Solar Energy in California: Supercharged! | ETF Trends

By Veronica Zhang, Analyst for VanEck Global

Starting on January 1, 2020, the California Energy Commission mandated that all new residential construction under three stories high will have a solar energy component, while also incentivizing battery storage to meet a target of reducing energy use in new homes by half. The impact of this is significant and far-reaching: currently, only one out of five new homes in California has solar. It is estimated that this mandate could result in 40%+ growth in residential solar demand in California in 2020, with further improvement as this impact continues into the out-years. More importantly, we think the real uplift is the widespread influence of California’s energy efficiency policies: over 100 cities across the country have announced timelines to source 100% of energy needs from renewable sources, with a number contemplating their own version of California’s blueprint.

This is all wonderfully green and constructive for solar, but in our opinion, the gems lie in the details. California’s motivation behind this mandate was not just to throw panels on roofs, but to solve a number of problems that will ultimately lead to vastly improved economics for solar + storage.

Shining a Light on Streamlined Solar Installs and Costs

Solar panels, inverters and equipment comprise only 25% of total costs. A significant chunk goes into soft costs, which is what the California mandate seeks to target and minimize by standardizing the process: marketing and sales (no more cold calls, brochures on your windshield or unexpected guests at your front door), labor, installation, and permitting (more efficient installers familiar with solar panel wiring, simple and consistent roofs) and other miscellaneous costs (upgrading outdated electrical systems, landscaping for optimal energy production).

While the impact will take some time to become fully realized, a more efficient start-to-end process for a complete solar install is highly beneficial as solar matures from a “new technology” that requires an educational period for customers and installers alike, to a new standard—with the reduction in cost benefitting the end-user the most.

Where Do Solar Panel System Costs Go?

Where Do Solar Panel System Costs Go?

Source: Energysage

Storage: Where We Think the Biggest Impact Sits

California’s solar mandate, while grabbing headlines on the panel side, is inherently focused on overall energy efficiency. That introduces the incentive for battery storage. Under the mandate, homebuilders can deploy storage to offset the size of the solar PV system by up to 25%. Sunrun, one of the largest U.S. residential solar developers, revealed on its last earnings call that attachment rates for storage systems were 15% across the country, 30% in California and 60% in the Bay Area.

Battery cost reductions have been a primary reason for the increased adoption (attachment rates were in the single digits just a year ago) and continue as manufacturers pursue better energy density and higher efficiency in battery technologies. Cost reductions, however, are still in their infancy. Battery costs are slated to decline an additional 45% by 2030, after dropping more than 50% over the past three years.

Our view is that storage demand will take off as consumers choose to position themselves ahead of major policy changes from California utilities, who are implementing a dynamic rate model to replace the standard flat per-kWh rates with rates priced accordingly for peak demand shifts. Off-peak power users will have lower bills and on-peak power users will have higher bills—which makes the use case for batteries significantly more attractive, even though costs are not yet at “no-brainer” levels.

While the debate continues on economics versus rate of adoption, we look out into the long term and see an evolving structural benefit to both consumers and utilities.


1Based on a 2019 study by NREL (National Renewable Energy Laboratory) on 4-hour duration systems

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