By Richard Stubbe, BloombergNEF. This article first appeared on the Bloomberg Terminal.
Pairing batteries with solar in residential applications is quickly becoming the norm in the U.S., particularly in California, SunPower Corp. CEO Tom Werner said.
“The integration of storage will go mainstream, maybe as soon as one year but certainly in three years,” Werner said. “Having battery storage with solar systems could be the rule and not the exception by the end of next year.”
Werner also said the election of Joe Biden to the U.S. presidency should be favorable for solar in a number of ways, particularly by increasing the chance of an extension in the federal Investment Tax Credit for residential and commercial solar systems. The ITC has begun a stepdown and is scheduled for elimination at the end of 2022.
It’s been just under three months since SunPower spun off its manufacturing unit and became a “downstream company,” in Werner’s phrase. The new company is focusing on storage to complement rooftop solar, as well as commercial customers.
Investors have liked what they’ve seen out of SunPower since the spinoff, which also created panel maker Maxeon Solar Technologies, was completed Aug. 26. The shares rose more than 40% from then through Nov. 16, and Maxeon has fallen.
Werner took questions from BloombergNEF in two telephone interviews — one in late October before the U.S. presidential election, and a short follow-up Nov. 16 to discuss the results. The interview has been edited for length and clarity.
Q: You had solid quarterly earnings, as did the industry in general. What’s happening with the company?
Werner: They were good. It’s a product of a couple of things – it’s a product of splitting the company. Now SunPower is a downstream company, customer-facing, distributed generation. We’re still differentiating on a premium solution, a higher-performing solution, our battery-and-PV panel.
Q: What are the advantages?
Werner: In the near term, that profile of a downstream company, much like oil and gas, doesn’t have the capital expenditures, doesn’t have the development risk. What it does have is customer orientation software, and in our case, integration of solar with batteries, which emphasizes software even more. Because it’s capital-light, there’s very low risk of burning cash, most likely generating cash and profitable. So the profile of the new SunPower from a P&L standpoint is low downside risk, and I think and believe that we will deliver high upside including committing to 40% growth in our residential business.
Q: What was your take on the presidential election?
Werner: I think solar was going to do well regardless but it would be fair to say that a Biden administration is quite favorable for solar and for SunPower in particular. The likelihood of an Investment Tax Credit extension is increased significantly under a Biden-Harris administration. Biden’s clean energy standard would push utilities to go completely renewable by 2035, and upgrading the energy efficiency of federal buildings would also help renewables.
Q: What are you seeing a few years out?
Werner: When we look out – we’re U.S.-focused — when we look out one year, three year, five years, the integration of storage will go mainstream, maybe as soon as one year but certainly in three years. The attach rates are going from 20% to as high as 40% or 50% depending on the region you’re in. And so we’re not too far away from thinking of solar and storage simultaneously.
Q: When you say attach rates, you mean solar plus storage as a combination.
Werner: Yes. Having battery storage with solar systems could be the rule and not the exception by the end of next year. Maybe more than half of the time as we get to the end of next year and into 2022, more than half of the times battery storage will be sold with the solar systems.
That has profound implications. From SunPower’s standpoint, we have a storage system called SunVault and that allows us to have a long-term relationship with the customer so that they monetize the energy that they’re storing in their battery most effectively. That could be in terms of how they consume it or how they participate in the grid.
So, over the next one to five years. SunPower for sure and the solar industry at large goes from solar only to solar storage and software optimization, which the industry has various names for — grid services or just services in general.
Q: How well has SunPower recovered from the pandemic?
Werner: With the Q3 results and the beginning of Q4, I would say that we’ve more than recovered. We’re experiencing a V-shaped recovery. And then that would support that meeting the volume of business in Q3, and then what we’re committing to Q4 is better than last year. So we can say objectively that we’re beating pre-pandemic levels.
We’re seeing inbound online interest in solar up 43% this October over a year earlier. So there’s objective reasons to be optimistic that well.
Q: What is driving that interest?
Werner: It’s really work from home, which is driving home improvement, and it’s new homes. People are leaving expensive cities like San Francisco and buying new homes, and we’re the leader in solar for new homes.
And it’s the wildfires. The Public Safety power shutoff, if you combine that with work from home, there’s a real motivation to have more control, and so there’s very strong demand in the western part of the U.S. for solar and storage created by the combination of work from home and fires.
Of course, the underlying economics have improved as well.
Q: What’s your footprint geographically?
Werner: Growth is very strong in the key markets, which would be California, the West and some of the South – Texas and Florida. And the Northeast is very good as well. The West Coast is by far the best and the biggest.
Q: What are your most relevant markets beyond California?
Werner: Either Hawaii or New Jersey. Massachusetts and Maine are strong. Illinois is coming on. Hawaii uses oil to make electricity, and that’s extremely expensive. Solar penetration in Hawaii is rather unbelievable and therefore creating the need for batteries. And New Jersey’s been a leader in solar for probably a decade.
Q: Expensive grid electricity helps you.
Werner: The ideal combination for us would be sun, high cost of electricity and favorable state policy. In California and Hawaii, you have two of the three – lots of sun and higher electricity. In New Jersey, you can add state policy. That would be true of Maine and Massachusetts as well.
Q: California doesn’t have favorable state policy?
Werner: It does – you need to be a real energy detail person. It has favorable policy in terms of net metering. It has very high caps. There are not economic incentives for solar. There are for batteries but not for solar.
Q: You’ve shifted to more online sales. Are you seeing that as permanent?
Werner: Most of it. If you look at the cost of a residential solar system, the cost of acquiring a customer is up to one-third of the cost of a system. There was a desire pre-pandemic to go online, and we have invested heavily in software so that the end user has the power to control and choose what they want.
So we created the SunPower design studio, which does automatic rooftop design. And we had that pre-pandemic, where you can go to our website, type in your address, and design your own solar system. We can also do that now with a Zoom call and a designer. There is a certain efficiency in solar design online that fits nicely with the virtual selling.
In addition to that, software speeds the process of permitting a solar system. It’s something that has gone from maybe 10% online sales to 90% at our peak in the pandemic. We think it will settle in between 50% and 90% because people making purchases of this size often like to talk to a person, but today it’s still 85% online.
Q: What’s the median cost of a new residential system?
Werner: It’s reasonable to say it’s the cost of an inexpensive new car. I would estimate $20,000 to $25,000. Remember a lot of customers will lease, in which case the relevant number is the cost of energy it’s compared to.
Q: There’s also a tremendous amount of software to make the most of the system.
Werner: Now you’re on the topic I love. The cost of storage might be a quarter of the cost of the system. Let’s say $20,000 plus another $5,000 to $10,000 for storage. Whether I’ve agreed to a lease or bought outright, I now have kind of a power plant. Energy costs money to store, so we provide software so that you use the energy most cost-effectively.
That would be things like backing up critical load for a refrigerator in the case of a storm or power shutoff, or it could be rate-driven in places where rates vary by time of day. And then if you store a lot of energy, you can actually sell it back to the grid and software can make that decision way better than a human.
Q: So you are very much expecting batteries to become a major part of the landscape over the next few years.
Werner: Hawaii’s already there. California will be there in the next four to six quarters. And then the other states, to be fair, may be several years behind that.
Energy storage is becoming a very big business, and of course, we are capitalizing on electric vehicles as well. Money is flowing in, research is flowing in, and costs are coming down. So you do get a virtuous up cycle, like we’ve seen in solar.
Q: In solar, that virtuous up cycle has gone on for decades and is showing no signs of stopping.
Werner: The International Energy Agency just said solar is the least-cost source of electricity now, and of course wind is very economic as well. Just when you think that equipment costs can’t go down, allowing for a lower cost, they do.
Q: BNEF has predicted that the cost of a solar system will fall by 50% over the next 30 years in constant dollars.
Werner: You do have to be precise between a large ground-mount system versus a rooftop system. I think it will be easier, or less hard, to get 50% out of the large rooftop systems. Large ground-mount systems are already $20 to $30 a megawatt-hour. And when you get near sub-$20 a megawatt-hour, that’s really good.
Q: How will batteries evolve? Where does SunVault fit in?
Werner: Today you can get a very sophisticated app that will tell you how much are producing, how much you’re storing, and to some extent you can manage your battery. That capability to, on a mobile device, interactively manage your battery and make demand response decisions, and in the case of Texas, rate decisions, is just going to expand.
What makes SunVault unique is how we designed this system. The battery is the chemistry that stores the energy, but then you need an inverter that interfaces with the solar system and you need a service panel that interfaces with the load in the house and need a way to create a microgrid. And you need a way to monitor all of that.
Uniquely, we designed it so it has two boxes. One has the battery and the inverter. The other box contains everything else, and no one else in the industry has gone to that degree of integration, so you get higher amounts of integration, hardware integration, and our service panels have higher-rated electronics. So you can put more batteries and more solar, and therefore back up more load.
So you have two boxes that have more capacity, and that’s what makes SunVault different. Things will evolve here rapidly. Costs will come down and I’m sure both the software and hardware is going to evolve. It’s going to be really interesting.