Sunrun's Leadership in Solar Leases Proves to be a Tailwind in Current Environment

Equity Analyst

Brett Castelli

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Customer Agreements & Incentives

Solar Energy Systems & Product Sales

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Sunrun’s mission is to provide customers--primarily homeowners--with clean and affordable solar energy and related products. The company was a pioneer in the residential solar industry, offering its first solar lease in 2007. Sunrun targets day-one customer savings of 5%-45% compared with a customer's local utility rates. As of early 2023, the company had direct operations in 22 U.S. states and territories and was the U.S. residential solar market leader with high-teens market share share.

Sunrun sells its solar service offering through a multichannel approach. Most of its installations are through its direct-to-consumer channel, where Sunrun manages up-front lead generation and back-end installation. The company also utilizes a network of third-party dealers that install systems, then sell the systems to Sunrun. The company’s business mix has shifted toward direct to consumer in recent years, particularly following the acquisition of Vivint Solar in 2020. We view the Vivint acquisition as largely opportunistic and do not expect Sunrun to prioritize widespread consolidation of installers.

Sunrun was a pioneer with the solar-as-a-service model, and its customer additions continue to be weighted heavily toward subscribers through leases or power purchase agreements versus up-front sales (cash or loans). We expect leases to remain the majority of the company's originations.

Longer term, Sunrun is focused on evolving into a provider of whole-home electrification rather than just home solar. This would include opportunities such as home batteries, electric vehicle charging, and grid services. On this note, the company has invested in Lunar Energy, a product company developing a solar inverter and battery solution. We note this marks Sunrun's first foray into proprietary products, where it has historically taken an agnostic approach.

Business Strategy & Outlook

We assign a no-moat rating to Sunrun. While we think the company has scale advantages in solar lease financing, we do not believe its direct-to-consumer business has a competitive advantage.

Sunrun’s core product offering is its 20- to 25-year solar lease or power purchase agreement. The company goes to market with a hybrid approach, leveraging direct-to-consumer operations and a third-party dealer network. We estimate the majority of Sunrun’s business is from its direct operations following the 2020 acquisition of Vivint Solar. 

The residential solar installation business is highly fragmented, consisting of thousands of installers across the U.S. We think there are good reasons for this as the sale of residential solar is highly dependent on local factors such as utility rates, policies, and permitting. This has made it difficult for a national installation company to emerge, similar to industries such as home HVAC contractors. The top 10 residential solar installers accounted for less than 40% market share in 2019 and 2020, according to Wood Mackenzie.

Although Sunrun was the largest installer with 10%-15% market share, we do not believe this demonstrates a moat. We view the fragmented industry landscape as evidence of the difficulty in establishing a national installation business such as Sunrun’s direct business. We view cost advantage as a potential moat source for direct installers that can offer the lowest installation costs, but we do not believe Sunrun has a material cost advantage over competitors. Further, we do not believe Sunrun has achieved sufficient brand recognition to warrant a moat.

Within its third-party dealer network, Sunrun primarily offers its platform of financing solutions such as residential leases and PPAs.

The company was a pioneer of the solar-as-a-service business model, whereby a third party such as Sunrun owns a home solar system and leases it to a homeowner under a 20- to 25-year contract with $0 up front. Third-party ownership was popular in the early days of residential solar (72% of systems were TPO in 2014, according to Wood Mackenzie), but customer ownership has grown substantially in recent years. TPO is now less than 25% of the residential home solar market. While the market has shifted away from TPO to customer ownership largely through loans, Sunrun’s business has remained concentrated in leases and PPAs. Sunrun’s installation mix during the first half of 2021 was approximately 85% leases and PPAs as the company has prioritized leases and PPAs during the sales process with customers.

We view Sunrun’s leadership in leases and PPAs as its strongest competitive advantage. Financing of leases and PPAs offers scale advantages to raise debt such as asset-backed securities and tax equity through monetization of federal tax credits. Sunrun is the unquestioned leader in the lease and PPA market with approximately 70% share in the first half of 2021, according to Wood Mackenzie. However, because the direct-to-consumer business does not possess a moat, we view an overall no-moat rating as prudent.

None

Economic Moat

Sunrun

Sunrun, Inc. engages in the design, development, installation, sale, ownership and maintenance of residential solar energy systems. It sells solar service offerings and installs solar energy systems for homeowners. Customers can access its products through three channels: direct-to-consumer, solar partnerships, and strategic partnerships. The company was founded by Edward H. Fenster, Robert N. Kreamer and Lynn M. Jurich in January 2007 and is headquartered in San Francisco, CA.

Earnings data Q4 2023

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Sunrun, Inc. engages in the design, development, installation, sale, ownership, and maintenance of residential solar energy systems. It sells solar service offerings and installs solar energy systems for homeowners. Customers can access its products through three channels: direct-to-consumer, solar partnerships, and strategic partnerships. The company was founded by Edward Harris Fenster, Robert Nat Kreamer, and Lynn Michelle Jurich in January 2007 and is headquartered in San Francisco, CA.

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