On May 9 2018, the California Energy Commission (CEC) voted to approve measures associated with California’s Building Energy Efficiency Standards that require solar to be incorporated with all new residential homes in the state starting January 1 2020. The standards have been designed to help California meet its goals for reducing greenhouse emissions and attaining a renewable portfolio standard (RPS) of 50% by 2030.
- The policy will drive significant demand for solar in the new-built home market, increasing the total addressable market for solar in California
- Assuming recent annual residential home build rates are maintained through 2020, IHS Markit estimates this policy could increase demand for solar PV in California by 150 MW to 600 MW per year
- Home builders will become a significant customer segment for system suppliers, opening up new opportunities for strategic partnerships and sales channel development
- The solar roof mandate comes as regulators, utilities, and stakeholders in California are preparing for significant changes to net metering policy in 2019
- The policy could serve as an example for other markets where policy makers and home builders may seek to replicate similar initiatives, particularly in markets where solar already has strong support
IHS Markit Analysis
Requiring solar to be included with new homes constructed in California will have a massive impact on demand for solar in the market. Over the last five years, California has installed 700 MW to 800 MW of residential solar PV per year on average. Per the rules of the mandate, IHS Markit estimates the solar mandate could increase demand for PV in the market by 150 MW to 600 MW per year, assuming current residential housing construction rates in California hold steady past 2020. Most deployments associated with the policy are projected to be rooftop or on-site installations, but homes and multi-family residences not suitable for PV will be able to utilize off-site community solar solutions or obtain exemption from the mandate altogether.
The policy will also encourage the adoption of battery energy storage for new home construction. Policy makers in California see the incorporation of energy storage as a key element for optimizing consumption of renewable generation and creating new value streams for utilities and end users via grid services such as demand response programs and virtual power plant aggregation.
As a result of this policy, home builders will rapidly emerge as a significant customer segment in the California solar market. The distribution channel outside of the larger national installers has been growing over the last few years, opening up opportunities for local installers and component suppliers to partner with leading distributors, but the growth of the home builder channel will create a new segment of large volume customers that may open up opportunities for additional strategic partnerships to form. Suppliers developing innovative products that generate value by streamlining installation, optimizing supply chain logistics, or improving visual aesthetics could gain value with home builders seeking to add unique solar solutions to their portfolio. Potential product types that may be considered attractive could include building integrated PV (BIPV), module level power electronics (MLPE), rail-less roof mountings, and so on.
Additionally, to address the added cost of incorporating solar into construction of new homes, home builders may seek to leverage partnerships with solar developers that can provide an integrated solution with financing, including larger players such as Tesla, Sunrun, Vivint Solar, SunPower, and Sunnova. Partnering with solar developers that can finance PV systems and operate them as a value-added service could an attractive opportunity for both home builders and owners by lowering their financial risk and impact.
The solar mandate for new home construction comes at a time when regulators, utilities, and stakeholders in California are preparing to undergo a significant review of net metering policy in 2019. Early indications are pointing toward a revision of net metering policy that will alter the rate of compensation for exported generation from new installations of customer-sited PV systems. If the value of exported solar generation is reduced or becomes highly variable dependent on the time of day, location, and state of the grid, demand for retrofitting homes with solar may decline. Additionally, demand for battery storage may increase as customers seek to offset retail electricity purchases by optimizing solar self-consumption. Higher demand for solar with newly constructed homes could help to offset lower demand for more traditional rooftop retrofit installations and slow the rate of decline after significant changes to net metering occur.