The US Residential Solar Market Is Set For Major Change in the 2020s

Incentives and falling costs took the market this far. Geographic diversification and home solar mandates could change the equation again.

Residential solar PV has had a remarkable decade. From 2010-2020, more than 2 million residential solar panels have been installed in the U.S., supported in large part by the 30 percent federal Investment Tax Credit. But the ITC is of course only one part of the equation.

Though the ITC has provided foundational support to the solar industry across all segments, several states have gone further to provide additional in-state incentives for homeowners to purchase solar. Ranging from the early days of the California Solar Initiative to New York’s Megawatt Block program and the establishment of numerous lucrative SREC markets in the Northeast, these regions have benefited tremendously from supportive state-level solar policy and incentives.  

Unsurprisingly, this also means that to date, most growth in residential solar has been concentrated in a handful of state markets that offered additional incentives. Looking at cumulative residential installations, a mere five states account for a full two-thirds of national installed capacity — all concentrated in the aforementioned regions that provided state-level policy support for rooftop solar in the last decade.

In particular, the “Big Five” have historically been California, Arizona, New York, New Jersey, and Massachusetts.

But while the growth story of the last decade has centered around federal and state-level policy support subsidizing rooftop retrofit solar, the next decade of solar growth will have much more diverse demand drivers as the ITC steps down and legacy markets reach higher saturation levels.

With the decade ending, we’re beginning to see glimpses of the future composition of the solar market.

New states rise up the solar rankings

With the Q3 2019 solar data released in last week’s U.S. Solar Market Insight report, a notable trend has emerged. For the first time since Wood Mackenzie has collected data, not a single Northeast state market ranked within the top five states for residential installations.

Instead, these legacy markets were supplanted by a handful of newcomers like Florida, Texas and Nevada — states with a markedly different profile than the legacy markets that have driven growth to date.

These markets — and the comparison to legacy markets — are worth examining to better understand the future of residential solar demand over the next decade.

First, unlike the Northeast, these emerging markets do not have robust state-wide incentive programs. Further, while these states do allow net metering in some capacity, Texas only has net metering if individual utilities choose to provide it. Meanwhile, Nevada has a net billing mechanism with export credits that are below the full retail rate, leaving Florida as the only one of these three emerging markets with state-wide retail rate net metering policy.

In short, these states are seeing growth despite limited incentives and a less favorable solar policy environment.

Secondly, these states also have much lower electricity rates than legacy Northeast markets, ranging between 12th and 16th lowest retail electricity prices in the U.S. in 2019, according to Wood Mackenzie data. In contrast, three of the five legacy state markets have the first, second, and fourth highest electric utility rates in the country. This is important because rooftop solar needs to be much more cost competitive in these emerging state markets to enable solar adoption, though it bares mentioning that installations costs are lower in these markets as well primarily due to cheaper labor.