Three Predictions For US Solar In 2023

The US distributed solar industry is expected to install over 8 GWdc in 2022, nearly doubling the market size from 2018, just four years ago.

As the industry’s momentum grows this upcoming year, there will be several key trends to watch. Look for policy evolution away from retail rate net metering, shifts in residential solar financing, and the creation of new community solar programs.

Net metering policies continued to face opposition in 2022, more challenges in 2023

Net metering policies remained a central topic of debate and controversy in 2022 across the United States. Utility-backed proposals and bills in several states including California, Florida, Indiana, Idaho, Michigan, and North Carolina, sought to cut net metering compensation rates and/or enact fixed charges for distributed solar customers. Looking forward, Wood Mackenzie expects to see more challenges to retail rate net metering in 2023 for several reasons.

Increasing retail rates and growing distributed solar penetration will fuel challenges to net metering. The EIA’s December 2022 Short Term Energy Outlook predicts that the average US retail electricity price will continue to rise in 2023 to $0.154/kWh, after a 10% increase in 2022. This would amount to a 18.3% increase since 2019. Over the same period Wood Mackenzie estimates that the national market penetration of residential solar will have grown from 3.4% to 7%.

From the utility perspective, rate increases drive demand for solar as customers look to offset high bills and ensure that customers with existing solar receive higher compensation. Distributed solar will be a ripe target for utilities looking to defend their bottom lines and prevent spiraling rate increases and solar adoption. Installers will need to maximize self-consumption and find new revenue streams under successor tariffs.

With more challenges to net metering looming in 2023, installers will need to focus on incorporating battery storage into the value proposition for rooftop solar. Whereas traditional net metering allows customers to effectively use the grid as a battery, successor tariffs with net billing and lower export rates incentivize solar self-consumption. This self-consumption will be increasingly important for rooftop solar savings and will help to hedge against future uncertainty in export compensation. Furthermore, for developers looking to maximize self-consumption under successor tariffs, marketing solar-plus-storage is a far more lucrative option than selling smaller, undersized standalone systems.

Beyond self-consumption, the future holds opportunities for solar-plus-storage systems to provide value through resource aggregation. Evolution away from retail rate net metering will accelerate the formation of partnerships between battery storage manufacturers, solar-plus-storage installers, and aggregators as they try to capture the value of providing real-time grid services via virtual power plants and package the resulting savings into initial solar-plus-storage retail offerings.

Companies offering multiple financing for residential solar set for 2023 success

The residential solar industry will remain enthusiastic about the Inflation Reduction Act (IRA) this year, but it will shift the financing product landscape. Although the industry still awaits guidance from the Treasury on the investment tax credit (ITC) bonus adders, many installers and financiers expect that it will be beneficial to offer third party-owned products regardless of the final details of the guidance.

The third-party ownership (TPO) segment reached its lowest quarterly share in Q3 at 18.6% but still saw considerable growth of 27% year-over-year in 2022 through Q3. The TPO segment will continue to grow and win back share starting in 2023 as it will benefit from being the only residential solar financing segment eligible for the ITC adders.

Although the loan market has consistently dominated the residential solar space since 2018 and grew 66% year-over-year in 2022 through Q3, rising interest rates and dealer fees will slow the segment’s growth in the first half of 2023.

Companies focused on TPO products or those that offer multiple product options will be best positioned for success in 2023. These players, such as Sunnova, Sunrun, and SunPower, will be less impacted by the headwinds of the loan market and will benefit more from the bonus adders in the IRA. Companies that only offer loans may struggle as it will be difficult for salespeople to continue selling loan products at the same pace in this higher rate environment.

Companies that only offer loan products will likely explore or begin offering TPO options to remain competitive. As TPO products gain momentum, this trend is now reversing. We expect that many companies will reconsider or begin offering TPO again in 2023, especially as utility rates continue to increase.

Five states expected to make headway on community solar programs in 2023

With just over 1 GW of new capacity expected for 2022, community solar makes up under 13% of the total distributed generation solar market. In addition to various utility-led community solar programs, 13 states have formal community solar programs as of the end of 2022. These programs combine to a forecasted 7.3 GW of new solar capacity between 2022 and 2027.

But Wood Mackenzie’s forecast can be viewed as a floor for the segment’s potential over the five-year outlook – it only includes existing state-level programs. The burning question then becomes what – and where – is next for US community solar in 2023?

In 2022, just one new, state-wide community solar program was officially established. In September, the California State legislature enacted a new, state-wide program. Although the precise rules of the program have yet to be established, we expect the first projects could come online as soon as 2024. By 2027, we expect to see upwards of 250 MW of new installs annually. This program alone provided a 540 MW upside to our five-year forecast in Q4 2022, but this upside could be even greater once program rules and structures are established in 2023.

In addition to further guidance on the California program, we will likely see movement on policies in several states that have program proposals in place heading into 2023. The Midwest will be a key region to watch in the first half of the year. In 2021, Michigan, Ohio, and Wisconsin all introduced bills proposing state-wide community solar programs.

Michigan and Ohio appear to be the most promising prospects. If established this year, these programs provide an upside to Woodmac’s forecast of at least 400 MW by 2027.

Outside the Midwest, there has also been movement in Arizona and Pennsylvania. In Q3 2022, Arizona Public Service filed a community solar program proposal. Although unlikely to be approved in the proposal’s current state, the initial RFP would result in 140 MW of community solar. And in Pennsylvania, the prospect of a new community solar program has already resulted in early-stage development.

While these new programs would result in a relatively small 8 GW uplift to our current forecast, they signify a broader trend of new, emerging markets for community solar. New proposals are also expected to be introduced throughout the year and will continue to monitor how the IRA increases the potential success of these emerging markets.

To contact the author, email [email protected]