California Becomes First State to Order Solar on New Homes

May 10, 2018
Most new units built after Jan. 1, 2020, will be required to include solar systems as part of the standards adopted by the California Energy Commission

(Bloomberg) --California just sent the clearest signal yet that rooftop power is moving beyond a niche market and becoming the norm.

On Wednesday, the Golden State became the first in the U.S. to require solar panels on almost all new homes. Most new units built after Jan. 1, 2020, will be required to include solar systems as part of the standards adopted by the California Energy Commission. While that’s a boost for the solar industry, critics warned that it will also drive up the cost of buying a house by almost $10,000. Solar shares surged on the decision. Homebuilders fell.

The move underscores how rooftop solar, once a luxury reserved for wealthy, green-leaning homeowners, is becoming a mainstream energy source, with California -- the nation’s largest solar market -- paving the way. The state has long been at the vanguard of progressive energy policies, from setting energy-efficiency standards for appliances to instituting an economy-wide program to curb greenhouse gases. The housing mandate is part of Governor Jerry Brown’s effort to slash carbon emissions by 40 percent by 2030, and offers up a playbook for other states to follow.

“This is massive,” said Morten Lund, chair of an energy storage initiative at law firm Stoel Rives LLP. “Essentially, this could turn residential solar into an appliance, like a water heater. There has always been a certain inevitability about that outcome, but this is moving faster than most of us thought likely.”

Perhaps the biggest winner will be San Francisco-based Sunrun Inc., the largest U.S. residential-solar installer. Oppenheimer & Co. raised its price target Thursday for the company to $12, from $10. “We see Sunrun as the biggest beneficiary considering its entrenched position in the state,” Sophie Karp, a New York-based analyst at Guggenheim, said in a research note.

Sunrun rose as much as 15 percent to $11.34 Thursday, the most intraday since November 2016. First Solar Inc., a U.S. panel manufacturer, gained as much as 6.3 percent. KB Home, which has significant exposure to the California market, fell as much as 1.7 percent.

The U.S. had 10.4 gigawatts of residential solar power at the end of last year, up more than sixfold from five years earlier. The industry started slowing in 2017 amid policy changes and efforts by some companies to shift their strategies.

“Adoption of these standards represents a quantum leap in statewide building standards,” Bob Raymer, senior engineer of the California Building Industry Association, said during the meeting before the vote. "You can bet the other 49 states will be watching closely what happens.”

Tesla Inc.’s Francesca Wahl, senior associate of business development and policy, was among the company representatives to back the mandate at the meeting Wednesday, and expressed support for provisions that will also promote wider use of energy storage systems.

California’s solar policy will exacerbate another critical issue in the most populous state, where high housing costs are seen as a drag on the economy that also contributes to rising social tensions.

“With home prices having risen as much as they have, I think home buyers would find it a little distasteful to be forced to pay more for solar systems that they may not want or feel like they can’t afford,” said Brent Anderson, a spokesman for homebuilder Meritage Homes Corp. “Even though, in the long term, it’s the right answer.”

California’s economy added 2.3 million jobs over the past five years. Over the same period, the state issued permits for fewer than 480,000 new residential units, or about one home for every five additional workers.

The new policy applies to single-family houses and multifamily units that are three stories or less, and there are some exceptions for homes that are too shady. Homebuilders will probably try to pass on the costs to customers, Carl Reichardt, a San Francisco-based analyst for BTIG LLC, said in a phone interview before the vote.

Big homebuilders like KB Home and Meritage have an advantage because they’ve been offering solar homes for years. Smaller builders will have a harder time managing the new requirements, he said.

Installing a solar system and complying with other energy-efficiency measures required will add about $9,500 to the cost of a new home, according the the California Energy Commission. That would be offset by about $19,000 in expected energy and maintenance savings over 30 years, the commission estimates.

‘Admirable But Misguided’

Bloomberg New Energy Finance analyst Colleen Regan described California’s decision as “admirable but misguided.” The standard isn’t the best way to curb the state’s greenhouse-gas emissions and could exacerbate the steep ramp-up in solar power production that California’s grid operator is already grappling with at midday.

“It’s also a policy that very clearly is picking winners, and California would be better off focusing its efforts on the real source of the problem -- greenhouse gases -- rather than favoring one zero-emissions technology over others,” Regan said.

The energy commission meanwhile said the standards would cut greenhouse-gas emissions tied to home energy use while saving residents money over time. The California Building Standards Commission will need to adopt the rules as a formality.

Lynn Jurich, Sunrun’s chief executive officer, praised the decision, describing it as “a vote of confidence that these assets create value for the whole energy system.”

Jurich said in an interview that the standard is an opportunity for Sunrun, which offers solar leasing. With no-money-down solar service agreements, there aren’t additional costs to a builder, she said. “We are well-positioned to serve that market.”

Solar Demand

The state adds about 80,000 new homes a year, and the California Solar & Storage Association estimates that about 15,000 include solar power. The Energy Commission says that the average home system uses 2.5 kilowatts to 4 kilowatts of panels, so the additional 65,000 new systems would add as much as 260 megawatts of annual demand in the state -- about the size of one large solar farm.

SunPower Corp. expects the rule will increase demand for residential solar in the state by about 50 percent. The San Jose, California-based company makes panels and develops solar systems ranging from rooftops to large, utility-scale power plants.

It’s unclear how much major solar installers like Sunrun and Vivint Solar Inc. will benefit, said Joe Osha, a San Francisco-based analyst at JMP Securities. They typically target existing homeowners rather than companies building new homes.

“Your initial reaction is: ‘Oh, that’s great for the solar company,’” he said. “But their business is about acquiring individual customers. If you’re working with homebuilders, it’s a completely different thing.”

Some of the world’s largest solar-equipment manufacturers in Asia stand to gain in the long-run. President Donald Trump slapped tariffs on solar equipment imported into the U.S. in January, and that could mute some short-term gains.

But those tariffs phase out after four years, and “if you’re being forced to install something that you may not want, you’re going to go the cheapest route,” said Hugh Bromley, a Bloomberg New Energy Finance analyst. “And that’s likely to be equipment imported from Asia.

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