Solar Market Insight Report 2016 Q2

Industry Insights

U.S. Solar Market Insight Report.

Authors Note: Revision to U.S. Solar Market Insight report title

GTM Research and SEIA have  changed  the naming convention for the U.S. Solar Market Insight report series. From this publication onward, the report title will reference the quarter in which the report   is released, as opposed to the most recent quarter in which installation figures are tracked.

Key Figures

The U.S. installed 1,665MWdc of solar PV in Q1 2016, increasing 24% over Q1 2015. This quarter is the largest non-Q4 in U.S. the history of the U.S. solar industry.

In Q1 2016, the cumulative number of U.S. solar installations brought on-line eclipsed 1 million, representing 27.5 GWdc in operating capacity.

In Q1 2016, solar accounted for 64% of all new electric generating capacity brought on-line in the U.S.

Residential PV remained relatively flat com- pared to Q4 2015 due to seasonal effects, but still added well over half a GWdc for the fourth consecutive quarter.

For the first time ever, non-residential PV installed more than 300 MWdc in back-to- back quarters.

GTM Research forecasts that  14.5  GWdc of new PV installations will come on-line   in 2016, up 94% over 2015. Utility PV is expected to drive the majority of demand, accounting for nearly three-fourths of new capacity.

1. Introduction

In Q1 2016, the U.S. solar market installed 1,665 megawatts direct current (MWdc), up 24% over Q1 2015. For the tenth consecutive quarter, quarterly installations exceeded 1 GWdc, and this continued gigawatt- level growth enabled the U.S. solar market to achieve an important milestone in Q1 2016:

There are now more than 1 million operating solar PV installations, representing 27.5 GWdc of operating solar PV capacity in the U.S.

Putting this figure in historical context, 1 million installations is that much more of an impressive feat, given that more than 90% of these projects came on-line during this decade alone.

When accounting for all projects (both distributed and centralized), solar continues to drive a growing portion of new electric generating capacity additions. Last year, solar exceeded natural-gas capacity additions for the first time on an annual basis. Building off that momentum, solar accounted for 64% of all new electric generating capacity installed in the U.S. in Q1 2016, ranking as the largest driver of capacity additions across all fuel types.

Looking ahead, the extension of the federal Investment Tax Credit will enable the U.S. solar PV market to become a double-digit- gigawatt annual market not only in 2016, but also through the end of this decade. However,  in 2016, the rate at which the U.S. solar PV market grows in each market segment will be impacted by the timing of the recent federal ITC extension, along with the timing of several state-level policy developments that happened in late 2015 and early 2016.

Utility PV: Given that the federal ITC exten- sion was ultimately  passed  by  Congress in December 2015, more than 10 GWdc    of utility PV has been rushed through the development cycle and is still slated to come  on-line  this  year.  At  least  another

4.5 GWdc of utility PV installations are expected to be nearly or fully finished with construction in Q4 2016, with official com- mercial operation expected in 2017. The drivers behind where, how and why this spillover happens are explored further in the full version of this report.

Non-residential PV: For the non-residential PV market, which has remained flat over the past three years, a rebound in 2016 should stem from new state-level policies established during legislative or regulatory proceedings in early 2016. These include extensions to NEM program

Residential PV: The timing of net meter- ing reforms in a handful of major state markets will play a role in inflating 2016 growth. Most notably, Nevada’s market has seen  a  freeze  in  new  rooftop  solar sales in response to stark NEM reforms in NV Energy territory. However, more than 20 MWdc still came on-line in Q1 2016 from projects that rushed through the installation process in Q4 2015, with hopes of being grandfathered in under old NEM rules.

2016 finds the U.S. solar market in a period of transition, characterized by shifts in both the drivers  and  geographic  distribution  of market demand. A wave of geographic demand diffusion is expected, primarily in the utility PV market. Most notably in the southeast, states where operating solar capacity stands at or below 10 MWdc will increase their capacity by more than ten- fold due to inexpensive utility PV power- purchase agreements (PPAs) that reflect the ability of utility-scale solar to both compete with and complement new natural gas plants.

Meanwhile, commercial customers’ solar procurement strategies are expanding, with well over 1 GWdc of offsite solar projects in development, from both community solar and offsite utility-scale solar. And finally, the policy landscape for rooftop solar is becoming increasingly fragmented and complicated, with debates over net metering and rate design evolving beyond fixed- charge proposals to multifaceted ones that encompass demand charges, time-of-use rates, and/or value-of-solar tariffs.

Amidst these near-term state-level drivers and risks, the extension of the federal Investment Tax Credit will serve as a long- term policy bridge to help transform solar PV into an increasingly mainstream source of power generation in the U.S. electricity market. With the federal ITC extended through 2021, and a “commence-construction” rule added, market participants benefit from federal-level policy visibility through 2023. Building off that policy certainty, as the following figure reveals, U.S. solar is expected to account for more  than 6% of operating electric generating capacity by 2021, compared to just 0.3% at the beginning of this decade.

Market Segment Trends

Residential PV Key Figures

>>Up 1% over Q4 2015

>>Up 34% over Q1 2015

With an average growth rate of 11% over the preceding four quarters, the residential PV slowdown in Q1 2016 was a function   of both seasonal factors and the inevitable leveling-off of demand after years of persistently   robust growth . Though California still accounts for nearly 50% of residential PV this quarter, installations did not grow in Q1 for the first time in a year, with many major state markets experiencing similar trends.

Likely attributable to seasonal factors, California’s flat growth in Q1 is unlikely to continue into the rest of the year, as the state will retain its position as the top state market and a significant driver of PV demand. However, volumes in other major state markets that have experienced NEM reform, such as Nevada and Hawaii, will taper throughout the year as non-energized projects make their way through the interconnection queue. Despite declining or flat growth in select major states, growth in some major and emerging state markets helped buoy rooftop PV in Q1. New York’s and Maryland’s rooftop PV markets both experienced over 25% growth this quarter, while Texas and Utah both saw impressive  growth in their own right. Going forward, we expect a number of smaller state markets to pick up steam and balance out the demand slow- down seen in major states.

Non-Residential PV Key Figures

>>Down 6% over Q4 2015

>>Up 36% over Q1 2015

Continuing the trend of 2015, growth in the non-residential PV segment remains constrained. California’s share of the mar- ket continues to hover near one-third of the market total, though  the  state  saw  its first decline in installations since Q1 2015. Persistent stagnation within the non- residential space stems from  development issues specific to particular sub-segments, such as small-scale, unrated commercial and industrial, in addition to a deteriorating incentive environment in many major state markets.

On an individual state level, both Massachusetts and Maryland saw notable growth, as recent regulatory developments have provided some short- to medium- term policy stability for commercial development. In total, 20 states experienced growth on a year-over-year basis.

Utility PV Key Figures

>> 12th consecutive quarter in which utility PV added at least 500 MWdc

>> Contracted utility PV pipeline cur- rently totals 21.4 GWdc

The utility PV market continues to serve as the bedrock driver of installation growth in the U.S. solar market, accounting for 43% of capacity installed in Q1 2016. The mar- ket is on the verge of an unprecedented rate of project completion, with 8.4 GWdc already announced as under construction. Altogether, the utility PV market remains on track to install more than 10 GWdc in 2016 from late-stage projects that are coming on-line despite the extension of the fed- eral ITC. While 10 GWdc is an impressive figure, the 2016 outlook has substantially changed over the past few months, during which time developers are pushing project completion dates from this year into 2017. The ability to push these projects out to 2017 is due to three major reasons:

Manageable financial penalties: Financial penalties incurred due to interconnection delays are sufficiently low for a developer to spill over a project while maintaining required returns.Voluntary vs. required commercial operation dates: Many projects’ PPAs had voluntary 2016 commercial operation dates that were proposed by the developer, but mandatory 2017 commercial operation dates set forth by the utility.

Utility-led spillover: Some utilities have expressed willingness to push a project’s commercial operation date from Q4 2016 to 1H 2017 as long as the developer demonstrates substantial progress toward completion, such as finishing construction before the end of this year. Alternatively, certain procurement programs, such  as  the California investor-owned utilities’ Renewable Auction Mechanism, have clauses in PPAs that would allow for spill- over due to a utility-led interconnection delay.

Looking ahead, a couple of key trends that will shape the near-term utility PV market outlook include continued growth of utility PV outside of renewable portfolio standard (RPS) obligations and increased procurement by municipal and cooperative utilities. While only 9 states have 200 MWdc  or more operating, 17 states now  have  200 MWdc or more in development. This  is in part driven by utilities in both major and emerging markets procuring solar as   a hedge against natural-gas price volatility. Underlying these geographic demand and procurement trends is the low price environment for utility PV, with recent PPAs being signed at prices between $35/MWh and $50/MWh.

2.2. National Solar PV System Pricing

We utilize a bottom-up modeling methodology to track and report national average PV system pricing for the major market segments. Though we continue to solicit weighted-average system pricing directly from utility and state incentive programs, we believe this data less accurately reflects the current state of system pricing. Systems utilizing local incentive programs constitute a minority share of the market, and data from these sources often represents pricing quoted well prior to the installation and connection date.

Our bottom-up methodology is based on tracked wholesale pricing of major solar components and data collected from interviews with major installers, supplemented by data collected from utility and state programs.

In Q1 2016, overall system pricing fell by  up to 8.8%, depending on the market segment, with the largest declines in the utility tracking sector. On a quarterly basis, pricing continues to trend downward across all market segments. After a relatively stagnant 2015, residential system prices fell 8.3% in Q1 2016. This decrease is due to continued hardware cost reductions and an increased focus on tackling soft costs. Price declines of 8.3% and 6.9% also occurred in the non-residential and fixed-tilt utility sectors, respectively. Moreover, as installers and EPCs expand to states with lower labor and regulatory compliance costs (e.g., South Carolina and Indiana), these geographies will have a larger impact on aggregate pricing.

In Q1 2016, average pricing for residential rooftop systems landed at $3.21/Wdc, with nearly 63% of costs coming from on-site labor, engineering, permitting and other soft costs. While residential hardware costs fell by over 4% in the past quarter, soft costs have decreased on an industry-aver- age basis of almost 12%. In fact, this quar- ter has seen the first decrease in residential soft costs since Q4 2014. This was driven by concerted efforts by national and regional installers to lower operational costs and to optimize on-site installation labor.

In Q1 2016, the non-residential sector also saw a significant 7% fall in pricing. Within non-residential, hardware costs fell 6% quarter-over-quarter, while soft costs saw  a decrease of 9%. Despite this decrease, in Q1 2016 soft costs still accounted for approximately 50% of total system pricing. This reflects many of the challenges of selling and executing projects with multiple stakeholders and project parameters that may vary from sale to sale. Moreover, soft costs  can  be  even  higher  for  projects in regions with strict labor requirements, and particularly in jurisdictions with more stringent permitting and interconnection requirements . Despite the variety of challenges in the non- residential market , engineering, procurement and construction (EPC) providers are successfully reducing their design costs and minimizing over- head.

Utility fixed-tilt and tracking projects in Q1 2016 saw an average pricing of $1.24/Wdc and $1.41/Wdc, respectively. Among both fixed-tilt and tracker ground-mount systems, both hardware and soft-cost reductions contributed to lower overall system pricing. While utility system pricing is more tightly clustered than are residential and non-residential systems pricing, state-by- state variation is prevalent. In particular, Texas sees some of the most competitive ground-mount systems pricing. Moreover, the cost premium of tracking systems over fixed-tilt is beginning to shrink. In Q1 2015, tracker systems carried a $0.21/Wdc premium over fixed-tilt systems. However, in Q1 2016, that premium shrunk to $0.17/ Wdc. Continued reduction of upfront costs for trackers will spur the increasing share  of tracking projects in the utility ground- mount market. Projects that commence construction but do not interconnect in the years 2019, 2020 and 2021 can qualify for correspondingly larger tax credits if they come on-line by the end of 2023.

Given the timing of the federal ITC extension, however, the wheels are already in motion for U.S. solar to benefit in 2016 from a double-digit-gigawatt pipeline of late-stage utility PV projects that rushed through development last year. In turn, we expect another record year for the U.S. PV market in 2016, with installations  reaching 14.5 GWdc, a 94% increase over 2015. In 2017, while the residential and non-residential PV markets are both expected to grow year-over-year, the U.S. solar market is still expected to drop on an annual basis due to the aforementioned pull-in of utility PV demand in 2016. However, the year- over-year downturn for utility PV has softened due to a growing number of projects that have pushed out completion dates from this year to 2017.

By 2019, U.S. solar is expected to resume year-over-year growth across all market segments. And by 2021, more than half of all states in the U.S. will be 100+ MWdc annual solar  markets, bringing cumulative U.S. solar installations above the 100 GWdc mark.

Credits: GTM Research / SEIA U.S. Solar Market Insight®