From 2014 to 2022, small-scale solar photovoltaic (PV) electricity capacity in the U.S. more than quintupled. On the utility scale, these systems have become cost-competitive with wind and natural gas. Furthermore, they can turn every home into a power generation center; about one fourth of solar PV capacity consists of residential installations. Add on top of that generous subsidies, and one would predict the emergence of a steadily growing, healthy industry. Yet in 2023, there were more bankruptcies of residential solar installation firms than in the three previous years put together.
The explanation for this paradox begins in the early 2010s. At this time, solar PV panels were a relatively new and expensive technology, a characteristic which drove up their upfront cost and impeded their mass-market adoption. To make matters worse, permitting, inspection, and connection costs were considerably higher in the U.S. than in other countries, such as Germany. How could households be persuaded to switch to solar? A company called SolarCity thought they had a solution.
SolarCity began leasing solar PV systems to homeowners, eliminating the barrier of having to buy them for a high price. There were other benefits besides increased sales. The 2005 Energy Policy Act established a 30 percent tax credit for rooftop solar panels. As the owner of the panels, SolarCity was entitled to claim the credit. The business model became even more lucrative when SolarCity began selling their credits and leases to other businesses and investors.
As the rest of the solar industry followed suit, the trends set by SolarCity produced some contradictory effects. On the one hand, they helped some companies, such as SunPower and Sunrun, reap large profits and provide service across the nation. However, pressure for greater profits drove installation companies, particularly those competing on a national scale, to issue more and more leases. Not only did this pressure drive marketing costs to higher levels than the rest of the world, but it compelled installation companies to pursue aggressive marketing some claimed bordered on fraud.
Two events eventually pushed the industry over the edge. The first was a rise in U.S. interest rates as part of the Federal Reserve’s policy to fight inflation. The second was California, which accounts for more than a third of the country’s small-scale solar capacity, decreasing the rate, or tariff, it paid solar users for their electricity generation. Higher interest rates and a lower tariff made consumers less willing to lease solar PV systems, leaving the residential installation industry, especially national players, with shrinking revenue and increased borrowing costs. Thus, the present wave of bankruptcies began.
As solar installation companies become insolvent, they often leave dissatisfied consumers in a bind. Many customers allege that the corner-cutting marketing done by many installation companies meant that they were often promised government benefits or tax incentives they never received. Now that many of these firms have declared bankruptcy, consumers will have a much harder time filing lawsuits against them. Additionally, unfinished solar installation projects by these companies will be difficult to complete.
With residential solar installation in such dire straits, it is worth considering which factors played the biggest role in getting the industry to this point. SolarCity’s business model can certainly be criticized for engendering this situation. Policy missteps, however, cannot be ignored. The lucrative solar tax credit likely played a part in incentivizing the rush of sales to obtain and resell this credit. California’s abrupt change in tariff rates precipitated a rush of bankruptcies that might have been avoided with a more gradual decrease.
Of course, this is not to say that solar tax credits and tariff rates for home-generated energy are in and of themselves bad policies. But with billions of dollars currently pouring into clean energy, it is worth considering that poorly executed policies can do as much harm as good. To place solar installation on surer footing, a logical next step could be reducing solar installation costs by streamlining regulations. In the meantime, ensuring victims of fraudulent marketing by bankrupt companies can easily file a proof of claim could help stabilize their financial situation. Despite the industry’s current troubles, if the right policy reforms are put in place, the U.S. could yet see the sun rise on a more sustainable solar installation business model.
Written by Isaac Oh, Public Policy Intern
The Alliance for Innovation and Infrastructure (Aii) is an independent, national research and educational organization. An innovative think tank, Aii explores the intersection of economics, law, and public policy in the areas of climate, damage prevention, energy, infrastructure, innovation, technology, and transportation.