Tumult in residential solar

Summary

Catalyst with Shayle Kann: Tumult in Residential Solar Released on July 10, 2025 | Produced by Latitude Media

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Introduction

In the latest episode of Catalyst with Shayle Kann, host Shea Khan delves into the current challenges and future outlook of the residential solar market. Joining her is Julian de Mullen Smith from Jefferies, an expert in public residential solar companies. Together, they explore the tumultuous landscape shaped by policy changes, financial pressures, and market competition.

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Current State of the Residential Solar Market

Shea Khan opens the discussion by highlighting the rough period residential solar has undergone, marked by bankruptcies of major players like Synova and Mosaic, and significant stock declines for equipment suppliers such as Enphase, which saw a 40% drop in shares this year. Despite these setbacks, market leader Sunrun has experienced a year-to-date increase in the public markets, indicating a uneven impact across the sector.

Julian de Mullen Smith reflects on the market's volatility, describing it as a "solar coaster" due to the inherent ups and downs (Julian, [07:23]). He emphasizes that even after the enactment of the Inflation Reduction Act (IRA), which initially provided significant tailwinds, the industry continued to face substantial challenges.

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Financial Pressures: Interest Rates and Tax Equity

A primary concern discussed is the rise in interest rates, which directly affects the affordability of residential solar installations. Shea questions whether increased interest rates and changes in net metering have led to reduced profitability and demand. Julian attributes much of the industry's struggles to "competition" and the inability of companies to pass rising costs onto consumers effectively ([06:21]).

He further explains that tax equity issues have also hampered companies, as the shifting financial landscape made it difficult for businesses to maintain stability. Julian states, “Leverage is a real killer... having a lot of latitude is truly important” ([07:52]).

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Market Competition and Business Structures

The episode underscores the fierce competition within the residential solar market. Julian points out the rise of new entrants, including subsidiaries from larger energy companies and international players, which has intensified the competitive environment. This competition makes it challenging for companies to maintain profitability, especially when coupled with rising costs that cannot be easily transferred to consumers.

Julian discusses the financial structures of major public players like Sunrun and Enphase, noting that high leverage has left these companies vulnerable during volatile periods. He advocates for a more equity-based structure to provide greater resilience against market fluctuations ([07:52]).

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Policy Changes and the Budget Bill

A significant portion of the conversation revolves around the recent budget bill, referred to as "O Triple B," and its implications for residential solar. Julian explains that the bill accelerates the phase-out of the IRA’s benefits for residential solar, particularly affecting homeowner-owned systems. However, leasing companies remain eligible for tax credits until 2027, which could shift market dynamics towards third-party owned systems ([14:32]).

Shea probes whether these changes will advantage larger incumbents over smaller local installers. Julian agrees, suggesting that the bill will likely lead to increased consolidation in the industry, favoring established leasing companies capable of leveraging the remaining tax credits ([25:52]).

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Consumer Adoption and Demand Elasticity

Shea inquires about consumer behavior in response to rising electricity prices and changing incentives. Julian shares that utility rates are projected to increase by approximately 7% annually over the next five years, which could theoretically boost demand for residential solar. However, he cautions that the inability to pass all cost increases onto consumers might mitigate this effect. Additionally, he anticipates that reduced markups and increased competitiveness might help lower the net impact on consumers ([28:31]).

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The Role of Storage in Residential Solar

An essential topic is the integration of energy storage solutions with residential solar systems. Julian notes that while standalone storage markets are modest compared to solar, the coupling of storage with solar installations is becoming increasingly important. He foresees innovations in business models that combine solar leases with storage solutions, leveraging ongoing tax credits for storage to create more attractive and sticky offerings for consumers ([32:42]).

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Future Outlook and Industry Adaptation

Looking ahead, both Shea and Julian express uncertainty about the long-term viability of the residential solar market under evolving policy landscapes. Julian emphasizes the need for companies to adapt through financial resilience, innovative business models, and strategic consolidation to survive and thrive in a more challenging environment. He underscores the importance of visibility and adaptability as critical factors for success in the coming years ([34:32]).

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Conclusion

The episode concludes with a consensus that the residential solar market is at a pivotal juncture. With policy changes like the budget bill reshaping incentives, rising financial pressures, and intense competition, companies must navigate a complex and uncertain landscape. Storage solutions and leasing models emerge as potential avenues for resilience and growth. As Shea Khan aptly summarizes, the future of residential solar "requires imagination and adaptability," leaving listeners with much to consider as the industry evolves.

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Notable Quotes

• Julian de Mullen Smith: "Leverage is a real killer over the years." ([07:52])
• Shea Khan: "The most important point is as you roll forward to 2026... the open question is... how installers themselves are going to pivot to adapt that new reality." ([14:32])
• Julian de Mullen Smith: "Storage will be the linchpin of how solar is sold and having imagination of how that can shift and create stickiness." ([32:42])

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Further Resources

For more insights and details on today’s topics, visit latitudemedia.com. Subscribe to upcoming episodes of Catalyst and stay informed on the latest in climate tech and energy transition.

Transcript

[Latitude Media]

Latitude Media covering the new frontiers of the energy transition.

[Shea Khan]

I'm Shea Khan and this is Catalyst.

[Julian de Mullen Smith]

What I would argue is it was somewhat counterintuitive post Ira. It was almost like the best day was day one after Ira and after that there was just an ongoing train of challenges, whether it was the wider trade narrative or, frankly, as you put your finger on a second ago, the NEM 3.0 changes in California and how much that pulled back participation.

[Shea Khan]

Coming up, the murky future of Residential.

[Julian de Mullen Smith]

Solar.

[Energy Hub]

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[Latitude Media]

For an upcoming solar or storage project. ANSA is your best source of intel to stay on top of current policy, tariff, domestic content and supply chain issues. ANSA's team of experts is available to help you adjust procurement strategies, secure safe harbor products and find existing inventory in the US as policy continues to evolve. Learn more about ANSA subscription and service options to help you navigate an uncertain [e-mail] Latitude.

[Shea Khan]

I'm Sheil Khan. I invest in early stage companies at Energy Impact Partners. Welcome. So it has been kind of a rough run for residential solar dating back well before Trump's recent budget bill. Actually, we've seen bankruptcies from major players like Synova and Mosaic, and many smaller players have exited the market as well. This also extends to equipment suppliers like Enphase, whose shares are down 40% this year as of this recording. Not everyone is quite as battered, though. Sunrun, for example, the market leader, is actually up year to date in the public markets after taking more of a beating in 2024. Anyway, it was clearly already an industry in somewhat choppy waters and the one big beautiful bill hit. So what's the outlook. Now, I decided for this one to bring on my favorite watcher of public markets in this space, Julian de Mullen Smith of Jefferies. He's been covering all the public resi solar companies and has a clear view of the world they've been navigating. Also, before we begin, we're going to do another ask me Anything episode where I attempt to answer whatever questions you have about these markets, these technologies, these companies, investing in them, juggling whatever you want. Just email if you have a question@catalyst latitudemedia.com that's catalyst latitudemedia.com I always really enjoy getting these questions, so please send them in. And in the meantime, here's Julian. Julian, welcome.

[Julian de Mullen Smith]

Thank you very much for having me.

[Shea Khan]

All right, let's talk about residential solar, which has been a market that has experienced a lot of tumult, I would say, over the past couple of years. I want to start by having you kind of walk me through the state of the market and the major players in the market prior to the the budget bill that recently passed. So, like, talk me through what's been happening in that market over the past, I don't know, year or two.

[Julian de Mullen Smith]

Yeah, look, if I were to step back and talk about residential solar at the highest level or, you know, kind of the run up here, look, it's been a fairly tumultuous backdrop already, right? I mean, you've seen a lot of shift in market share, a lot of shift in technology. I mean, look, fundamentally solar is a technology sector, whether it's the electrical equipment or the panels themselves. And frankly, even the financing piece of it has been evolving too. Right. So you had ups and downs in the years going into this, to be sure. But I think at a highest level, post the enactment of ira, you all of a sudden opened yourself up to a lot of different positive angles, principally domestic contents adder, the ability to tap energy communities as supplemental adders to the core itc. That really was a watershed moment to try to enable real profitability in the space. I think that is at its core, what transpired in 22 onwards. Now, look, it's not lost on me and probably you that like, look, you also had a lot of tumult and exits across residential solar in the run up to ira. And frankly, IRA never got reformed and you still had a number of bankruptcies and the like in the last couple of years. So don't get me wrong, it has not been a panacea and I don't want to characterize it as such. And that's Why I say, in some respects, you know, many people term this a solar coaster. I think the example of the solar coaster is residential solar in many different ways.

[Shea Khan]

You talk more about those. I mean, you sort of made a good point there, right? Like the IRA passed and that provided a bunch of tailwinds for Resi Solar amongst a bunch of other sectors. You said the energy communities and domestic content bonus means that like some projects could get 40, 50% tax credit, et cetera. And yet again, even prior to this budget bill getting passed, it had actually been a pretty tough ride for a lot of the companies and we had seen some bankruptcies and so on. So what was driving that? I mean, I can name at the really high level, like two things that seem like they were fundamental drivers, which was basically interest rates rose and that seems to have a pretty meaningful impact on adoption of residential solar, possibly profitability of the companies and then net metering changes, particularly in, in California, just making it less lucrative. So was it, was it a thing where all of a sudden companies couldn't sell profitably? Was it that consumer demand started to dry up? Was it they were financially mismanaged? Like what was going on there?

[Julian de Mullen Smith]

Look, I mean, I think at its core, to be honest with you, I mean, I think this is competition. It's probably the single best way to summarize it. I mean, again, I don't mean to that to be a cop out per se. Like your core response, your initial response is, right, interest rates going up, of course, right. Like, yes, this is an incredibly interest rate sensitive product. Interest rates go up. That is the principal driver of raising prices. Now look, you talk about competition. Look, in theory, if it was less of a competitive space, you would say interest rates go up, the cost of solar goes up to homeowners and ergo, it just effectively passed along. Right. We talk a lot about inflation in the current environment and we talk a lot about saying, hey, well, consumers are just going to take it. Right? Not so much as it turns out. Right. I mean, going back to your point, the problem was having inputs that ultimately weren't necessarily passed along. I would throw in another twist there, that frankly, tax equity in its various permutations also was really stymying or stymied a number of companies within the space as well. Right. I mean, but look, in many instances, I don't think you can blame tax equity in as much as it was sort of an output or the specific manifestation that, that drove companies to their end. Right? In, in, in many, in many ways.

[Shea Khan]

That sort of relates to One question I wanted to ask you, which is what is or was the financial structure of the major players, the public, say, the public players in the, in the market, companies like Sunrun and, and Sonova and so on. Like how are they structured financially? And when things happen, like, I don't know, tax equity becoming more expensive, interest rates going up, like flow through to the economics of those businesses.

[Julian de Mullen Smith]

Look, to be fair, I mean, I think, you know, you, you hit on another core point. Like if you're going to focus on the existing large companies that are public, I mean, look, I think a lot of the story there was just leverage, right? How they financed themselves gave them much less latitude when things went against them. Right. Let's, let's call spade a spade. And this is true across any sector we cover. I mean, you and I have talked over the years, you've seen a lot of these different permutations. Leverage is a real killer over the years. And look, to be honest with you, I think that is definitely a contributing factor as we saw here yet again in recent months. I mean, to cut to the chase, one should have had more of an equity structure given the volatility. And again, you could talk about the volatility. You're like, what are you talking about? Customers sign up for a 20 plus year term volatility. I mean, that doesn't resonate. Yeah. My point to you is you don't necessarily know how many customers are going to be signing up. You don't know the discrete terms that you're going to sign up that next customer. The volatility of the business that we just described, whether it's interest rates or otherwise. That's where there's ambiguity in the business model. It's not in the discrete decision of like, hey, a customer signing up for 20 years, that's contracted cash flow. Cool, that's great. That's the core tenet of the business model. Sure. But the sort of supplementary piece of holding leverage at the parent company is really what we're talking about here is having a company that goes out and effectively finances and develops residential solar that has a certain limitation on the amount of leverage it can take. And making sure that you're very diligent to keep the maturity profile and give yourself a lot of latitude is truly important. I think that's really what ended up being a critical factor for at least a couple of the major bankruptcies in the last few years. Just diligence in rolling debt is at its core. Now you could also go back to it and say, wait a Second leverage. Come on, you can't blame leverage. No, you're right. You can't just blame leverage. Naively, the ability to refinance, the ability to roll forward your debt. If I have maturity, if I have a home or whatever, I'm just going to roll it forward. The problem here was that you couldn't necessarily when you needed to, right? You need a proactive rule for your debt and more to the point, the economics of the business, ergo, go back to that core mantra of competition wasn't necessarily working in your favor, right? You had a number of new entrants, right? Think about this. If you want to talk about probably the unsung story of what's going on, residential story, in the last couple years, it's been, you have a number of different novel competitors out there, right? You've got this Nextera subsidiary, you've got various private folks from abroad coming in with their own equipment, tethering, leasing terms to that equipment, right? There's lots of look, and I would call that innovation. I would call that look. I mean, in a world of solar and understanding that look, it's sort of like up to consumers to select. I get it, I really do. But again, I would also emphasize it's been brutally competitive at times. And I think in many ways I think that's the culmination of what we've seen out there is the inability to pass along in a linear fashion pricing. And I could argue even from today, regardless of what's happening with O bbb, is that frankly, the competitive landscape could get worse. I mean, you could see a declining volume environment in the next few years against the backdrop of having still a landscape of different solar vendors. And frankly, the prospects there become a little bit more of a knife fight in the sense that, yeah, we're competing over a greater number of customers. How does that evolve? How do other players fall out of this market? That's the open question. But we can talk about that. There's a lot to unpack there, frankly.

[Shea Khan]

What do we know about consumer adoption and I guess demand elasticity? One of the things I don't really have a clear handle on is, okay, obviously at the margin, if solar becomes more expensive because we have import tariffs, because interest rates go higher, whatever it is, obviously at the margin that should impact customer demand and volumes. But I don't really have a sense of, you know, like back in the day when I was paying more attention to residential solar. The magic, there was some magic point you had to hit where you had to offer like a 20 year lease or PPA with a 3% escalator that gave you 15% year one savings or whatever the number was. Something like that. Is there, do we have evidence of sort of how much Mandela is to see there is. In other words, do small changes in price to the consumer really drive meaningful demand changes or is the market less elastic than that? And what's actually happening here is more about like the profitability of the individual unit for the supplier, for the installer.

[Julian de Mullen Smith]

Yeah, I mean, look, I'm not going to try to argue that this is like a truly competitive landscape. What I would argue is you're right, there's a lot of different inputs that are going against companies and their inability to in a linear fashion pass those along to customers has been unfortunate. Not to rehash too much from the last second, I mean, and frankly we've seen a lot of different oscillations in the last years. It has been striking. I think what I would argue is it was somewhat counterintuitive to the cumulative challenges that we've seen post ira. It was almost like the best day was day one after ira and after that there was just an ongoing train of challenges, whether it was the wider trade narrative or frankly, as you put your finger on a Second ago, the NEM 3.0 changes in California and how much that pulled back participation in California. And that was a big volumetric impact that really cascaded not just across the actual lessors and installers, but also across the equipment manufacturers that really challenged the system just from a volumetric perspective for quite some time. And I think we were just coming out of that last year and then we started talking about, oh, and now we've got this IRA question. Right. And I think that's really what's. What is in front of us now is like how you think about what is to come is really going to be dictated by all variety of interpretations, not just under obb, but really where this administration wants to go in terms of interpreting policies. That's so critical here as far as I'm concerned. But look, I want to make sure I'm answering your question directly. Yeah.

[Shea Khan]

I mean, you alluded to the key thing of the moment, which is the budget bill O Triple B, as you called it. All right, so let's dive into that a little bit. Can you just walk through what that bill does to and for residential solar relative to status quo beforehand.

[Julian de Mullen Smith]

The best way to frame what's happening under this bill now is not just in a linear sense. Okay, yeah. They've shortened and accelerated the phase out of ira, Right? Like, okay, sure, I got it. In fact, in many ways, where that ended up at the end of last week was actually, frankly, at the better end of the spectrum of what fears were. Again, everyone understood at the outset that there was going to be some pain to be taken. Frankly, when you saw the House, the House of Freedom Caucus come out a few weeks ago, it was like, oh, my, they are really taking a hatchet to the residential solar space. In particular. You've seen a lot of major gyrations in the space that aren't over yet. And we'll get to that in a moment. But I really would emphasize that I few. Like, literally a month ago, you were staring at this being like, wow, like you could see a precipitous decline in residential solar as of next year, right? I mean, whoa, okay. But really what's transpired is like, no, actually leasing companies are going to be eligible to continue to participate through 2027. Residential storage is, in theory, extended through the full life of ira as, as you saw folks chiming in saying, look, firm capacity deserves to get the full IRA benefits. Got it. And then ultimately, look, the biggest dynamic for residential solar we're looking at right now is really consumer solar in the context of this 25D piece, right? Like, to the extent to which that consumers can no longer qualify themselves for the, the tax credits, that's a game changer, right? I mean, if you want to talk about being pro consumer or not, I mean, the nuance here is like, look, you're going to only limit the ability to tap tax credits to corporate entities and commercial entities, and you're going to take it away from consumers directly. Like, again, not exactly intuitive, but has major changes for the underlying landscape that we're looking at here, right? And I think that's the most important point is as you roll forward to 2026, when you have this requirement go into effect, the open question is, well, so leasing companies effectively take over this market. Now, again, broad strokes, you've got a two to one ratio already of leasing companies versus folks doing, you know, loans already and doing their own financing, right? So again, I think the backdrop and the trend was already going towards leasing arrangements, right? Like, that shouldn't be lost on people. But if you think about rolling forward next year, like, you're basically going to have two options. You can buy this thing outright, but realistically you're going to forego the tax credits, or B, you can continue to lose leasing companies and they can qualify for the tax credits and they can indirectly flow that back to you in the form of a lower offtake arrangement, an offtake price. So that's really where the industry model's going. And the question is, how much demand erosion are you going to see writ large on the back of that, how much of that one third ish of the industry are you going to say, well look, that's just demand that evaporates versus simply saying, look, they're just going to pivot to a different financing structure and now you're going to have effectively market share capture by a variety of the incumbents, principally, as far as I'm concerned. And how are the installers themselves going to pivot to adapt that new reality? So for as much as we've seen a lot of gyrations, 2026 is going to be, again, I would call it extraordinarily dynamic in a market which you could argue the market itself is going to decline in absolute terms. And yet for the incumbent leasing companies, arguably their volumes on a discrete basis are going to go higher because they're going to capture the market share that they didn't previously have that was going directly to consumers. So that's one of the single most important dynamics as you roll forward. And then if you'll permit me, the other important piece here that you got to talk to is, wait a second. So that's only 26 and 27 in theory, the tax credits, the ITC rolls off at the end of 27 under the deal cut with the House Freedom Caucus and Lisa Murkowski and all that across the House in the Senate. And then there's this nuance of like, wait, wait, wait, wait. It's not technically the end of 27 because there's this so called thing called the safe harbor. You have this dynamic where in theory, if you commence construction, and again, that commence construction is a really technical legal term. In theory, you can buy equipment and some permutation and effectively extend out the life and the eligibility of that ITC beyond that 27 cliff, if you will. And so, yes, technically the two year period, 26, 27 is going to be dominated by leasing companies, but the question thereafter is really going to be dominated by, well, how does this administration seek to change those safe harbors?

[Shea Khan]

Right?

[Julian de Mullen Smith]

Because the day after, I mean, almost literally the day after, as in we're literally staring at, you know, Monday, July 7th, days after this thing was formally signed on July 4th, the administration comes out immediately and issues an executive order and says, actually we're going to rethink how we're doing this, commence construction in Safe harbor. And that's a big question mark here on what this means for residential solar in 28 and 29 and 2030 and that's unresolved, right? If you catch yourself up to the story today, and that's the single biggest sitting at the edge of our chairs question mark for enabling and giving some degree of visibility because these business models want visibility. I'm building a business with two years of visibility on solar and then I'm going to sort of roll the dice on how this evolves further.

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[Latitude Media]

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[Shea Khan]

Correct me if I'm wrong though, the degree to which the Commence Construction rule and any changes treasury might try to make to it affects like huge business decisions today feels to me more significant more dire for utility scale than it does for resi. For resi because because this 2027 placed in service rule which exists if you don't successfully start Quote, unquote, start construction by mid-2026. That's really, really hard to hit in utility scale because you're subject to like, interconnection timelines and all this other stuff. Whereas in resi, you're just kind of like rolling, doing installations. Not that it's not important and as you said it like it affects the 28, 29 volumes, but it feels to me like it's, you know, if you're in utility scale, you're like eyes glued to the treasury process because it's all that matters. Less so in resi. Am I wrong?

[Julian de Mullen Smith]

Look, point, counterpoint, right? Look, your point's made, but I'll give you the counterpoint on that. Look, utility scale, solar. Look, the reality is that market is principally driven by CNI demand, commercial and industrial demand. What is that? Effectively, it amounts to tech companies, data center demand. Right. Like, am I really worried substantively that someone's not going to step in and want to enter the utility scale markets and buy renewables in the future? We've already got a clear deficit of supply to meet what effectively is tech and CNI demand out there. Right. So if I were to summarize it this way, the ability to pass along the inflation X tax credits in that market, which is the bulk of the renewable market, is fairly transparent. It's going to be there. In fact, that's what makes this IRA conversation, IRA reform conversation, so readily happening, is that there's a growing implicit acknowledgement of if these IRA credits are going to tech companies, why do we need this? That's the tension at its core of how this came to be today. But if I were to think you're.

[Shea Khan]

Arguing that like, that the itc, PTC is more existential for residential than it is for utility scale, and thus you don't. Whether you get it in 28, 29 matters.

[Julian de Mullen Smith]

Yeah. Well, let's put it this way. I wouldn't use the word existential. I would say it this way. It's much more transparent to me sitting here today in 2025 that I've got a buyer, aka supposed future data center company or the like, who is keen to procure that at not any price, but at a price, rather than saying, look, I'm going to jack the price up of residential solar by x percent and 28 or 29, depending on exactly how safe harbor and depending how much, if they buy storage with it. And there's sort of an uncertain elasticity on pricing that you're walking into. Right. Clearly there's a market for solar for residential and for utility scale ex tax credits and without knowing who that buyer is. Right. Like transparently. But there's a much greater degree of uncertainty on the residential side given how much more meaningful on a relative basis the value is of that tax credit in residential solar versus utility scale on a percent basis, the tax credit's more valuable.

[Shea Khan]

Right. Fair enough. So I want to go back and unpack for a minute just some of the other dynamics that you laid out there. So basically what the bill does is it says if you are doing homeowner ownership of residential solar, whether through direct purchase or a loan, which is the two ways that you do that, you're not going to get the tax credit after the end of this year. So it, it kind of ends tax credits at the end of 2025. Right. For, for anything that is owned by the homeowner. And then meanwhile it allows the tax credits to continue in the same manner as you get for utility scale. If it is third party owned, which is where you're seeing the leasing companies in theory, PPA as well would, would qualify in the same manner. And so it really advantages anybody who can offer third party owned solar. And I guess this is my question for you. Does the bill, does the, the dynamic of qualifying for the credits for a lease versus ownership probably result in a, an even bigger incumbency advantage? Do you have to be a big player to take advantage of those credits rather than being a small local installer?

[Julian de Mullen Smith]

Look, let's be honest, right. That trend towards consolidation has been going on for years. And look, I will like firmly agree with your characterization what we are poised to see, whether it's 25 into 26, whether it's 26 going into 28, we're going to continue to see the consolidation. Now again, let's be careful. It depends where you are in the value stack, right. Like in the financing terms and effectively who's originating these leases. Sure, that's going to continue to consolidate. That's what the interesting question is. Who's going to win in that race and what is the innovation there? Is it just be a race to the bottom on cost of capital, for instance. But look, I think separately and distinctly from that as you frame, it's like, look, the individual installers who had been principally selling loans and had sidestepped this whole conversation to a large extent, that's really going to continue to be phased out. And in many ways what I would argue to you is when you look at the trend over the last years where you've seen residential solar Companies take advantage of the ira, which only authorize domestic contents and only authorize energy communities to leasing companies. You know, frankly that already shifted the market share away from loans. The higher interest rates themselves shifted people away from loans. Right. That has been the story of consolidation for the last two years running. And that's only going to be magnified here from what we can tell with the 25 DPs phasing out at the end of the year. Now look, there could be like a pull forward. There could be some dynamics where you see folks say actually I'm going to run in, I'm going to, I'm going to buy it while it's hot. I'm going to get it before the end of the year. Do you see a little bit of a pop? We've been asking ourselves that for a little while here.

[Shea Khan]

Okay. Two other dynamics that I want to talk about with you. One is the effect of likely rising electricity prices. I mean we're already in an environment where retail electricity prices have been rising more so in some places than others, but, but significantly, and I think general expectations are that a variety of factors including removing tax credits for utility scale renewables will probably cause electricity prices to rise even more in the future. How do you think about that in the context of residential solar? Obviously the whole, the dynamic of the economics to a customer of residential solar are a function of how much does the solar cost versus how much does your grid electricity cost. So if electricity prices are like inflationary across the board, presumably that's a helpful signal for Resi solar, but I don't know how quickly that flows through to actual demand.

[Julian de Mullen Smith]

So yeah, look, if I were to answer the question directly, I would say, look, we ran this math a month ago as we were looking at the prospects of O triple B phasing out the IRA incentives and said look, utility rates are going up. So when we ran our math, assuming that you benefited on a, your starting point was an ITC that included some degree of domestic contents in energy communities. The point is if you're talking roughly 40% tax credit to begin with and you roll that off, you're effectively talking about ballpark, a 3 cent, a kilowatt hour increase in pricing. Right. So again, is that the end of the world? No, not necessarily. Is that if I were to use kind of like a year over year bill increase you're talking about, call it almost a 7%, five year trajectory. Right. If you think about this phase that happening cumulatively over a five year period or something like that, we're talking about this being like a 7% per annum increase over a five year period. It's not trivial. Are we expecting utility rates to increase at that rate? No, but I think the historical growth rate of utility rates at 2% to 3%, could we expect that to increase? Relatively speaking? Sure. I think that's certainly in the cards. And I think a further nuance here and a really important nuance is, look, is the cost structure going to come down in residential solar? I mean that's the other elephant in the room, right? To be honest with you guys, we talk about competition and this may really not sit with people because people. What are you talking about? There is still a lot of value that is caught up at various points in the supply chain that, you know what, honestly, if you look internationally you would ask why is US residential solar so expensive versus say Australia? We ask this a lot. And arguably as we see the tax rates come out, you're going to see that spread, that difference in how you price residential soil in the US start to come off the dealer markups and the like start to come down. I think that's the principal metric variable here that you're going to be looking towards. And that could actually mean that that 7% impact or you think about that 3 cent a kilowatt hour is blunted as it makes its way to consumer pricing. And so you could make, as you kind of allude to, you could make a much more cogent argument saying, well look, utility rates 2 to 3%. Not sure that's really the case prospectively. I'm not going to say it's five plus by any means to be sure. But I'm also going to not going to tell you that 7% is going to be going right to the consumer either. I think as you look at it, you're going to be parsing details. And yes, indeed, as I go back to initially X tax credits, there is still clearly a market out there and the fact that the ongoing tax credit for the storage, which we haven't even talked about separately is still there only adds to that conviction. Again, the question is for a sector that has otherwise been a growth market, right, like residential storage, has been very much viewed as a growth sector writ large, which is difficult to stomach entirely in an infrastructure world. You're like wait a second. So it doesn't appear to be a growth sector anymore, it's a sector and overall volumetric decline potentially for several years in a row. And how does the industry adapt around that? That's the new bigger reality that we should be addressing and talking to here.

[Shea Khan]

Okay, so you alluded to my last thing to talk about which we maybe shouldn't save to the end, but is. But is super important, which is storage. So you know, obviously the storage credits will persist longer than the solar credits will, so there will be a particular incentive to continue to attach storage. I guess I'm curious about two things. One, how central has storage already become for these residential solar companies? Like is the attach rate so high now that we should actually be thinking of them as solar plus storage companies or is it still kind of a side business for them? And then two, do you foresee a future wherein there's a. These. Some of these companies at least pivot to a storage only business or at least significant storage only installations. Is there a world for resi storage in the absence of resisolar? We have seen those deployments happen in some places already.

[Julian de Mullen Smith]

Yeah, lots to unpack there. But I'll try to be concise. Number one, storage. Look, I don't necessarily think there's a sizable storage standalone business at least relative to the size and scope of what we're looking at today in solar and storage and solar only. Obviously it's there. It's just as a relative percentage of people who are going to do solar and solar and storage. I think the storage only market's modest. A B Look, I think when you think about the business model, yeah, clearly the fact that you can still sell solar and storage and then take a tax credit only on the storage piece, which conceivably also includes the power electronics, mind you, critically, that's actually a real value proposition there. So I think you're going to see an evolution of sort of like a cash sale plus a lease sale or some sort of lease that effectively embeds the tax credit on the storage piece, but then also has an ongoing solar lease in there as well that just doesn't have a tax credit in it. So I think you're going to see again, we talk about the evolution of the business model. The leasing terms are going to evolve to encapsulate and effectively price up modestly, but keep embedded the implicit tax credit that stays with the inverter and the underlying power electronics to integrate the storage as well as the storage solution itself. And I don't think that piece is going away and I think those are going to folks are going to innovate to get there in the next couple of years. That's where people are going to have to win. We see new and novel business models emerging around storage as well. And I'm sure you've seen some of these different antidotes around Texas and how this is being sold to consumers. Stay tuned is what I would offer in terms of storage being the linchpin of how solar is sold and having imagination of how that can shift and create stickiness.

[Shea Khan]

Well, stay tuned I would say is a good coda to this whole conversation and a good way to end it. So Julian, thank you so much as always. Really fun to talk to you.

[Julian de Mullen Smith]

Thank you sir, so very much. Appreciate the time.

[Shea Khan]

Julian demoulin Smith leads power utilities and clean energy equity research at Jefferies. This show is a production of Latitude Media. You can head over to latitudemedia.com for links to today's topics. Latitude is supported by Prelude Ventures. This episode was produced by Daniel Waldorf. Mixing and theme song by Sean Marquan. Stephen Lacey is our executive editor. I'm Shail Khan and this is Catalyst.