an important element of Sunrun’s strategy. In September, the company appointed the former Commissioner of the Maryland Public Service (the utility regulatory body in Maryland), as its Chief Policy Officer. She will be responsible for representing the company in discussions with policymakers, utilities and other stakeholders. [4] Having an industry insider in this type of role is probably a smart move on the company’s part, as it will help them build and maintain relationships with regulators. Being a part of the policy discussion with regulators may help the company shape the future regulatory landscape to their benefit. [5] While public utility commissions are already supportive of renewable energy and customer choice for solar energy [6], it probably doesn’t hurt Sunrun to have a former regulator on board.
In the near to medium-term, Sunrun has visibility into the tax benefits it will receive from the ITC. Therefore, their goal should be to lower their costs significantly before then, so that by the time the tax credit expires, it will have less impact on the economics of the business anyways. In fact, advances in solar technology are already driving costs down. [7] Sunrun should also continue pursuing volume growth, and take advantage of economies of scale. To that point, one of the company’s greatest challenges is customer awareness, which is quite low today. Sunrun’s marketing strategy should focus on increasing awareness in key markets via low cost channels. One way would be to generate local media buzz around the sustainability angle of their business; today, the marketing message seems to focus more on saving its consumers money than sustainability.
Overall, it seems like Sunrun’s operating model is creating a lot of value for its customers, but is the company capturing enough value for itself? Since Sunrun is a public company, we know that it had a net loss of about $249 million in 2015. [8] However, the company and its investors are betting on the fact that as the cost of solar energy falls, and the number and lifetime value of new customers increases, the economics of the business will look better and better. [9] (774 words)
[1] Sunrun, “Where’s Sunrun,” https://www.sunrun.com/solar-by-state, accessed November 2016.
[2] Solar Energy Information Association, “Solar Investment Tax Credit,” http://www.seia.org/policy/finance-tax/solar-investment-tax-credit, accessed November 2016.
[3] Sunrun, Form 424B4 (filed August 5, 2015), via BamSEC, accessed November 2016.
[4] “Sunrun Appoints Anne Hoskins As Chief Policy Officer,” press release, September 7, 2016, on Sunrun website, https://www.sunrun.com/why-sunrun/about/news/press-releases/sunrun-appoints-anne-hoskins-chief-policy-officer, accessed November 2016.
[5] Marcel W. Brinkman, Nick Hoffman, and Jeremy M. Oppenheim, “How climate change could affect corporate valuations,” McKinsey & Company, October 2008, http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-climate-change-could-affect-corporate-valuations, accessed November 2016.
[6] Credit Suisse Securities Research & Analytics, “A Solar Platform Leader with Room to RUN; Initiating at Outperform,” August 31, 2015.
[7] Ibid.
[8] Sunrun, December 31, 2015 Form 10-K (filed March 11, 2016), via BamSEC, accessed November 2016.
[9] Credit Suisse Securities Research & Analytics, “Another Quarter Outshining Peers: Strong Execution with a Consistent Strategy,” August 12, 2016.
What a smart move! When all the glory is being put into the increasing minute percentages of solar panels’ efficiency, Sunrun is focusing on the service and channels aspect of the industry. I’m interested to learn more about what predictions they will have on increasing innovation in the field, in addition to some of the beneficial (maybe in the future mandatory?) regulations by the government. Also to bring Elon Musk to the discussion, as all solar energy discussion would, what strategic partnerships can they strike with solar city and other manufacturers?
Great post! Given the major run-up in share prices of solar companies, such as SunEdison and Solar City, followed by a significant market readjustment, I am curious how investors view these companies long-term potential. Personally, I see obsolescence as one of the major risks facing the industry. Companies such as SunRun typically do most of their business through PPA or lease agreements, rather than outright sales of systems to customers. As such, SunRun retains a risk of default or non-payment, particularly if systems don’t meet performance standards. Given the limited history of residential solar, it seems there is significant risk of obsolescence as efficiency continues to grow exponentially while costs decline dramatically. Additionally, there is uncertainty around performance of these systems over such a long time horizon. How do you see SunRun addressing these risks?
Great article!
I think you were spot on in your point about solar companies such as Sunrun being vulnerable to changes in regulatory policies. To take another example, SolarCity saw some huge swings in performance last year due to such changes. Late last year, on news that the ITC would be extended through 2022, the company’s stock soared by over 30% overnight. A few months later, however, the company had to cease operations entirely in Nevada entirely on news that the state would be terminating its net-metering program (see here for some highlights: http://www.investors.com/news/technology/tesla-cousin-solarcity-trims-2016-view-on-nevada-itc-effect/). In light of these challenges I think its a great move for Sunrun to ally itself with policymakers.
I agree with Emma’s comment above concerning the huge risks that Sunrun bears by running a “solar as a service” model rather than selling the panels outright. Do you have any sense for how investors are reacting to each of the two models?
Thanks for the great post. It’s very thorough with a lot of supporting evidence. I’m curious to hear more about Emma and Andrew’s comments about the “solar as a service” model compared to buying the panels outright. I wonder how the economics of the two options would compare. If it’s anything like Cloud Computing or the way most “as a service” IT providers operate, it sounds like a promising model. Are other solar tax incentives being considered as well, or will they consistently dissipate over the coming years? It sounds like that is one of the most promising parts about their endeavors.