A steep decline in solar panel prices is helping solar installers attract new capital, a trend likely to trigger consolidation in the fragmented industry and drive down the cost of putting the renewable energy system on rooftops.
Panel makers such as Suntech Power Holding, SunPower Corp and Yingli Green Energy suffered from a glut of supplies that pushed prices for solar panels down 50 percent last year, sending their share prices crashing.
But those cheaper panels meant lower costs for the installers who buy them, such as SolarCity, the market leader in residential and commercial installations, which is expected to seek an initial public offering this year that could value the company at about $1.5 billion.
An IPO would make SolarCity and Real Goods Solar Inc the only two publicly traded companies solely focused on that market. Their success, and that of privately held rivals such as SunRun and Sungevity, could lead to "exponential growth" of the market, according to Neil Auerbach, founder of private equity firm Hudson Clean Energy.
"SolarCity is not going to be the only company to enjoy the benefit of that," he said. "We definitely believe that this is an attractive area. We have been looking at it. We haven't found the right horse."
Total solar installations in the United States are believed to have nearly doubled in 2011 from the previous year to between 1,500 and 2,000 megawatts of capacity. About 16 percent of that went to residential rooftops and 40 percent for installations at commercial sites, according GTM Research.
Much of solar's recent growth has been from large-scale power plant projects designed to feed the wholesale electricity market in California. But with the state's demand for large projects likely full through at least the middle of the decade, investors are looking at the spread of smaller installations, which may offer better returns.
Bank of America Merrill Lynch is backing about one-third of SolarCity's $1 billion "SolarStrong" project to put panels on military housing, and developer Borrego Solar secured $47 million this week from U.S. Bank and East West Bank for projects on corporate, educational and municipal sites in California and Massachusetts.
Companies such as Google Inc have also invested in funds that provide new financial tools for companies that have helped make the residential market one of the fastest growing segments of the industry.
Those financing tools include leasing offers for homeowners or businesses, which can install the renewable energy systems on their rooftops without spending the tens of thousands of dollars a small-scale installation can cost.
Under the lease system, the installer brings outside financing, similar to that used by car dealers for auto leases, and the homeowner spends little or no money up front while still getting lower power costs.
Utility company PG&E and U.S. Bancorp have sunk $400 million into SunRun to fund their solar lease program.
Still, the solar installation market is very fragmented, with hundreds of small companies in California alone. Many experts believe that may open the door for a "roll-up" strategy in which well-financed companies buy up competitors.
"The competition is somewhat regional. There are not a lot of other national developers," said Borrego Chief Financial Officer Bill Bush. "I think that will probably change over time."
SolarCity is the market leader in residential installations with a 14 percent share, followed by Real Goods Solar with a 6 percent share, according to GTM Research.
Real Goods expanded from its base in Colorado last year with the acquisition of Alteris, giving it access to the fast-growing East Coast markets, where state incentives and high-power prices are expected to boost business.
Several larger solar companies have recently began offering solar leases, including MEMC Electronic Material's SunEdison and SunPower, although those companies have also focused on larger-scale projects.
Those large projects and "utility" projects have dominated the market over the last two years because they are more cost-effective to build. Small projects on a single home or business tend to cost more than double the larger utility projects, often as much as $6-$7 per watt.
Despite the drop in panel prices, costs for residential and small commercial solar installations have seen little change in the last year, experts said, and can be about 50 percent more expensive than comparable installations in Germany, the world's largest solar market.
"What has happened in the industry in the last two years hasn't really gotten to the end customer. The homeowner is still waiting," said Deep Chakraborty, chief executive of CentroSolar America, a unit of Germany's Centrosolar Group AG.
Nearly a $1 per watt of the cost for residential or small business solar installation is due to "customer acquisition," he said, or the marketing and outreach needed to close a deal.
And since most installers are very small companies, they typically purchase panels and other equipment such as wiring, power inverters, mounting racks and hardware separately, driving up costs.
Centrosolar is targeting that area for cost cuts, an effort Chakraborty says is key to creating a more cost effective "channel" to drive down the price of solar systems.
Still, building a network of installers that can reach thousands of homeowners can be expensive, and some players, such as Borrego are focusing on the "commercial" segment that includes businesses and government building for projects that are typically larger than residential installations.
"Relying on the residential market -- I just don't see how it could be scaled dramatically unless you can make it less expensive and it requires cutting out some of the parties involved, such as outside financing," said Mehdi Hosseini, solar analyst at Susqehanna.
"If you can combined commercial with residential rooftops then you have a business model that can be scaled," he said.
(Reporting By Matt Daily, additional reporting by Nichola Groom in Los Angeles. Editing by Gunna Dickson)