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Are Solar Firms Too Big to Scale?

We all know that being big just works. When you have more money, more people, more markets, you get more power and greater efficiencies and you win.

But what if it doesn't always work that way?

The big three residential solar companies -- SolarCity, Sunrun and Vivint Solar -- lead in a high-growth industry. Bloomberg New Energy Finance forecasts 2.6 gigawatts of solar panels to go up on U.S. homes this year, double the installations of two years ago. By 2020, it should be 3.6 GW a year.

Investors apparently aren't buying it.

Granted, they haven't been helped by the flame-out of SunEdison, whose attempt to buy Vivint was just the final chapter in a familiar tale of corporate hubris. Investors, apt to paint in broad strokes, saw that implosion and re-evaluated the whole sector.

But there's another, more fundamental issue, that came out in different ways when the companies reported earnings earlier this month.

Costs, or at least certain types of cost, are proving to be stubborn. Here is how solar providers' overall costs to install panels has moved since the start of 2015.

Much of this decline has come at the installation level, which includes the cost of the panels, inverters and labor to get the whole thing mounted on your roof. And while there is some benefit to being a big player in that regard -- for example, you buy panels by the thousand rather than dozens -- the general deflation in solar equipment costs benefits all participants to some degree.

More stubborn are the costs of acquiring customers and general overhead.

This has been a theme since at least last October when SolarCity scaled back growth plans to deal with bloated costs. It also came up again in the company's latest shareholder letter:

As our infrastructure had been built to handle ~1.25 GW of annual capacity, we will be...