Worldwide, 2024 was a difficult year for the residential solar market. After several years of 30 percent annual growth in installations, 2024 saw a decline: fewer panels were installed in many markets, and companies’ valuations declined. This led to large capital injections, major bankruptcies, and job losses.
Although these conditions might appear bleak—a delay on the path to net zero and yet another setback in an industry that has taken decades to take off—our analysis suggests a more promising outlook. Residential solar might be down today, but its long-term prospects remain solid. We see that residential solar is poised for steady growth, especially for companies that take the right steps now in preparation to enter the next phase.
In this article, we explain some of the key factors behind the industry’s recent decline, offer three reasons why we believe the market’s fundamentals are solid, and suggest what players can do to lead as the market moves into a new period of steady growth.
Three insights into what has happened so far
Our analysis of industry indicators has led us to these underlying insights.
The run-up was not sustainable
Even with the tremendous growth journey the industry has been on over the past decade (see sidebar, “The solar boom”), what we observed between 2020 and 2023 was simply not sustainable. A confluence of factors led the market worldwide to its new heights, with growth rates of 30 percent per year (Exhibit 1). One factor was gas supply disruptions in Europe caused by Russia’s invasion of Ukraine; a 2021 McKinsey survey found that the majority of Germans saw installing solar panels as a critical matter of national security. Another was policy incentives such as Italy’s Superbonus, which offered homeowners the opportunity to deduct 110 percent of the expenses incurred for installing residential solar. In the United States, interest rates were low, and California’s consumers were motivated by the impending end of the state’s net energy metering (NEM) 2.0 policy, which paid higher rates to consumers for home energy generated by solar.
Together, these factors encouraged consumers to install solar panels at record numbers. Meanwhile, enticed by the possibility of continued 30 percent annual capacity growth, many companies expanded beyond their means and lost the flexibility to quickly respond to changing market conditions.
The drivers of decline are now well understood
Interest rates, a critical bellwether in this industry of heavily financed products, tripled between 2021 and 2023. Policy reform in many markets was already in the works: Just as Italy’s incentives drove huge numbers of households to install solar, the discontinuation of those incentives was going to cause installations to plummet. The business boom caused by the anticipation of decreasing incentives enshrined in California’s NEM 3.0 policies was going to end when NEM 3.0 actually went into effect in April 2023. Electricity tariffs in Europe, which had reached all-time highs because of gas supply disruption in the winter of 2022, tapered as countries found alternative sources of energy.
Our analysis shows that across countries, incentives lead to peaks that drop off—sometimes precipitously—when the incentives expire (Exhibit 2). A number of these regulatory shifts took place in 2024, exacerbating the worldwide slowdown already underway with rising interest rates.
The fall was hard, but there was solid ground below
Much has been made of the “crash” in the global residential solar market, and although the fall hurt, there was solid ground to land on. Many markets, including most US states, France, and the United Kingdom, have continued to grow, albeit at a slower pace than before (Exhibit 3). Even with total new capacity down approximately 15 percent in 2024, most large markets are still demonstrating growth of around 20 percent per year over the past five years.
Nevertheless, this year’s declines have had painful consequences. Companies that planned for 30 percent growth but instead saw 20 percent declines essentially face having 60 percent more of everything they need: equipment, labor, and supplies. This situation has led many to realize that their variable cost structure is not as variable as they thought it was. The public and private capital being invested into the market has also created more competition among better-funded players, which has, in some regions, increased the cost of customer acquisition. As more marketing dollars chased fewer customers, project profitability eroded.
The future of residential solar remains bright
While forecasting outcomes in the residential solar industry has never been easy, our analysis of the industry’s fundamentals suggests a more stable outlook.
Rooftop solar is still competitive
In many markets, households can still generate savings by installing rooftop solar. Including all costs of installing a solar rooftop, the electricity generated over its lifetime—the unsubsidized levelized cost of energy (LCOE)—is still cheaper than comparable grid electricity in many markets. In the United States, electricity prices rose approximately 5 percent in the past year. California, Colorado, New York, and North Carolina—states where the sun or the incentives are strong—saw increases between 10 and 20 percent. In Europe, residential system prices have been declining relative to their peak between 2022 and 2023, but they still allow for payback times below eight to ten years, a benchmark that we know leads to significant adoption of distributed generation.
The increasing demand for batteries as part of residential solar installations—providing backup power and a source of renewable energy at peak evening times—could help unlock additional value. Overall, in most markets, rooftop solar is likely to continue to be a competitive source of green electricity.
Costs are likely to keep coming down
While the cost reductions of the past decade were primarily enabled by declining equipment costs—which we expect will continue to a certain extent—there likely will be other opportunities for cost savings. The boom of the past five years pressured companies to rapidly ramp up sales and installation teams, leaving plenty of room for operational excellence to increase efficiency. Streamlining installation, improving sales team productivity, embedding management best practices, and implementing digitization and gen AI tools can yield cost savings.
Customer interest is at an all-time high
Rooftop solar is no longer a niche product for customers who value sustainability and reliability. Surveys repeatedly show strong consumer interest. In a 2022 McKinsey survey in the United Kingdom, 59 percent of people without a residential solar system said they definitely would install one or were likely to consider it in the next few years. A recent Forbes Home survey found that approximately 90 percent of residents with solar panels are satisfied with them and more than 80 percent would recommend them to others.
Based on our analysis, the global residential solar market is likely to stabilize between 2026 and 2030 at around 35 gigawatt deployments per year, still above 2022’s install rate (which was already roughly 40 percent higher than 2021 and 80 percent higher than 2020). This would restart a growth trajectory after a forecast decline in 2024 and 2025. In this scenario, residential solar’s cumulative installed capacity would more than double relative to today by the end of the decade. The growth could be further enhanced by increased national decarbonization commitments or rooftop solar support packages similar to Solar for All in the United States, REPowerEU, or the Energy Performance of Buildings Directive in Europe.
How can companies position themselves to capture the coming growth?
As the residential solar industry moves into a phase of steady but more moderate growth, what will separate the leaders in this market from those who fall behind? What will it take to capture a disproportionate share of the market going forward? And why will the coming growth provide steady gains? We have identified five factors likely to be the main differentiators.
Innovation in customer acquisition
Customer acquisition costs (CAC) have long been a thorn in the side of the residential solar industry. In the United States today, they can amount to almost $10,000 per sale, which can be 25 percent of the total cost of an installation. This cost is 13 percent higher than it was two years ago.
However, CAC remains the most compressible element of the cost stack in this industry. Opportunities exist across marketing, sales, and operations to reduce the CAC by as much as 70 percent (Exhibit 4).
In the industry’s next horizon, pursuing new business models will be essential. Several players are already deploying successful approaches, including bank partnerships to integrate financing into the sales process; omnichannel sales and marketing across mobile, web, and showroom; and AI deployed at every stage to identify customers, automate design, and improve customer experience. The right approach will vary for each company, but the process of acquiring customers ought to be consistently iterated and improved to reduce costs.
Integrating digital tools and gen AI into all business processes
Residential solar businesses are complex. Installers design and run thousands of simultaneous small construction projects in different regions, often with differing rules. The best performers will be those that digitize across the solar journey. Tangible examples of gen AI integration we are beginning to see include the following:
- Marketing. Gen AI creates personalized offers and quotes, as well as initial system designs, which can accelerate the process of bidding to customers and reduce customer acquisition costs.
- Project design. Algorithms automate and optimize project design, speeding up the design step and minimizing waste.
- Project management. AI tools generate automated checklists and validate critical-path items across design, site audit, permitting, and installation to improve quality assurance and streamline approvals.
- Customer engagement and scheduling. AI coordinators reach out to customers to schedule home visits and update the daily branch schedule accordingly to optimize routes and sales force productivity.
Active workforce and talent management
End-to-end solar rooftop deployment can involve managing more than 50 roles, often spread across locations. Ensuring that all of this is running smoothly—in an environment where employee turnover is high and market needs are changing—is hard. Rooftop solar companies often encounter bottlenecks in a specific task while other steps have slack, delaying completion times and costing millions in profits. To grow the workforce needed for success, companies can implement workforce best management practices: professionalizing their workforce, investing in workforce training and retention, and identifying talent sources, particularly for roles in tight labor markets, like electricians.
Seamless product bundling
Customers are increasingly interested in a full spectrum of climate-friendly energy products—including heat pumps, batteries, and home electric-vehicle charging—and they want these systems to work seamlessly. In a recent McKinsey survey of customers who purchased more than one of these solutions from different vendors, more than 40 percent said they would have preferred to deal with a single entity.
For rooftop solar companies, taking a multiproduct approach may significantly increase the price they charge for each project, shrinking relative customer acquisition and installation costs and unlocking additional synergies on energy usage. For instance, customers may need or want more panels if they also install a battery or heat pump.
This opportunity does not come without challenges. While deploying batteries may require minimal changes to implement, adding products like heat pumps may require entirely new capabilities, such as plumbing. Customers will also likely have different needs or motivations: While a solar rooftop customer typically wants to reduce electricity costs or increase independence from the grid, heat pump customers are more likely to buy during home construction or renovations or when they need to replace their heating system. The complexity of adding products is substantial and may not be for all players, but it could unlock significant additional value pools for those who take it on.
Localized operating model agility
The volatility of the residential solar market—including changes in economics, regulations, and operational practices—has earned it the nickname “solar coaster.” To manage this volatility, companies will have to closely monitor material pipelines and changes in trends, economics, and regulations and then make fast, strategic moves. This means being able to adjust operating models and cost structures at the local-market level—for instance, identifying where to invest in crews or owned media and marketing and where to leverage contractor partnerships.
In our experience, developers’ portfolios typically have wide disparities in profitability per project, often with a sizable chunk of projects that don’t make money. The ability to respond nimbly to variability—for example, by closing unprofitable channels and rejecting or repricing installations—could help ensure profitability. As incentives and competition change, players will need to continuously refine their local channel strategies and footprints. Developers may need to move fast and react on short loops, rather than wait for yearly strategy reviews.
The residential solar market is down, not out. Our analysis indicates that the market is likely to revert to more stable long-term growth over the next several years on the back of strong fundamentals. Almost certainly, surprises will pop up along the way; the industry is not called the solar coaster for nothing. The leaders in the market are likely to be those that can compress cost through innovation and operational efficiency, incorporating digitization and artificial intelligence at every step; expand the scope of their offerings through product bundling; and remain agile, able to capitalize on local market differences. These leaders may be able to get off the solar coaster and take a steadier ride.
