Sunrun: Energizing Your Home

Behind the Sun
In the largest acquisition to date in the residential solar power industry, Sunrun Inc. closed its purchase of Vivint Solar (Vivint) on October 8th, 2020 for $3.2 billion. Prior to the acquisition, Sunrun and Vivint were the leading players in the industry, together accounting for a 17.5 percent share of the U.S. residential solar market in 2019. Despite being the largest industry players, both companies were unprofitable, with Sunrun losing $391 million and Vivint losing $396 million in 2019. The combined company, operating under the name Sunrun, aspires to become a global leader in solar installation.

Cost synergies and an expanded customer base were the primary motivators for Sunrun’s acquisition of Vivint. Sunrun projected $90 million of annual cost synergies, largely attributable to eliminating redundancies in marketing costs. The combined company also has an expanded customer base of nearly 500,000 households in the U.S. However, it is likely that Sunrun will be unable to make up its losses from these cost synergies alone. Sunrun continues to face challenges in customer acquisition, arising from the highly fragmented market in which it operates. The fragmentation of the market means that there is no clear go-to for residential solar installation for Americans; this creates an opportunity for Sunrun.

It is clear that Sunrun’s customer acquisition spending is eating away at its margins. Prior to the acquisition, these costs amounted to $5,219 per customer, comprising 27 percent of the average revenue per installation. Moreover, while its strategy of establishing marketing booths within Home Depot is successful within smaller geographies, it will become difficult to scale as Sunrun expands its domain. COVID-19 has also impeded the success of this strategy in the short-term amid store closures and enforcement of social distancing measures. Ultimately, to reach a broader market and grow in the residential solar markets, it is clear that Sunrun must reduce customer acquisition costs.

Brighter Days Ahead with Renewable Energy
Transitioning to renewable energy in the residential sector is significantly beneficial for consumers. One of the primary incentives of switching to solar energy is environmental—solar power can supplement and even replace fossil fuels for residential energy use, reducing the carbon footprint of the home. Homeowners with solar panels also receive financial benefits in the U.S., including a 26 percent federal tax credit against the cost of installation, solar rebates, and state-level renewable energy credits. Finally, direct savings exist due to reduced utility expenses for households, with solar energy devices resulting in average savings of $1,100 per year. However, the extent of actual savings is dependent on a number of variable factors; namely, the hours of direct sunlight, size and angle of the roof, and local electricity rates.

When consumers install solar panels, the value of their homes also increase. On average, homes with solar panels sell 20 percent faster at a 4.1 percent premium compared to those without solar panels. For each additional kilowatt of solar energy generated, studies have found a corresponding increase in home resale value ranging from $4,020 to $5,911. This translates to a market value increase of at least $24,120 for a mid-sized US home and a typical six-kilowatt solar panel installation. Thus, the cost of an average rooftop solar installation and battery can be easily recouped from the appreciation in property value. This provides incentives for consumers to seek ways to integrate renewable energy into their homes.

An attractive option for homebuyers to finance the installation of solar panels is the Energy Efficient Mortgage (EEM) program enacted by the Federal Housing Administration. EEMs allow borrowers to finance energy-saving measures along with the purchase of their home. The savings realized from the energy-efficient measures are classified as additional income for the borrowers, helping them qualify for larger loans and more favourable financing terms. State and local governments incentivize mortgage lenders to partake in this program by “buying down,” or reducing, the interest charged to borrowers in exchange for cutting their home energy consumption. While the program benefits both the bank and the homeowner, U.S. institutions that offer EEMs or equivalents remain scarce. However, this program has successfully scaled in Europe: over 50 banks have joined the initiative and these banks account for 55 percent of all European mortgages.

Lending a Shining Light
The U.S. mortgage industry is one of the largest revenue segments for financial institutions, with a market size of $11 trillion. In 2020, 4.8 million homes were sold, of which 33 percent were to first-time homeowners. This number is expected to increase as interest rates remain at record lows, while young professionals, namely Millennials, start moving into suburbs amidst the new virtual work environment. In addition to being the most prominent demographic taking out mortgages, Millennials are also the most environmentally conscious, with 70 percent extremely worried about climate change and its effects. Over half of this demographic is also expected to install solar panels in the next five years, compared to only 18 percent of Generation X.

Although over 10,000 companies offer solar installations in the U.S., only six percent of U.S. homes currently have solar installations. Since there is no industry go-to for residential solar panels, particularly for new homebuyers, leaving an open net for Sunrun and its competitors. To capitalize on this opportunity, Sunrun should partner with a major American mortgage lender to pursue new homebuyers. In this partnership, Sunrun should launch EEM products with the lender, specifically targeting first-time Millennial homebuyers. Not only would this partnership appeal to Millennials’ favourable attitudes towards solar panels, but the convenience of purchasing a new home and installing solar panels in the same transaction removes yet another hassle for the consumer.

The partnership would complement Sunrun’s existing strategy of advertising within Home Depot. While the company’s previous strategy aimed to service existing homeowners interested in improving their house through renovations, partnering with mortgage lenders would target first-time homebuyers. The partnership would also raise awareness for solar power, as Sunrun’s existing marketing materials could be distributed through the partner company’s digital platforms. Examples include distribution through the partner’s mailing list to mortgage clients and content on the EEM segment of the partner’s website. Above all, as the residential solar panel market is still emerging, Sunrun should use this partnership to help achieve growth and increase brand awareness.

Reenergized: Building a Productive Partnership
Given its position as the largest commercial bank by mortgage originations in the US, Wells Fargo would be the ideal partner for Sunrun. The breadth of Wells Fargo’s outreach is especially beneficial in this partnership as it would give Sunrun access to a large pool of new potential consumers. The bank has also committed $200 billion from 2018 to 2030 to finance sustainable projects, with 50 percent allocated towards investments in renewable energy that directly support the transition to a low-carbon economy. Sunrun’s product offerings can assist with Wells Fargo’s mission of combating climate change and moving the country towards mass adoption of renewable energy.

Wells Fargo is also poised to profit from this partnership. Sunrun should pay the bank up to $2,600 for every customer referred by the mortgage lender, which is less than half of Sunrun’s current customer acquisition cost of $5,219. In the short term, Wells Fargo can generate revenue from customer referrals without significant costs or effort beyond the initial launch of the partnership. In the long-term, Wells Fargo’s partnership with Sunrun could also help raise awareness for solar financing in general, thereby increasing exposure and demand for other solar financing options offered by the bank.

For pricing, Sunrun and Wells Fargo should collaborate to design mortgage bundles that include solar panel installation. This mortgage bundle would group solar panel and installation costs in the mortgage payment plan. The plan would spread these costs over the term of the mortgage, making it easier for homeowners to opt into solar-powered energy. While residential solar panel installations are costly—typically ranging from $11,144 to $14,696 after solar tax credits—spreading it over a longer horizon will make the cost more digestible.

Growth on the Horizon
As Sunrun expands its operations in hopes of capturing a larger portion of the growing residential solar panel market, a partnership with Wells Fargo would allow it to tap into a well-aligned customer base. This strategy will increase the number of residential solar panel users and decrease customer acquisition costs; all of this in turn can help Sunrun move towards profitability. Looking forward, Sunrun could expand its partnership to include other banks to further capitalize on this mutually beneficial strategy. With no industry go-to for residential solar panels, Sunrun has a unique opportunity to be the guiding light in this market.


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