© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to Sunrun's Third Quarter 2020 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Patrick Jobin, Senior Vice President, Finance and Investor Relations.
Thank you, Operator.
Before we begin, please note that certain remarks we will make on this conference call constitute forward-looking statements. Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the company’s filings with the SEC for more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements.
Please also note these statements are being made as of today and we disclaim any obligation to update or revise them. Please note that the results we will discuss today do not include Vivint Solar unless otherwise specified as the acquisition closed after the end of the third quarter.
On the call today are Lynn Jurich, Sunrun’s Co-Founder and CEO; Ed Fenster, Sunrun’s Co-Founder and Executive Chairman; and Tom VonReichbauer, Sunrun’s CFO. And now, let me now turn the call over to Lynn.
Thanks, Patrick.
We are pleased to share Sunrun’s third quarter results and progress against our strategic priorities. We grew our base of customers 20% compared to last year to 326,000 and to over 500,000 with the acquisition of Vivint Solar in October.
In the quarter, Sunrun added 14,700 customers representing 109 megawatts of deployment, a 40% sequential improvement and exceeding our prior outlook. This performance is a testament to growing consumer interest and Sunrun’s leading execution at scale. We expect improving that cuts for margins and accelerated growth to continue into 2021.
Consumer desire for clean, affordable and resilient power is stronger than ever with increased outages from storms and wildfires, combined with more time spent at home.
As we discussed last quarter, the Sunrun team pivoted quickly at the onset of COVID increasing our digital lead generation activities, virtual selling capabilities and other operational efficiency initiatives.
The sales productivity increases we highlighted last call have stayed. With our salesforce productivity up around 40% compared to the same period last year. Our cycle times from customer signature to install have continued to improve along with our installation labor productivity. These positive trends mean less wasted resources and a better customer experience. As a result, we continue to expect $2,000 per customer and cost improvements compared to earlier this year. And we enter 2021 in a strong position.
The U.S. is at early stages of significant innovation and electrifying our buildings and transportation. Ongoing improvements in solar energy storage and electric vehicles are leading to an enhanced value proposition. And solar plus batteries will affordably replace more of consumers energy needs and together with EV we will unlock virtual power plant revenue opportunities.
Sunrun aims to be the consumer brand synonymous with repowering your home with renewable energy. And the network created by owning more of these nodes will lead to a winner take both markets.
Integration of the companies during the first four weeks has progressed well. The complimentary operational strengths and cultures have exceeded our expectations. We are already leveraging best practices from each company. For example, the Vivint Solar sales teams have more than doubled their battery attachment rate in California to over 20% since close.
On the installation side, we have piloted the use of drones for site surveys along with our proprietary racking technology and the Vivint Solar crews love it and are excited roll them out.
We've already been able to fill excess demand and markets by leveraging our combined companies crews to maintain high scheduled density and system throughput. We are rolling out Vivint Solar sales and trading practices developed through their world-class direct to home channel to enhance the effectiveness of our complimentary sales team.
Our channel partners are also excited about the scale we bring and our increasing brand strength. These partners delivered a strong quarter and we will continue to grow the segment as an important part of our strategy and maximizes our market reach.
Our Brightbox battery offering is now available in all of our active markets. Failed attachment rates hit a record high this quarter and installations grew more than 45% compared to last year. We expect Brightbox installations to accelerate and grow over 100% next year.
Our efforts to develop grid services markets across the country are progressing well. And we expect to announce meaningful virtual powerplant contracts in the coming quarters.
To-date, we have won 11 virtual Power Plan awards, which cover over 10% of our geographic footprint.
Today, we are announcing a new virtual power plant award. Sunrun recently executed a contract with Southern California Edison to provide five megawatts of capacity. During the 10-year fixed price contract, Sunrun will dispatch energy from thousands of its Brightbox solar battery systems installed in SE territory, lowering the overall cost of power and reducing critical terrain on the energy system.
The same solar power home batteries will also provide reliable backup power to these households if the power goes out. We'll share more detail soon.
We have a pipeline of over 50 million and awarded contracts are those in the works, which would expand that 10% coverage to 50%. These opportunities not only provide us with additional recurring revenue streams, they provide a differentiated customer offering. We also finalized a joint venture with SK Group to accelerate electrification of the home. This is still in stealth mode, but we will have exciting updates in the coming quarters.
We believe that the expected growth in electric vehicles will also benefit several and multiple dimensions. One, households will consume more electricity necessitating larger and more profitable solar system. Two, we can be the provider of charging infrastructure and resource management throughout the home. And three, it creates urgency to adopt solar and batteries.
In the U.S. residential electricity sales are over 180 billion and utility CapEx is over 100 billion annually. This doesn't even consider the fuel switching opportunities.
Residential solar has only penetrated 3% of U.S. homes and Sunrun represents a tiny fraction of this massive energy market with ambitions to become a significant player. The runway ahead is just enormous.
Lastly, our commitment to sustainability will help our customers, shareholders, employees and communities. In September, we announced a partnership with Chanel to install approximately 30 megawatts of energy projects for low income multi-family households. Expanding access to solar for nearly 30,000 low income residents across California.
Chanel's investment will also support more than 20,000 hours of job training, offering valuable vocational skills and certifications to hundreds of people in disadvantaged communities.
Also, during the quarter, we provided 1400 hours of paid job training opportunities for people to gain hands on experience with solar installation projects through grid alternatives.
We expanded our product suite for low income families in California to Illinois, and announced a partnership with the Honnold foundation to launch a new grant fund that will offer grants to community-based non-profits led by black, indigenous and people of color in the most polluted places in America. This will help install solar energy systems.
Before I turn it over to Ed, I want to say how proud I am of the Sunrun and Vivint Solar team. Bringing together organizations is never easy and simple. But the passion, ingenuity and dedication to our collective mission is inspiring. We are collectively energized to lead this industry forward to deliver the best service for our customers, provide meaningful and rewarding career opportunities for employees and address climate change head on for our country and the world.
For over 500,000 customers strong today and just imagine the value we can create when we welcome millions to the Sunrun network. Over to you, Ed.
Thanks Lynn.
Today I'll discuss the financial markets for assets or asset performance and recap our capital runway.
We're now seeing significant tailwinds in financing markets. Our contracted long-term high-quality recurring cash flows have always been the bedrock in which we raised non-recourse project financing to fund our growth and offer customers a compelling value proposition.
The positive trend we highlighted last call has continued with capital cost and continued decline, senior debt in particular pricing an all time lows. The improving spreads and strong project finance markets for solar assets are driven by investors desire for stable, long-term cash flows, a growing track record of the asset classes performance, including through another economic cycle and a growing appreciation of Sunrun strong underwriting effort and service performance.
For instance, in late September, Vivint Solar issued two asset backed securities that taken together provided 246 million in proceeds at a 2.33% weighted average yield and an 84% advance rate. Assuming a 9% cost of capital for the remainder of the capital stack, as measured against the securitization with share of the asset value. The weighted average cost of capital would be below 3.5%.
Consistent with my comments over the last two quarters, customer payments performance remains strong with delinquencies at or below where they were before the onset of COVID. We continue to maintain a healthy project finance runway that affords us the ability to be selective and capital market activities. Sunrun and Vivint Solar together have closed $2.4 billion in project capital in 2020 year-to-date all on attractive terms.
As of November 5, close transactions and executed term sheets provide us expected tax equity and project debt capacity to fund over 275 megawatts of leased projects beyond what was deployed through the end of the third quarter of 2020.
I'll now turn the call over to Tom.
Thanks Ed.
Looking now to the third quarter’s results and our outlook. The quick actions we made to position the company to emerge even stronger through COVID, combined with the increasing value proposition of our service offering has enabled Sunrun to thrive and deliver another strong quarter with increasing volumes, rebounding, net customer margins and a strong balance sheet.
In the third quarter, we deployed 109 megawatts of solar capacity, a 40% sequential increase from the second quarter and a 2% increase from the prior year exceeding our initial expectations. We deployed systems to approximately 14,700 customers in the quarter. We ended Q3 with 326,000 customers growing 20% year-over-year with most of them paying us on a recurring monthly basis for the clean electricity we provide them under 20 or 25 year contracts.
In Q3 project value was approximately $33,200 and creation cost was approximately $26,800 resulting an NPV of approximately $6,500 per lease customer. With higher volume in Q3 compared to Q2, we improved our cost absorption. We also continue to realize benefits from our operational efficiency improvement efforts.
A quick update on Vivint Solar's financial and operating performance. We closed the acquisition of Vivint Solar on October 8 in the fourth quarter. As such, we will report Q4 results as a combined company with partial period accounting as of the acquisition date. During the third quarter Vivint Solar installed approximately 47 megawatts and ended the third quarter with $404 million in total cash.
Vivint Solar was impacted by areas which suffered more significant restrictions during COVID, principally Massachusetts and Illinois. If you excluded these two states Vivint Solar’s volumes would have grown 20% sequentially and 8% including them. We are encouraged by recent trends and expect strong growth from Vivint Solar's direct-to-home channel. As an early indicator, their salesforce headcount is at the highest level it has been all year including pre-COVID doing no small part from the enthusiasm for selling with the Sunrun brand and product offering.
Turning now to gross and net earning assets on our balance sheet. Gross earning assets were 4 billion at the end of the third quarter, reflecting an increase of 132 million from the second quarter. Gross earning assets is the measure of cash flows we expect to receive from customers over time net of distributions to tax equity partners and partnership flip structures, project equity financing partners and operating and maintenance expenses discounted at a 6% unlevered WACC.
Net earning assets were $1.7 billion at the end of the third quarter, reflecting an increase of $24 million in the second quarter. Net earning assets, this gross earning assets less all project level non-recourse financing.
We ended the third quarter with 382 million in total cash an increase of $28 million in the prior quarter. We believe looking at the combination of cash and net earning assets provides a way to evaluate our performance in generating shareholder value. We have increased both cash and net earning assets this quarter compared to last quarter and have increased the combination by $228 million compared to the prior year.
Turning now to our outlook. We expect to see continued growth and margin expansion in Q4. We expect total volumes pro forma for the Vivint Solar acquisition to increase over 10% sequentially to approximately 172 megawatts. We also expect to see continued improvements in our net customer margins to above $8,000 per leased customer.
We're in the process of harmonizing our reporting systems and methodologies across both companies to commence with reporting for the combined company in Q4. Note that there will be some changes in how costs are reported as a combined company starting in Q4.
For example, the addition of the Vivint Solar business will result in a reduced channel mix as a percent of total volume, which will decrease installed costs and increased sales and marketing costs purely based on the GAAP treatment of a customer originated through each part of our business. Additionally, geography and product mix shifts will result in fluctuations from historical Sunrun cost trends in the near term as we progress through integration.
With the operational efficiency improvements discussed earlier and the acquisition of Vivint Solar, we expect to enter 2021 with an improved cost structure and higher net customer values. In 2021. We expect to grow above market -- above the long-term industry growth rates we've discussed in the past, we will provide more detail on our 2021 outlook on the Q4 call in February.
With that, let's open the line for questions please.
Thank you, sir. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Moses Sutton of Barclays. Please proceed with your question.
And congrats on the merger close and strong results especially off of the COVID there. Ed, how is the ABS market looking now for a new issuance? Any chance we get something this year, especially following this Vivint transaction? And would you see similar terms you expect?
So the ABS market is strong and definitely supportive of incremental issuances. We've often shied away from issuing transactions deep in the fourth quarter, because some buyers step out of the market awaiting a resetting their budget. So I wouldn't expect further transactions in the quarter. But do expect that next year, we will avail ourselves of that market and indication suggestion, which would be similar to the last transaction.
Great, that's helpful. And then the 275 megawatts of funding capacity sounds good, but any thoughts of targeting a larger role in the amount of funding capacity available given the increased scale of the business, basic acquisition maybe this comes out to a bit less than half of a year's deployments worth, not accounting for seasonality. Any thoughts on how you design the funds going forward?
Yes, a great question. So we actually disclosed that in tax equity because the debt runway is substantially greater than that internally. But we limited by the two here constrained by tax equity, tax equity is generally lowest for us as we head into the fourth quarter because next, most tax equity investors receive new budgets in January. And so most of the transactions don't straddle the calendar year, but we have discussions ongoing, fairly up to buy another 500 megawatts in tax equity. So I would expect as we go into next year, you'd see those numbers increase.
Great, very helpful. One last one, if I could squeeze in before I pass it on, lease versus loans becomes sort of a bigger topic, again, any thoughts on how that markets trending into fourth quarter, sounds like your volumes are pacing above the market, but really anything on that more specific, sub topic of the mix, that you sort of see this quarter and into next year.
Again, our lease and loan mix has remained pretty consistent, I think you probably will see a little bit more of the loan at the tail end of the year, just again, given the tax credit, delta, but nothing that's going to materially change the numbers. We still believe that the tail winds in the industry point to more solar as a service versus customer own projects. I think it's just one besides just being a better value proposition for the customer.
Right now, just interests are aligned, where we guarantee the power and we have higher quality equipment, I think we also have a capital cost advantage. If you look at the third party end market versus the loan market, you're starting to see a diverge in terms of locked rates and their superior for the service market.
And then, you also have the ongoing trend of the assets being plugged into the grid services market and the home relationship to energy being a little more complex, which I think lends itself to a manage and own system by a third party. And then, finally, in terms of the ITC, of course, we have a strong Safe Harbor program and are able to benefit from that arbitrage over the next few years, and then really in perpetuity, if the last days as it is, the source of service assets will receive a 10% tax credit and customer own will be at zero.
The next question is from Mark Strouse of JPMorgan. Please proceed with your question.
Yes, good afternoon. Thank you very much for taking our questions. So it's good to see the grid services announcement with so colored. Can you just talk about how material grid services is to your revenue or your cash flow or your unlevered NPV per household? Whichever do you think is the best metric? You're kind of currently in how you expect it to trend over the next year or two?
Yes. So we believe, thank you, great question. We believe and what we're seeing in our first 11 grid grade service program is about a $2,000 in NPV per customer. And that's been really consistent. Many of these programs you fit into in advance and so specific to the grid services revenue, you won't see that for a few years. But the short-term value is there. It's really in the fact that we have a differentiated offer to sell our customers in these markets. And then it also starts to lead the industry structure into more of a winner take most market. And so, we'll start to see us really differentiated on that consumer offering. And, again, the current contract cover about 10% of our geographies that we serve, but the pipeline that we have covers about 50%. So, again, I think the next couple of years, its differentiated consumer offering and the grid services revenue will follow beyond that.
Okay. And just to clarify on that, the unlevered NPV per household on these initial contracts, are you seeing close to $2,000 there? Or is that something you have to scale into?
Yes.
Okay, perfect. And then just one more quick one. Sorry. Just the last comment regarding the acceleration in volume in 2021. Just was that on an organic basis or was that just simply a function of layering in Vivint on an organic?
Organic, it’s pro forma…
The next question is from Julien Dumoulin-Smith of Bank of America. Please proceed with your question.
Perhaps just to kick it off on the storage front. Just want to understand a little bit more on the decision to expand here. I mean, first off input, I suppose implicitly that you have confidence in just being able to obtain enough supply to meet your demand, if you can comment first on that. And then secondly, can you elaborate a little bit more on implied attach rates across geographies? It seems as if and certainly reinforced from your comments here that it's no longer just California wildfires that are driving this, certainly resiliency concerns in the southeast from storms, et cetera. Just want to understand why the expanse were more importantly than the thought process from your customers too?
Sure, this is Ed. I can touch on the battery supply. And maybe Lynn wants to take it from there. I think across all manufacturers, we definitely have enough batteries to support our growth. We think our scale puts us in a preferred position for supply presently and certainly the supply agreements we have in place also help further reduce that risk. For sure, it's true that the rapid growth in demand for batteries has not been outpaced by manufacturing capacity yet. And so cost declines have been a little bit limited and obviously with lower battery costs, the growth rate in batteries would accelerate further yet, but multiple existing manufacturers are increasing capacity. We also expect further insurance in the coming year and so we do expect to have the batteries that we need to service our customers.
And on the demand side, it's fairly strong. In the quarter, we had our highest attach rate on sales that we've had. So that continues to grow. If you look at installs, they grew 45% year-over-year and we expect that to grow 100% next year. And the attachment rate by market is highly variable, 100% in Hawaii. And, we've said in the past above 30% in California. We also have the one of the benefits from the integration as well, which we didn't specify in, count in the $90 million synergy number is that Vivint had been, had less adoption of solar, and just in the first month, we've increased the attachment rate in California 20%, with their salesforce.
So, we're very encouraged and we expect the battery to dramatically outpace the solar growth rate, which is already strong over the future. I think also the -- one of the reasons to expand into all the markets is, there is a learning curve to in terms of getting your crews trained on this educating the HJ's and so we really want to lay the groundwork for what we believe will be a market where in two, three years, every solar system has a battery.
Got it. Excellent if I can just quickly follow to clarify the above market on 21, what does that mean, a little bit more quantitatively?
Yes. So, we've historically said we think the industry can grow 15% to 20% annually over the long run. And we think next year returns to more normal growth rates and our expectation is that will grow above market, given our strength position now with the larger salesforce stronger brand and improved product offering.
Okay, all right. So that's not changing. That's key. This is in 2020.
Yes.
The next question is from Brian Lee of Goldman Sachs. Please proceed with your question.
And maybe just a follow on Julian's questions around growth. Yes, I know you're talking about ‘21. But if we just hone in on the 4Q outlook, deployments guide into better than 10% sequentially. I appreciate you guys giving us the baseline including the actual, but it implies roughly, I guess, 180 megawatts on a combined basis for 4Q which is actually kind of flat to slightly down year-on-year. And if I recall correctly, last year, you guys are still having a little bit of issues around the labor side of things. And so, I felt like the cost might have been easier and you grew 2% year-on-year in 3Q. So just wondering why that's not maybe seeing a faster acceleration out of the -- end of the year here on a year-on-year basis.
Yes. So we're seeing the 10% increase quarter-over-quarter important to note that the NPV and profitability increase quarter-over-quarter is north of 20%, which is really strong results. We also -- there's a couple things going on, one is, we're really focused on a fast and swift integration. And that's why you've seen just in the first 30 days, we've already, put best practices from each company into each respective team, which has us feeling quite confident in terms of what our growth acceleration will be. And then, we have the factor that Tom mentioned on the call where, the direct to home model of Vivint Solar was had bigger share and some key markets like Illinois and Massachusetts that had more restrictive COVID. And so we're just growing out of that.
So I wouldn't read too much into the fourth quarter. I think there's a lot of integration and sort of COVID rebound still in there. And we do expect strong growth performance in 2021.
Okay, fair enough. No, I appreciate the color. And then just a second question on, one of the other metrics here, that you guys have highlighted cash generation and continue to report historically Vivint hasn't provided that metric. So I'm wondering how you're thinking about cash generation, does the vivid deal really impact that capability and maybe any early thoughts on how that particular figure can grow into 2021 versus historical trends. I know you guys were, if I recall correctly tracking to $100 million or more on cash generation, this year before the pandemic and so, how you set a high level, should we be thinking about cash generation is it as relevant of a trick with under combined basis and does the business model change sort of the economics for you when it comes to cash gen?
Yes, thanks. Good question here and a couple things on here. So first, we're still in the process of combining metrics. As you can imagine, there are a few things around the edges that we're aligning and we'll report Q4 with the combined company metrics. Overall, a customer and volume growth, as well as customer margins, or NPV, and then the cash and NEA combo, I think continue to be good indicators of our overall performance. And so, we're largely going to gravitate towards that.
As we think about 2021, we will again provide a bit more precise color when we update q4, but I think the above industry growth rates we expect as well as the expanded margins. Yes, that will translate well into strong cash generation and/or NEA growth depending upon the capital structure decisions that we make there.
We're really focused on the integration work as Lynn mentioned, given the acquisition just closed four weeks ago, but very confident heading into 2021.
The next question is from Michael Weinstein of Credit Suisse. Please proceed with your question.
Hi, guys. Hey, I'm sorry, if you already mentioned this, but is the Q4 deployment guidance 10%. Is that include Vivint Solar, historically or if it did, how did Vivint Solar perform in Q3?
Yes, good. Good question. So the 10% growth quarter-over-quarter is inclusive of Vivint Solar and their deployments for Q3 were approximately 47 megawatts.
Got you. And Ed, can you talk a little bit about FERC 2222 and when I know that the participation in New England ISO market is a lot bigger than some of the other maybe smaller contracts you have with utilities. Is there a timeline out there? Expectations you might have for other ISO type participation in markets?
Sure, great question. That's going to be the backup for everyone on the call, the FERC 2222 order, we're excited about as you know we've already met with significant success finding counterparties to grow our virtual power plant business. And this order by opening up wholesale markets, expands the number of counterparties, we can work with, actually FERCs own press release said it pretty nicely. They said the order will help usher in the electric grid of the future and promote competition in electric markets by removing the barriers preventing distributed energy resources from competing on a level playing field. So, we couldn't agree with that more.
To your point, I think it might take a year or more to fully establish all the rules for our participation, these could also have to be done individually and on a regional basis. So there's not going to be a very near term impact from this order. But these sorts of opportunities, which are complex and benefit from scale, really play to our competitive advantages and also exist, obviously, in this area of virtual power plants we're leading the industry by leaps and bounds. So we're very excited about it. But probably wouldn't see it increasing our virtual power plant business for at least a year, although we do expect significant growth in that business from the existing pipeline, as Lynn mentioned earlier, heading into next year.
Right. And you mentioned earlier that tax equity is an important part of the capital, capital structure. And I'm just wondering, I know, you guys are large players in that market. So you don't really have -- you don't have the same concerns smaller uses of tax equity might have but can you talk a little bit about what you're seeing for 2021? How that market is shaping up in terms of scarcity, and then also, any thoughts on how the election might impact -- might be impacting that markets going forward?
Well, I feel like the last thing the world needs is more election speculation at the moment. But I think that, the tax equity market might be a little smaller in 2021, than in 2020, which candidly, probably plays to our advantage. I'm quite confident that, we have the supply that we need to support our growth and more than that. And in markets like this our long and excellent track record, our scale, our steady deployment cadence are attractive. And frankly, the counterparties like residential, because it provides smooth GAAP earnings profiles for them as compared to utility scale, they can kind of deploy, a fund of whatever size they want to. And it's fantastically diversified.
It's also still very much a relationship business and obviously, this is a place that, we've built strong relationships with counterparties over almost 15 years now. So feel very good about it, and it actually might turn into a strategic advantage. I think probably people who provide it, plan their budgets around the existing corporate tax rates. So if those rates were to go up, it would probably increase supply at higher corporate tax rates also increase the value of our assets, because they benefit from more depreciation. So all that would be upside, but not anything we're contemplating comments that we're making today.
Great. And just one last one, maybe you could talk about your strategy for safe harboring, how much cash you intend to put into that. Now, post-election, you're probably developing a new strategy, or at least tweaking it, wondering how that's going?
Yes. That is a great question as well. So, we expect to enter 2021, with a significant number of megawatts safe harbored at 30%. And as a reminder, next year, solar systems sold to a customer for cash or loan will receive the 22% credit. So that's about $2,000, less than the 30% credit. Earlier this year, we entered into agreements to make additional Safe Harbor purchases of modules and inverters, which would qualify it and the 26% credit and be in addition to those at 30. Simultaneously, we negotiated options expiring mid-November, that would allow us to add to our 26% safe harbor purchases if we so choose to. But we haven't yet decided whether or not to execute those options. And so, I think probably the best time for us to provide a complete view of our safe harbor position would be on the next call.
The next question is from Stephen Byrd of Morgan Stanley. Please proceed with your question.
Congrats on the strong growth and good NVP per watt progress. One of my questions had been addressed. I wanted to maybe focus on California for a moment just with the blackouts that we saw in California this summer. I'm curious if you see any additional opportunities for grid services or changes to compensation on storage, or just sort of other developments you're watching in California, given those -- the need for more storage?
Absolutely. The consumer interest across all the indicators is very high. And like we've said previously, I think this just builds it's just -- these outages are going to happen in every year and so the interest, it just continues to build so. So we're encouraged by that long-term trend. I think from a California policy and regulators, there's a lot of opportunities here to use this one to accelerate our efforts at streamlining permitting. We estimate that with automatic permitting and in our connection we can save $7,000 off our customers contract. And also, that's just even that much more important when people need a solution quickly to anticipate power outages. I think you're also seeing, likely to contribute to additional support for programs like the one they rolled out for batteries in disadvantaged communities that are in wildlife areas. And that's the program we are participating in, and that has been quite successful. So there's just a number of ways that, I think this will lead to great markets, there isn't necessarily something that I can specifically point to today. But there's no question that it's a strong tailwind for the business.
Understood. I'm going to shift to the federal level. I know there's a lot of uncertainty even as we speak in terms of the direction of federal policy, but just stepping back is there were to be federal stimulus bill. And there were sort of some green elements in that stimulus bill. I just like to get your latest thoughts on sort of ideally what you'd like to see in terms of support for for clean energy and how that might impact your gross margin potential. I know that's expected. I'm just curious, your latest policy thoughts there at the federal level?
Yes. So I think first, I should really underscore that consumers choose rooftop solar and batteries, because it's more reliable, it's a better value proposition than grid power and provided by companies that deliver a better customer experience than utilities do.
And recently, frankly, the most supportive federal policy for renewables has been low interest rates, which we expect is going to persist, kind of regardless of the election outcome. And going to the fundamentals with more than 90% of Americans, obviously, therefore, across party lines, supporting rooftop solar, and with rooftop solar comprising 69% of all jobs and wind and solar development. And our product obviously makes unreliable power reliable. And so it kind of because of all these things, we do expect increasingly supportive policies over time, will further accelerate our growth future.
And probably the policy that would be most likely to be included in a measure like that, if one were would be some form of extension to the tax credit, my suspicion, that's previously been expanded under republican presidents in Congress, always been and perhaps, off late increasingly as a sort of bipartisan supported effort.
So again, as I think I've always said, it's very difficult to predict exactly when these sorts of policies might be enacted. But I think our view taking a long-term horizon is that for sure, the fact that we're able to decarbonize make more reliable power and drive significant economic growth and employment, makes us an attractive candidate for government's support.
Yes. It's a fair point that you're providing value with or without any change to federal policy. One thing, I guess I was thinking about in terms of solar tax credit extension is the possibility of congress going in a direction where they would take away that limiting factor relating to tax equity converted into something that's more easily monetizable, with direct cash payment or some other form. But I take your point earlier to the question, you answered earlier about the availability of tax equity, that you're in a relatively good position but if that were to change and there were no limit from that perspective, would that have a material impact in terms of your growth? I hadn't been thinking of that as a major limiter to your growth that as we stand now, but just curious how you think about that.
Yes. So as you know, we have a very significant policy team, and we're engaged on countless policy topics. This year, we've not been active asking for refundability which is the term that people use to describe what you're talking about. And certainly, in the current environment, do not view our growth in any way constrained by the availability of tax equity.
And I think probably refundability is marginally less likely to occur under a Republican Congress, not for any reason related to renewables but just because generally republicans don't love refundable or anything. And so, that's not really been a topic we've been engaged in one way or the other.
The next question is from Kashy Harrison of Simmons Energy. Please proceed with your question.
I know it's early but I was just wondering if you all have any expectations of where net energy metering 3.0 in California may be headed? Do you think investors should be looking to Hawaii as an example for where net energy metering is going into the future? Or maybe you have some other framework that we should be thinking about?
Yes, great question. So first of all, I feel like if there's a cost shift to talk about, today, utilities are earning a regulated rate of return on equity in excess of 10%. When anyone with $1 to invest knows that with today's valuations and low interest rates investors would candidly be ecstatic at 5% or 6%, return on a regulated system.
That said, early discussions around them 3.0 are underway, with an anticipated decision date of late 2021. The timing could be impacted if the parties come to an earlier settlement. Obviously, it has always been the case, our goal in these discussions is to ensure correct information, that we challenge any information or proposals to undermine fair compensation to our customers. For the solar energy they share with the grid are dispatched from their batteries.
It's interesting, you mentioned Hawaii, I think Hawaii is a fantastic example. Because, as you may know, Hawaii did move years ago to basically eliminate exports with the utility, we actually one in three homes has solar, we can’t handle them. And, our response to that was that we installed 30 kilowatt hours of storage on every system we installed. And after several years of doing that, the Hawaii utility called us up and actually now is offered to pay us to dispatch that power in the evening, which is effectively what time of use rates, encourage us.
So, I think Hawaii is actually one of several examples. Nevada being another, Arizona being another, regulators where they typically gone the direction of complicating net metering, end up actually ultimately returning the other way. So, I'm confident that, our customers will continue to be fairly compensated for the energy that they create and the contributions they make for the grid. And, we'll be working through that process over the next year.
Thank you for that. Appreciate it. And maybe just, I know tax equities have talked about a lot, but just maybe a follow up on that. Ed, can you discuss maybe some of the trends in the tax equity required rate of return? Clearly, interest rates are a lot lower and generally, the market's rate of return is much lower. But I'm just curious if the supply demand, dynamics or play how those are impacting what tax equity investors won in terms of IRRs?
Yes, so we just frankly, don't see any variation. I mean, it wouldn't surprise me like, if you look at our partnership plus transactions that we've entered into over 15 years, the highest pretax and lowest pretax capital cost or maybe 50 basis points different I mean, it's totally immaterial. Really, what constraints pricing, the tax equity market is that it has to be a pretax rate of return, in order to clear the Safe Harbor. And so the after tax return kind of falls out of that. So we just don't see variation in the cost of tax equity really ever across any economic cycle. We didn't see it in 2010. We didn't see it before COVID. We haven't seen it during COVID. It just really kind of always priced at the same level.
The next question is from Colin Rusch of Oppenheimer. Please proceed with your question.
Thanks so much, guys. As you think about the opportunities enabled by lower cost capital, can you talk about your plans to expand into new geographies and the lower cost capital influence in that decision?
Absolutely. Our current outlook and the growth that we described for 2021 does not depend on any additional geographic expansion. That being said, when we started the business, we were California only and now we're in 22 markets. And that really was predicated on the cost reductions. So when we look at the opportunities ahead of us, with the cost reductions from efficiencies from the synergies with the additional value created from batteries and grid services, with utility rates continue to increase, we absolutely expect that, this will be a product that will be available nationwide. But again, for next year, there isn't a need to expand in order to hit those sort of growth targets. And there's probably not in the next quarter, a geographic expansion on the horizon.
That's super helpful. And then, just thinking about, now we've seen the energy storage products in action, been able to sign a number of deals, and you've got a couple of strategic partnerships in terms of deployments. Can you talk about the pipeline of potential new partnerships that you guys are thinking about and considering not dissimilar to the Edison deal or others that you have got, as we think about what might happen on a go forward basis?
Absolutely. The current contracts that we have only cover 10% of the markets that we operate in. But the pipeline, which is over $50 million, includes would be 50% of our geographies. So it's a pretty significant market development work that we have in process. So you should certainly expect that we continue to expand these virtual power plant opportunities.
I'll take it offline. I got a clarification on that. Thanks so much.
The next question is from Philip Shen of ROTH Capital Partners. Please proceed with your question.
Hey, guys, thanks for taking my questions. Wonderful up on the 21 outlook. If you look at Q3, you're down on a combined basis 9%, year-over-year, Q4 looks like it could be, you guys could be down 6%. So, as we get into next year, you highlighted the issues and the reasons why. And with integration, so forth for Q4. But how long do you think that extends, so does it persist into Q1, you think your flat year-over-year. And I know it's tough to talk in the sense that you've been given guidance, but any commentary on that cadence of your year-over-year growth in megawatts that we could see on a combined basis in Q1, Q2 and Q3 of next year would be fantastic. Thanks.
Yes. So we'll come back with a more precise figure for the year. And I think too early for us to call a quarterly cadence at this point. But I think the issues around Illinois and Massachusetts for the Vivint direct-to-home team that we highlighted earlier, we're working through. And I think with the integration efforts that Lynn mentioned adding batteries to the Vivint team is offering and more grid services partnership. So I think we feel good about where growth trends and getting through some of the near term elements notwithstanding other potential disruptions here on COVID. I think we feel good about where that's at right now, but too early to call specific quarters.
Okay. Thanks, Tom.
If I can just add one thing to that, we're in -- it's a operational business and we manage both to grow and to margin. And I think, if you look at the results, it's pretty -- they're pretty outstanding, I think moving quarter-to-quarter going up 40%. And then, into q4 increasing by another 10%, while doing an integration, in addition to expanding the profit margin by 20%. That's pretty significant growth in our scale. I think, in 2021, will probably have more profit than all competitors combined. And so, the sequential growth rate is quite strong. And something that gives us a lot of confidence going forward.
The next question is from Sophie Karp of KeyBanc. Please proceed with your question.
I was just wondering if you could allow me to comment on the relative economics of grid services that, is it accessed via different channels FERC 2222 versus direct deals that you do? And how soon do you think that when the revenue if you will be big enough to become maybe its own segment or its own line item?
Thanks Sophie, good question. Because these contracts are contracted in advance most of them are for settlement in 22 and 23, you won't see it in the next, couple of years results in a meaningful way. That being said, it will drive meaningful business value over the next couple of years. First, because we'll have a differentiated offer to sell our customers. And, second because that differential offering will enable us to create really industry structure that's more of a winner to take most structure than it currently as with solar only,
All right. Thank you. And then also on that topic, should we be thinking about some degree of cannibalization of cash flows between sort of the traditional [indiscernible] revenue and grid services revenue because the same assets are being used for both, right? There's so -- are these strictly additive or is it cannibalization that goes between these cash flows?
Good question. It's additive. So the way that you would see that roll through would be in your net present values per customer. And, again, today, Q4, we expect that to return to $8,000 plus per customer and we expect the grid services and the initial contracts support and additional 2000. So you'll see it show up in that NPV number. Now, some of it, you may pass through to consumers to grow adoption, we'll still -- we'll work through all the elasticity and making those calls, but you should think of it as additive.
The next question is from Philip Shen of ROTH Capital Partners. Please proceed with your question.
I think I got cut off. But, anyway, I was looking into -- in terms of '21, you guys talked about growing above market? At what point do you think you grow above market? Do you end the year at a run rate above market? Or do you think you can actually grow above market for the full year '21?
Yes. What we stated was will grow above market for the full year 2021. And again, I would caution anybody to draw a conclusion about one quarter sort of going forward with integration, everything underlying it. It's absolutely strong results and I think positions us to have outsize growth rates for the years to come.
As the numbers get larger, they're tougher. In terms of…
Let me clarify that, not as we get larger. I mean, certainly I'm not saying that, as we get larger, the growth rate slows. I'm saying the opposite. I believe that given the industry dynamics that continue to invest in the brand, the continued investment in the product differentiation will enable us to exceed market growth rates because of our scale.
And then in terms of backlog, we're hearing out there that backlogs are growing. I mean, there are some people talking about labor constraints and so forth. And in other constraints in the ecosystem? Are you guys seeing that at all? Are you seeing backlogs increasing or are you guys able to get through that okay?
That was the question on labor Phil?
Yes, just backlog and labor in general.
Got it. We don't see any issues with labor in our business, we obviously will stay vigilant on that, our expectation is that the world will embark in dramatic electrification of the home. And if you look at the U.S., that would create 25 million jobs, which is why it's so politically popular. And so will always stay vigilant, build a differentiated talent brand, invest in job growth. And one of the things I'll note is, we use the McKinsey process to evaluate the cultures of both Sunrun and Vivint Solar, and the result was that very similar result and both in Tier-1. So both companies are places that attract high quality employees. And then, we also have our channel model as well, which also helps tap into the local market of the local solar installers to additionally fulfill deployments.
Great. Thank you. I think we're at top of the hour. I believe that's the end of the queue. So appreciate everybody's attention and we'll talk again next quarter, take care.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.