In a study with colleagues from the University of Oxford and the National Renewable Energy Laboratory, Center for Sustainable Energy (CSE) research analysts took a look at the market dynamics of third-party owned residential solar energy systems by investigating the effects of installer competition on prices. It is often assumed that competition leads to lower prices, however, the findings show residential lease contract prices were higher in more competitive markets.
Over the past several years, CSE and research partners have investigated solar adoption and diffusion under the Solar Energy Evolution and Diffusion Studies (SEEDS) program as part of the U.S. Department of Energy’s SunShot Initiative. Focusing on San Diego County, the project explored a variety of questions into consumer characteristics and motivations for adopting solar, market dynamics and drivers.
Dominance of third-party ownership
A major driver in the growth of the residential solar photovoltaic (PV) market was the emergence of third-party ownership (TPO) structures in 2007. By 2013, TPO systems dominated the residential PV market, representing more than 70 percent of installations that year. The steep growth in TPO PV adoption was accompanied by a substantially growing pool of solar installers and developers competing for customers. Between 2007 and 2012, the number of solar companies offering TPO systems in the residential market in the San Diego Gas & Electric (SDG&E) service territory increased from one to nearly 50, with only five companies holding more than 50 percent of the market.
The study, The Price-Concentration Relationship in Early Residential Solar Third-Party Markets, builds on previous research studies that demonstrated correlation between consumer prices and various market factors. We used a unique data set – the actual sales contracts for a sample of residential TPO PV systems installed during 2007-13 in the SDG&E territory. The team mapped the installations and quantified the number of installers active in a particular neighborhood, and examined if or how competition affected prices.
More installers, higher prices
The results seem counterintuitive, but we found that TPO contract prices were higher in neighborhoods with a larger number of installers.
The reasons competition is not lowering costs could be market-driven, such as solar installers competing on service rather than price to obtain business in more competitive environments. It is also possible that firms are setting low prices that are below potential competitors’ marginal costs, which could deter entrants and ensure a larger market share. That is why we may find lower prices in areas where only few installers are active. In other words, firms might be prioritizing growth over profits in the near term, with the belief that larger market share will yield greater profits later on.
The paper adds to a growing emphasis on understanding supply-side factors in scaling up solar markets in the residential sector. In recent studies we have seen that pricing factors such as declining hard costs and installer experience reduce solar contract prices. The influence of competition on prices provides insights that contract price setting is complex, and evolving markets can behave in unexpected ways.
The findings can be useful for policymakers interested in understanding solar market dynamics of evolving markets. In addition, it continues to be pivotal for homeowners to be able to reliably compare solar offers and prices and make informed decisions in competitive market environments.