Sunrun Inc (RUN) 2020 Q3 法說會逐字稿

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 a 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 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 in Sunrun's leading execution at scale. We expect improving net customer 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 sustained, with our sales force 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 in 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 EVs, 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-most market. Integration of the companies during the first 4 weeks have progressed well. The complementary 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 in markets by leveraging our combined company's crews to maintain high schedule density and consistent throughput. We are rolling out Vivint Solar sales and training practices developed through their world-class direct-to-home channel to enhance the effectiveness of our complementary 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 this 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. Sales 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 power plant contracts in the coming quarters. To date, we have won 11 virtual power plant 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 5 megawatts of capacity. During the 10-year fixed-price contract, Sunrun will dispatch energy from thousands of its Brightbox solar battery systems installed in the SCE territory, lowering the overall cost of power and reducing critical strain on the energy system. The same solar-powered home batteries will also provide reliable backup power to these households, if the power goes out. We'll share more details soon.

We have a pipeline of over $50 million in awarded contracts for 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 Sunrun on multiple dimensions. One, households will consume more electricity, necessitating larger and more profitable solar systems. 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 multifamily 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 1,400 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 Honold Foundation, to launch a new grant fund that will offer grants to community-based nonprofits, 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 our employees and address climate change head-on for our country and the world. We're 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 financing markets for our assets, our asset performance and recap our capital runway. We're now seeing significant tailwinds in financing markets. Our contracted, long-term, high-quality recurring cash flow has always been the bedrock in which we raise nonrecourse project financing to fund our growth and offers customers a compelling value proposition.

The positive trend we highlighted last call has continued, with capital costs in continued decline. Senior debt, in particular, is pricing at 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's strong underwriting criteria and service performance.

For instance, in late September, Vivint Solar issued 2 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's share of the asset value. The weighted average cost of capital would be below 3.5%.

Consistent with my comments over the last 2 quarters, customer payment performance remained 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 in 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, closed 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 in -- 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 in an NPV of approximately $6,500 per leased customer.

With higher volume in Q3 compared to Q2, we improved our cost absorption. We also continued 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 2 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 sales force headcount is at the highest level it has been all year, including pre-COVID, due in 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 from the second quarter. Net earning assets is gross earning assets, less all project level nonrecourse financings.

We ended the third quarter with $382 million in total cash, an increase of $28 million from 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 the 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 install costs and increase 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.

(Operator Instructions) Our first question today comes from Moses Sutton of Barclays.

Congrats on the merger close and strong results, especially off of the COVID woes 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?

Hey Moses, this is Ed. Great question. 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 reset in 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 suggestions would be similar to the last transaction issued.

Great. Great. Great. That's helpful. And then the 275 megawatts of funding capacity sounds good, but any thoughts of targeting a larger rolling amount of funding capacity available, given the increased scale of the business, basic calculation, 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 debt and tax equity because the debt runway is substantially greater than that incidentally. But we limit it by the 2 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 budget in January. And so most of the transactions don't straddle the calendar year. But we have discussions ongoing for really up to buy another 500 megawatts in tax equity. So I would expect as we go into next year, to see those numbers increase.

Great. Great. Very helpful. One last one, if I could squeeze in before I pass it on. Lease versus loans become sort of a bigger topic again. Any thoughts on how that market's trending into fourth quarter? It sounds like volumes are pacing above the market. But really, anything on that more specific subtopic of the mix that you sort of see this quarter and into next year?

Quite sure. Lynn, go ahead.

Yes. And again -- go ahead, Ed. So again, our lease and loan mix has remain pretty consistent. I think you probably will see a little bit more of a loan at the tail end of the year, just again, given the tax credit delta. But not saying that nothing that's going to materially change the numbers. We still believe that the tailwinds in the industry point to more solar-as-a-service versus customer-owned projects. I think it's just, one, besides just being a better value proposition for the customer. Right now, interests are aligned. 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 owned market versus the loan market, you're starting to see it diverge in terms of loss rates and they're superior in the solar-as-a-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 managed and owned 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 law stays as it is, the solars-as-a-service assets will receive a 10% tax credit. And customer-owned will be at 0.

The next question is from Mark Strouse of JPMorgan.

So it's good to see the grid services announcement with SoCalEd. Can you just talk about how material grid services is to your revenue or your cash flow or your unlevered NPV per household, whichever you think is the best metric, kind of, currently, and how you expect that to trend over the next year or two.

Yes, so we believe -- thank you, great question. We believe that the -- and what we're seeing in our first 11 grid service programs is about a $2,000 in NPV per customer. And that's been really consistent. The -- many of these programs you bid 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-takes-most market. And so we'll start to see us really differentiated on that consumer offering. And again, the current contracts 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, it's 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 that you have to scale into?

Yes. Yes.

Okay. Perfect. And then just 1 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?

Organic, some form of -- yes.

On an organic basis. Yes.

The next question is from Julien Dumoulin-Smith of Bank of America.

Congratulations on everything. 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, 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 by your comments here, that it's no longer just California wildfires that are driving this. Certainly, resiliency concerns in the southeast around storms, et cetera, just want to understand why the expansion, but more importantly 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 to 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 cost, the growth rate in batteries would accelerate further yet. But multiple existing manufacturers are increasing capacity. We also expect further entrants 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 very 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. 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 sales force. So we're very encouraged, and we expect it to continue -- the battery growth rate 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 cruise trained on this, educating the HJs. And so we really want to lay the groundwork for what we believe will be a market, wherein 2, 3 years, every solar system has a battery.

Got it, excellent. And if I can just quickly follow up 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% over -- annually over the long run. And we think next year, returns to more normal growth rates, and our expectation is that we'll grow above market given our strength, position now with the larger sales force, stronger brand and improved product offering.

The next question is from Brian Lee of Goldman Sachs.

And maybe just to follow on Julien's questions around growth. I know you're talking about '21, but if we just hone in on the 4Q outlook, deployments guidance of better than 10% sequentially. I appreciate you guys giving us the baseline, including the Vivint actuals, 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 were still having a little bit of issues around the labor side of things. And so I felt like the comps 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 the year 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 of things going on. One is, we're really focused a fast and swift integration. And that's why you've seen just in the first 30 days, you'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 in 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 a strong growth performance in 2021.

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 much. So I was wondering how you're thinking about cash generation, does the Vivint 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 there to $100 million or more on cash generation this year before the pandemic? And so how -- at a high level, should we be thinking about cash generation? Is it as relevant on a combined basis? And does the Vivint model change sort of the economics for you when it comes to cash gen?

Yes, thanks. Good question here. Couple of things I'll hit 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, 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'll 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 expansion margins, 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 4 weeks ago. But very confident heading into 2021.

The next question is from Michael Weinstein of Crédit Suisse.

Sorry if you already mentioned this, but is the Q4 deployment guidance 10%, does that include Vivint Solar, historically? Or if it did, did it -- how did Vivint Solar perform in Q3?

Yes. 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 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 the utilities. Is there a time line out there, expectations you might have for other ISO-type participation in markets?

Sure. Great questions. So maybe to back up for everyone on the call. So 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, FERC's 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 of 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, where 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 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 as smaller users 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 market 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, like, almost 15 years now. So I feel very good about it. I think it actually might turn into a strategic advantage. I think probably people who provide it, plan their budgets around the existing corporate tax rate. So if those rates were to go up, it would probably increase supply, 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 in the comments that we're making today.

Great. And just one last one. Maybe you talk about your strategy for safe harboring? How much cash you intend to put into that, now with the election? 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 a loan, will receive a 22% credit. So that's about $2,000 less than a 30% credit. Earlier this year, we entered into agreements to make additional safe harbor purchases of modules and inverters, which would qualify it at a 26% credit and be an 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. We haven't yet decided whether or not to execute those options. And so I think that's 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.

Congrats on the strong growth and good NPV per watt progress. One of my questions has 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 there's clearly 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, every year. And so the interest, it just continues to go. So we're encouraged by that long-term trend. I think the -- 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 interconnection, we can save $7,000 off our customers' contracts. 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 -- it's 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 a program 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, if there were to be a federal stimulus bill, and there were sort of some green elements in that stimulus bill, I'd just like to get your latest thoughts on sort of ideally what you would like to see in terms of support for clean energy and how that might impact your growth margin potential? I know that's -- especially, I'm just curious of 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, there for our cross party lines, supporting rooftop solar, and with rooftop solar comprising 69% of all jobs in wind and solar development. And our product, obviously, makes unreliable power reliable. And so kind of because of all these things, we do expect increasingly supportive policies over time, will further accelerate our growth future. The -- 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, would be my suspicion, that's previously been expanded under Republican presidents and Congress and has always been and perhaps of late increasingly as 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 -- for the government support.

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, convert it into something that's more easily monetizable, a direct cash payment or some other forms. 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 haven't been thinking of that as a major limiter to your growth 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 quality 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 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.

So 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, it's funny, I feel like if there's a cost shift to talk about today, it's that utilities are earning a regulated rate of return on equity in excess of 10%, when anyone with a dollar to invest notes that with today's valuations and low interest rates, investors would candidly be ecstatic at a 5% or 6% return from a related business. That said, early discussions around NEM 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, as it's 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 or dispatch 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 set. We -- actually, 1 in 3 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 has offered to pay us to dispatch that power in the evening, which is effectively what time of use rates encourages. So I think Hawaii is actually one of the several examples, Nevada being an other, Arizona being another, where -- regulators where they've 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 to the grid. And we'll be working through that process over the next year.

Appreciate it. And maybe just -- I know tax equity's been 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 lot lower, and generally, the market's rate of return has moved lower, but I'm just curious if the supply demand dynamics play, how those are impacting what the tax equity investors want in terms of IRRs?

Yes. So we just, frankly, don't see any variation. I mean, it wouldn't surprise, like if you look at our partnership transactions that we've entered into over 15 years, the highest pretax and lowest pretax capital costs are maybe 50 basis points different. I mean, it's totally immaterial. Really, what constrains 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 a 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 prices at the same level.

The next question is from Colin Rusch of Oppenheimer.

As you think about the opportunities enabled by lower cost capital, can you talk about your plans to expand in new geographies and the lower cost capital influencing that decision?

Absolutely. The -- our current outlook and the growth of 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 reduction. 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 continuing 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 the -- now we've seen the energy storage products in action, you've 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 that similar to SoCalEdison deal or others that you've 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. And -- but the pipeline, which is over $50 million, includes, would be 50% of our geography. So it's a pretty significant market development work that we have in process. So you should certainly expect that would continue to expand these virtual power plant opportunities. Okay. I'll take it offline to get a clarification on that.

The next question is from Philip Shen of ROTH Capital Partners.

I want to follow 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, with integration and so forth for Q4. But how long do you think that extends? So does it persist into Q1? Do you think you're flat year-over-year? And I know it's tough to -- tough in the sense that you haven't given guidance, but any commentary on that cadence of year-over-year growth in megawatts that we could see on a combined basis in Q1, 2 and 3 of next year would be fantastic.

Great question. Go ahead, Tom.

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 integration efforts that Lynn mentioned of adding batteries to the Vivint team's offering and more grid services partnerships. So I think we feel good about where growth trends and getting through some of the near-term elements, notwithstanding the other potential disruptions here on COVID, where I think we feel good about where that's at right now, but too early to call, specific quarters.

Okay. That's a -- please.

Hey Phil, so one thing that I -- Phil, if I can just add one thing to that. We're in a -- it's an operational business, and we manage both to growth 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, and at our scale. I think in 2021, we'll probably have more profit than all competitors combined. So the sequential growth rate is quite strong and it's something that gives us a lot of confidence going forward.

The next question is from Sophie Karp of KeyBanc.

I was just wondering if you could maybe comment on the relative economics of grid services that you guys access via different channels for 2022 versus direct deals that you do, and how soon do you think that, when revenue, if you will, would be big enough to become maybe its own segment or it's own line item?

Thanks, Sophie. Good question. The -- because these contracts are contracted in advance, most of them are for fulfillment 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 an industry structure that's more of a winner-to-take-most structures than it currently is with solar only.

All right. And then also on that topic, should we be thinking about some degree of cannibalization of cash flows between sort of the traditional lease PPA revenue and grid services revenue because the same assets are being used for both, right? So are these strictly additive? Or is this a 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 value per customer. So 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 an additional $2,000. 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 in making those calls, but you should think of it as additive.

The next question is from Philip Shen of ROTH Capital Partners.

I think I got cut off. But anyway, I was looking into -- and so in terms of '21, you guys talked about growing above market. At what point do you think you grow above market? Do you think it's -- do you think 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've stated was we'll grow above market for the full year 2021. And again, I would caution anybody to draw a conclusion about 1 quarter, sort of, going forward with integration and everything underlying it. It's an absolutely strong result and I think positions us to have outsized growth rates for the years to come.

Yes. Until we get that, as numbers get larger, they're tougher. That in terms of back...

No, let me clarify that. Not as we get larger. I mean, certainly, we -- 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, the continued investment in the brand, the continued investment in the product differentiation will enable us to exceed market growth rate because of our scale.

Great. 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 other constraints in the ecosystem. Are you guys seeing that at all? And are you seeing backlogs increasing? Or are you guys able to get through that okay?

That was a 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 we'll always stay vigilant, build the 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 results and both in Tier 1. So both companies are places that attract high-quality employees. And then we also have our CHANEL model as well, which we -- which also helps tap into the local market of the loca solar installers to additionally fulfill deployment.

Great. Thank you. I think we're at the 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.