What Sunnova's Bankruptcy Means for the Future of Residential Solar
When I had lunch with then-Sunnova CEO John Berger in March 2022, things seemed to be looking up for the residential solar company. In his telling, rising energy bills and the growth of work from home had made consumers more conscious of their electricity consumption. The push to address climate change and energy security concerns following Russia's invasion of Ukraine added momentum at the national level. 'A lot of consumers, companies will want more solar and batteries for certainty,' he told me, citing the broader volatility in energy markets.
That was then. On Sunday, the company filed for bankruptcy as its debts mounted and the market for residential solar faces difficult conditions. It's a stunning reversal that tells us a lot about the past, present, and future of the clean energy industry. President Donald Trump's policy rollbacks combined with preexisting market pressure adds up to steep challenges for many clean energy companies.
At the same time, the Sunnova case study shouldn't be taken as an indicator that renewable energy is over. Other companies with different business models, less reliant on consumers and tax credits, will have better results.
To understand Sunnova, it's helpful to go back to the company's founding in 2012. At the time, the residential solar industry was booming. The cost of home installations had declined substantially in the preceding years, and interest rates were at historic lows making solar panels easier to afford. A key business model innovation for companies like Sunnova was to finance or lease systems to customers rather than asking them to come up with the money to pay upfront on their own.
Sunnova IPO'D in 2019 and its valuation subsequently soared, as did those of many clean technology companies. In January 2021, its market cap topped out at more than $5 billion. But over time its fortunes began to change. Solar panels are expensive up front but can save money as they reduce electricity purchased from the grid over time. But, because consumers and businesses usually need to borrow money to install them, rising interest rates made the math more challenging. Even before Trump took office, policy developments like a change in the way that California utilities pay consumers for electricity slowed down the industry.
But there's no question that Trump and the coalition he leads in Washington has been a singular force. He entered office directing federal agencies to implement policies that harm renewable energy, and Congress is working on a budget package that, if passed, would effectively nix the vast majority of clean energy incentives included in the Inflation Reduction Act, President Joe Biden's landmark climate law. That would hit residential solar hard given the sector's reliance on tax incentives to make the financials work.
The fate of different segments of the clean energy economy appear increasingly divergent. Followers are quick to cite offshore wind as the most troubled. The sector has struggled in recent years due to supply chain constraints and permitting difficulties. And, for reasons that no one can fully explain, Trump views offshore with particular animus, and the administration has made special efforts to slow the industry. Residential solar, which is heavily dependent on government incentives to make the economics work, also falls in the highly vulnerable bucket. And Sunnova wouldn't be the only casualty in that space.
It's naive to think that any clean technology would be immune, especially if Congress passes the budget package currently under consideration. That bill would aggressively phase out crucial clean energy tax credits and lead to fewer renewable energy additions—though the degree of that drop off is debatable. (I've seen figures as low as a 10% decline and as high as a 70% decline).
Nonetheless, some technologies, including and especially utility-scale solar power and battery storage, will remain economic in many places. Electricity demand is rising, and solar is often easier and more economic to build than gas, the primary alternative. And there are other clean power sources like geothermal. While geothermal energy loses out in the current package, some Republicans, including U.S. Energy Secretary Chris Wright, have called for the power source's tax incentives to remain.
None of this will do any good for Sunnova, or the other companies that focus on consumers and other subsidy dependent distributed solar installations. But, as troubled as the industry may be, not everyone is in dire straits to the same degree. Clean energy installations, including solar, will continue, if more slowly than previously predicted.
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