Don't Count Out Solar Water Heating, It's a $123 Billion Dollar Market

According to a new SEPA report titled “Heating Up: The Impact of Third Party Business Models on the US Market for Solar Water and Space Heating,” Sixteen percent of the 110 million U.S. households are suitable for solar thermal systems, also referred to as solar domestic hot water systems. The report states that at given market conditions, the technology is not attractive for natural gas customers but is favorable in 72 utility areas around the country at an installed cost of $7,000 before incentives. This represents a $123 billion dollar market. 

With all the focus on the development of the solar PV industry, many have forgotten that solar thermal has huge growth potential.

However, simply because the raw economics of the technology work for so many Americans does not mean that it will be magically adopted. The solar thermal industry, and the private companies supplying equipment and installing projects, will need to determine the best way to organize manpower and assets to deploy this technology.

My goal is to help solar thermal installers and policy makers understand how the solar thermal industry has progressed and help uncover ways to drive further growth.

If it's a $123 billion opportunity, what do we need to understand about the market and industry to spark growth and job creation?

Solar PV vs Solar Thermal

The first distinction that everyone learns when entering the solar industry is that sunlight can be used for two applications, creating electricity or heating water. While the spot efficiency of solar thermal modules is extremely efficient, well over 90 percent, compared to between 12 percent and 16 percent efficient for commercially available solar PV modules, there are other factors hindering solar thermal technology adoption.

Solar PV has a few distinct advantages:

1. While it can be designed and installed on a specific customer's house, grid tied systems have an almost unlimited demand to feed into the grid.
2. Residential systems can be cheaply designed and quote. For example, systems can be fairly accurately quoted from Google Earth.
3. The market is growing as more states adopt solar PV policy and the installed costs are falling dramatically.

Solar thermal has advantages too, but some of the advantages can be disadvantages:

1. It's a mature industry and technology. Modules are cheap to manufacture and thus there are lot of manufacturers. The rest of the parts are also off-the-shelf commodities. This is good news because the systems are already cheap, it’s bad news because any significant market share increase will likely need to come from a factor other than decreased installation costs, namely higher energy costs, business model innovation, or state policies.
2. The technology must be tied to a specific load. This can make design more expensive because each project requires a site visit by an experienced professional and also limits system size because all energy must be consumed in the specific building.  

Key point for solar thermal installers: Solar thermal makes the most sense for a very specific group of customers in the right market. The correct markets and customers are determined by the cost of fuel it's offsetting and water usage rather then local policy that tends to drive the solar PV industry.

Key point for policy makers: From an energy perspective, solar thermal is a much better investment. The unsubsidized return of both technologies side-by-side favors solar thermal because for less money, it will generate more energy and offset more energy that would otherwise need to be produced.

The Commercial vs Residential Solar Thermal Markets 

For existing or potential solar thermal installers, there are benefits and drawbacks to focusing on either the residential or commercial markets.

Residential Solar Thermal

The residential market has the benefit of broadly applied, packaged systems. Most residential customers have very similar load profiles, determined by family size, and thus the design process can be standardized with two to three configurations.

The huge residential market opportunity is both a blessing and curse. Unlike the solar PV industry, where the residential market is around 30% of installed capacity, the solar thermal market is dominated at the residential end. This is a challenge because it can be harder to find residential clients, but a blessing, because they could be all around.


Commercial Solar Thermal

Each commercial project is a new engineering challenge, but the upside is that the projects tend to have better economies of scale and thus margin due to the massive amount of equipment that is being purchased.

As SolarFred pointed out, the target market for commercial solar thermal projects are very clear. Heavy hot water use buildings are very easy to find, apartment building, hotels, laundromats, nursing homes, and hospitals.

As the SEPA report points out, these customers have their difficulties as well. They may have limited cash flow reserves and can have layers of bureaucracy, two items that can significantly slow sales.

Current Solar Thermal Industry Success

What is the industry currently doing well and what are the bottlenecks?

1. The industry is still growing as a whole. The 2010 IREC Solar Market Trend reports that the whole industry expanded by 6 percent in 2010.
2. The commercial solar thermal market is growing fastest at 20 percent and is expected to grow even faster as utility payments in some markets continue to increase while the installed cost of solar thermal remains the same.
3. Some states are beginning to back the technology. Massachusetts has both a residential and commercial program and North Carolina also has attractive state incentives.

What are the bottlenecks and how can they be removed?

Similar to solar PV, SEIA reports that Nearly 74 percent of those surveyed were interested in solar thermal but the main customer objections are high initial costs and maintenance costs. Thus, from an adoption perspective, reducing installed or maintenance costs are key. However, given solar thermal is a more mature market than solar PV, these cost reductions are harder to find. Harder to find, but not impossible - here are a few suggestions:

1. Focus on new home sales, in the correct markets. Because new homes tend to be financed, solar thermal system installation costs can be bundled into the mortgage and be profitable from day 1.

2. Use already existing financing. This will vary based on municipalities, state and utility. You need to understand your local market to understand what is available. PACE financing is active in some local market. Massachusetts has Heat Loans that provide up to $15,000 at 0 percent interest for efficiency or solar thermal.

3. Increase professional knowledge and contractor knowledge. Increasing knowledge for contractors will be key because the more knowledge they have of the simplicity of the system, the more comfortable they will be trying to sell projects. NABCEP has created an entry level education program for solar thermal contractors and certifies training providers. Also, Bob Ramlow has published an amazing and well-written book on solar water heating and a whitepaper on the four basic steps to designing solar thermal systems that any contractor can download for free.

4. Product Innovation that decreases installed costs or maintence. Even though its a mature industry, product innovation is still happening. Wagner Solar has introduce a new drainback product that reduces installation costs and Sunnovation has created a new pumping mechanism that is cheaper then existing pump product and also reduces the man hours needed to install. "We're finding our dealer partners are saving an average of 10 man hours per residential installation" said Sunnovations CEO Matt Carlson.

5. Reduce customer acquisition costs by proper placement in the supply chain. In this segment, the solar thermal industry can learn from the solar PV industry. In the solar PV industry, it's a race to the bottom, everything is facing downward pressure; installed costs, financing costs, and customer acquisitions costs. Whoever can have the lowest of these three costs will have an advantage.
There are many strategies the solar PV industry is executing to lower customer acquisitions costs. Here's a sample.

• SolarCity is trying vertical integration and owning everything from financing, sales and installation.
• SunRun is working with local partners.
• Sungevity is using software to provide quotes very quickly and cheaply then partnering with local installers
• OneRoofEnergy is partnering with roofing contractors to cross sell a solar lease to customers who are already replacing their roof.

The solar thermal industry can learn the most from One Roof Energy's strategy. In the US, there are between 7 to 9 million water heaters replaced or installed each year. Since spending the time and money to get into a customers home is often the most expensive part of the sales process, it will be cheaper to cross sell a solar thermal system if you're already installing a water heater.



Given we have around 100 million homes, this means 7 percent to 9 percent of our entire water heaters are changed every year. This would be a great opportunities to upgrade to solar thermal.

6. Scaling Thermal Financing. The main purpose of the SEPA report was to establish the history, challenges and success of financing in the solar thermal industry. Clearly, solar PV financing has become the norm in the industry and will be needed to sell to mass-market customers. The solar thermal industry needs financing to become mainstream and progress is happening.

Both Skyline Innovations and FLS Energy have raised 30 million and 12 million dollars respectively, for funding commercial financing. The report notes that, the solar thermal industry seems to be following the same development path as solar PV financing, the model was first created, proven and scaled with commercial companies - SunEdison - and then was copied by competitors and configured to work for residential applications as well. I expect to see residential solar thermal financing in the next 3 years.

Four takeaways for solar thermal Contractors

Based on the recent SEPA report and general market analysis, here are my suggestions for contractors and professionals interested in the industry.

1. Solar thermal is a large market, but you need to find the right customers in the right markets. The best markets are in the Northeast, due to high energy costs and low inlet water temperature, and Southwest due to high solar resources. The best customers will be using oil or electric heat and will be planning on living in their homes for more then 7 years. If you’re focusing on the commercial market, pick one type of customer in your region so you can become very efficient at selling to the specific customer.

2. Get educated. The only way you're going to be successful at quoting and installing projects is if you know what you're talking about. NABCEP has great resources for contractors interested in solar thermal.

3. Financing is on the way. Just keep your eyes open. It’s not a questions of if, but when and who.

4. If you already have customers, start cross selling. If you're a plumber or general contractor, consider cross selling solar thermal whenever you're doing existing plumbing work. If you’re already in the customer’s home, you’ve done the hard and expensive part and offering solar thermal could increase profits without much additional work.

Chris Williams is a former geothermal, solar PV, and solar thermal designer and installer and is now the Cheif Marketing Officer at HeatSpring Learning Institute. HeatSpring's goal is to make sure small businesses make money in the renewable energy industry by providing NABCEP solar training and IGSHPA geothermal training.