Prepared remarks
Greetings, and welcome to the Sunrun Fourth Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patrick Jobin, Investor Relations. Thank you, sir. You may begin.
Thank you, Maria. Before we begin, please note that certain remarks we will make on this call constitute forward-looking statements related to the expected future results of our company, including our 2026 financial outlook and other statements that are not historical in nature or predictive in nature or depend upon or refer to future events or conditions, such as our expectations, estimates, predictions, strategies, beliefs, or other statements that may be considered forward-looking. 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, during this earnings call, we may refer to certain non-GAAP measures, including cash generation and aggregate creation costs, which are not measures prepared in accordance with U.S. GAAP. These non-GAAP measures are being presented because we believe they provide investors with means of evaluating and understanding how the company's management evaluates the company's operating performance. Reconciliation of these measures can be found in our earnings press release and other investor materials available on the company's Investor Relations website. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. On the call today are Mary Powell, Sunrun's CEO; Danny Abajian, Sunrun's CFO; and Paul Dickson, Sunrun's President and Chief Revenue Officer. The presentation is available on Sunrun's Investor Relations website along with supplemental materials. An audio replay of today's call, along with a copy of today's prepared remarks and transcript, including Q&A, will be posted to Sunrun's Investor Relations website shortly after the call. Now let me turn the call over to Mary.
Thank you, Patrick, and thank you all for joining us today. Sunrun continues to deliver strong operating and financial results. Our disciplined growth strategy focused on our role as a critical energy system player, while creating healthy margins is paying off. The heart of our strategy is providing a richer and more meaningful customer experience by providing generation and storage capabilities, and then utilizing those resources to create the nation's leading residential power producer, leveraging our assets as a distributed power plant. We are providing American families peace of mind with predictable, affordable and reliable energy, which is particularly welcomed in an environment where utility costs are rising rapidly, and the grid is proving time and again to be unreliable in the face of extreme weather and increased demand. We have built a base of incredibly valuable grid resources that are helping to improve our country's energy system and meet the growing energy capacity challenges. Just last year, we dispatched 425 megawatts to the grid, equivalent to the peaking capacity in some states. Our growth each year is equivalent to adding a moderate-sized utility to our fleet, in addition to dispatchable generation capabilities of 1.5 gigawatt hours added in 2025. In 2025, we demonstrated our value in the face of significant uncertainty surrounding passage of the 2025 budget bill. This process served as a powerful catalyst for us to help legislators and their constituents recognize that distributed storage plus solar is not just a preference, but of strategic importance to meet America's energy needs. We emerged in a stronger position, focused on higher-value storage-first offerings and building upon our domestically focused supply chain. To that end, in 2025, we continue to prioritize growing our customer base in an optimized disciplined way, focusing on product mix and the highest value routes to market and geographies. We increased our storage attachment rates to 71% exiting the year, up 9 percentage points from the prior year. At the same time, we also remain focused on being the absolute best in the business on customer experience, while simultaneously unlocking additional cost efficiencies as we leveraged AI and streamlined operations. This margin-focused strategy resulted in the highest subscriber values we have ever reported and drove strong upfront unit margins with upfront net subscriber value exceeding $3,200 per subscriber addition in 2025. Sunrun reached an inflection point in 2025 in terms of our financial performance. We oriented our business to generate strong upfront returns and to structurally generate cash. In 2025, Sunrun delivered $377 million of cash generation and paid down approximately $150 million of parent-level recourse debt. We expect to continue to build on this momentum and drive meaningful value to shareholders in 2026 and beyond. Turning to Slide 6. I want to spend a minute on Sunrun's strategic priorities for 2026. We will continue to lead in our efforts to be the best in the energy business, delivering sophisticated energy offerings and a strong customer experience, while building the nation's leading distributed power plant. We plan to expand our storage attachment rate on our path to being America's choice for greater energy independence and control. Over the last few years, we have dramatically improved our vertically integrated Sunrun direct business, achieving Net Promoter Scores that rival some top-tier brands. We have executed amazing pivots to make our products and sales force the best in navigating increasingly complex utility rate structures and selling an entirely different offering centered around dispatchable storage. We believe that we will deliver robust growth in 2026 at higher margins and stellar quality in Sunrun's direct business, which already represents over two-thirds of our volume. We expect high single-digit to low double-digit growth in our Sunrun direct business this year. We recently decided to reduce our volume through affiliate channels, which we expect will lower affiliate volumes by over 40% in 2026, leading to slight declines in overall volumes. We made these changes because our direct business provides greater customer experience and operational control to manage regulatory and compliance complexity, resulting in stronger customer credit profiles, higher margins, and better strategic alignment with our long-term objectives. The increasing complexity of sales processes, utility rate structures, storage integration, distributed power plants, and ITC compliance requires ever-increasing standards of training for our employees on our best-in-class products and operations. Today, very few industry participants are able to execute in this landscape to our standards. We will continue to value and work with partners that meet our rigorous standards and further our strategic objectives. To put it simply, complexity, control, and end-to-end visibility add to Sunrun's competitive advantages. We will continue to expand our work as a distributed power plant, designing our approach by market with the best possible products and services for our customers and generating additional value as our assets get leveraged as a grid resource. Our team launched innovative customer products that provide enhanced value and further differentiate Sunrun. In 2025, we launched Flex, which has now reached thousands of installs per quarter. In 2026, we will aim to further accelerate innovation, focusing on expanding our lead as the largest distributed power plant operator. As you can see on Slide 7, our nation needs more power to meet the demands coming from the AI and data center revolution. Many of our top markets have already experienced exponential growth in retail electricity prices and face an uncertain future as it relates to affordable and reliable energy. By aggregating our growing fleet of dispatchable storage and home solar, Sunrun is building the next generation of power plants to deliver the critical energy our customers and the U.S. grid urgently requires. Importantly, we can scale these resources quickly as opposed to traditional utility solutions that can take years or even decades to bring online. This fleet of storage provides important resiliency benefits to our customers. The value of this was recently highlighted yet again during Winter Storm Fern. As widespread grid outages swept across the U.S., Sunrun kept the power flowing for our storage customers, delivering uninterrupted energy for these households. Over the course of 2025, our 237,000 storage customers faced over 650,000 unique outages. In many cases, customers had enough stored energy to power through outages that lasted days. We have already reached a sizable scale with over 4 gigawatt hours of dispatchable energy. Over the last year, our customers participated in 18 active programs across the country that provided 425 megawatts of peak power capacity. During 2025, Sunrun generated tens of millions of dollars of revenue for dispatching energy onto the grid, and we expect to expand this in 2026 as we grow our battery base, increase customer participation, and diversify into new power plant programs. Our customers are also directly financially benefiting from participation in these programs. In Q4, Sunrun announced a partnership with NRG, pairing Sunrun storage and solar offerings with optimized rate plans through NRG's retail electric provider. We believe that we will be a meaningful contributor to NRG's goal of creating a 1 gigawatt distributed power plant by 2035. Uptake by existing and new Sunrun customers has been strong, and our batteries under the program have already delivered energy back to the grid during multiple dispatch events. We look forward to scaling this program in a meaningful way in 2026. This is in addition to the programs we have already launched with other retail energy providers such as Tesla, providing a more sophisticated solution for customers in Texas as we design products that integrate retail electricity plans with solar and storage subscriptions. Retail electricity providers are seeing the benefits they can derive from these partnerships while customers receive better value. We expect to launch additional partnerships in 2026. Our priority is to deliver strong financial results. We believe that our margin-focused growth strategy will continue to produce meaningful cash generation. This is delivered through innovations in how we operate and how we finance our growth. We expect to lean even more into our AI and technology capabilities this year. At Sunrun, AI is foundational to how we are transforming the business to an energy generation and dispatch company, in addition to unlocking further cost efficiencies and enhancing the customer experience. At the same time, we aim to continue to strengthen and diversify our capital sources to fund growth through new innovative structures with strategic partners. We have deployed various structures to accelerate investment in distributed energy resources. First, we are pleased to announce we evolved the asset sale structure we launched in Q3 into something even more strategic between both parties, forming a new joint venture partnership to acquire and finance residential storage and solar energy assets. This was the initial intent of the parties. The partnership not only provides efficient capital formation, it provides preferred returns for the infrastructure investor, while Sunrun retains a long-term share of project cash flows and maintains the customer relationship and cross-selling opportunities. The partnership also envisions accelerating distributed power plant development across the country. Additionally, in Q4, we entered into a new partnership with Hannon Armstrong. This innovative structure is a first of its kind for residential storage and solar financing. We expect this will drive a more efficient and lower overall weighted average cost of project capital. Before handing it over to Danny, I want to take a moment to celebrate some of our people who truly embrace energy independence and the desire to connect customers to a more secure way to power their lives. I specifically want to call out our leading installation teams in Houston, Texas. Higher power prices and the prevalence of extreme weather events have highlighted our value proposition in Texas, where we give our customers peace of mind by offering them the ultimate in reliability and the ability to power the grid when needed. Our Houston sales and install teams have been exemplary in advancing this mission and are a critical piece in supporting 25% year-on-year growth in the Texas market. Further, they are executing at strong levels of efficiency with excellent customer satisfaction. Ricky and all the Houston installation team members, Let's Go Texas, and thank you. All right. Now I'll turn the call over to Danny for the financial update and outlook.
Thank you, Mary. The Sunrun team executed well in Q4, both operationally and in our financing activities. Subscriber additions were approximately 25,000 in Q4, bringing the full year subscriber additions to 108,000, approximately flat from the prior year. Compared to the prior year, we increased our storage attachment rate by 9 percentage points to 71%, allowing us to grow storage capacity installed by 26%. Average system size grew by 4%, leading to similar growth in solar capacity installed. This margin-focused disciplined growth strategy allowed us to generate meaningful cash. In the fourth quarter, we increased sales of newly originated assets to the financing structure we launched in Q3 that resulted in upfront revenue. In the fourth quarter, approximately half of our subscriber additions were monetized through this vehicle, while the remaining half was monetized through our traditional on-balance sheet structures. This represents an increase from 10% of our mix being monetized through this arrangement in the third quarter. As a result, GAAP revenue, gross profit, and operating income were meaningfully higher in the period. Also as a result, our reported non-GAAP value creation metrics were lower in Q4 as these metrics do not include future cash flows from these customers, even though we maintain a service relationship, rights to grid services, and the ability to cross-sell and upsell these customers over time. The diversification of funding sources is prudent for our scale, carries improved and simpler GAAP results, and generates equal or better upfront cash on our originations. Further, as Mary noted earlier, we have transitioned this asset sale relationship into a strategic joint venture. Going forward, we expect to maintain a share of long-term customer cash flows under the partnership structure, which will maximize value and have a less dilutive effect on our subscriber value and other value creation metrics. The GAAP accounting clarity and benefits will be maintained under this new partnership structure. We expect the mix of non-retained or partially retained subscribers to decline in Q1 and to continue to remain a part of our diversified funding mix in the quarters ahead. Turning to the unit level results for the quarter on Slide 14. Subscriber value was approximately $50,200; a 2% decrease compared to the prior year. We increased our storage attachment rate by 9 percentage points and benefited from a 42% weighted average ITC level, an increase of 3 percentage points from Q4 of last year. Subscriber value reflects a 7.1% discount rate this period. These positive project attributes were offset by the dilution from the asset sale activity I discussed earlier. Creation costs increased 8% compared to the prior year. The increase is primarily attributable to larger system sizes and a higher storage attachment rate requiring more hardware and associated labor costs. This resulted in a 7% year-over-year increase in installation cost per subscriber. We experienced 4% higher sales and marketing costs per subscriber addition. G&A was elevated in Q4, primarily owing to financing transaction-related costs along with less fixed cost absorption. These factors led to a $3,800 decrease in net subscriber value year-over-year to approximately $9,100. Turning now to aggregate results on Slide 15. These results are the average unit margins multiplied by the number of units. Starting on the top line, aggregate subscriber value was $1.3 billion in the fourth quarter, an 18% decrease from the prior year. Aggregate creation costs were $1 billion, which includes all CapEx and asset origination OpEx, including overhead expenses. Our Q4 contracted net value creation was $176 million. This reflects a net margin of approximately 14% of aggregate contracted subscriber value. This figure is lower than last year, primarily due to the shift toward asset sale financing mix. Slide 16 breaks down the unit-level economics and aggregate economics on a contracted-only basis, along with the main underlying drivers. Turning now to Slide 17. For retained subscribers reflected on our consolidated balance sheet, we raised nonrecourse capital against the value of the systems. This includes tax equity and asset-backed debt, along with receiving cash from subscribers opting for prepaid leases and from governments and utilities under incentive programs. As discussed earlier, we now also received proceeds from the full or partial sale of a portion of newly deployed systems, and we refer to the related subscribers as non-retained or partially retained subscribers. We estimate these upfront sources of cash called aggregate upfront proceeds will be approximately $1.1 billion for subscriber additions in Q4, representing an advance rate of approximately 91% of the aggregate contracted subscriber value, an increase of 5 percentage points year-over-year. When we deduct our aggregate creation cost of $1 billion from the aggregate upfront proceeds, we are left with an expected upfront net value creation of approximately $69 million. This figure excludes any value from our equity position in the assets over time, including potential asset refinancing proceeds and cash flows from other sources such as grid services, repowering or renewals, or upside from Flex electricity consumption above the contracted minimum. Though upfront net value creation is different from cash generation due to working capital and other items, it is a strong indicator of cash generation over time. Proceeds realized from retained subscribers in the quarter were $829 million with $542 million from tax equity, $214 million from nonrecourse debt, and $74 million from customer prepayments and upfront incentives. Aggregate upfront proceeds differ from proceeds realized from retained subscribers due to the former being an estimate for all subscriber additions in the period and the latter being the proceeds received only against retained subscriber additions that may also have occurred in a different period. Sunrun also recorded revenue of $569 million from the sale of non-retained or partially retained subscribers, which is not included in the realized proceeds figure. Cash generation was $187 million in Q4 and $377 million for the full year 2025. Turning now to Slide 20 for a brief update on our capital markets activities. Sunrun's industry-leading performance as an originator and servicer of residential storage and solar continues to provide deep access to attractively priced capital and has enabled us to build a strong diversity of funding sources. During 2025, we added $2.7 billion in traditional and hybrid tax equity. We raised $2.8 billion in nonrecourse project debt, and we recorded revenue of $684 million from the sale of non-retained or partially retained subscribers. As of today, closed transactions and executed term sheets, inclusive of agreements related to non-retained or partially retained subscribers provide us with expected tax equity capacity or equivalent to fund approximately 499 megawatts of projects for subscribers beyond what was deployed through the fourth quarter. Our transaction activity in the tax equity market increased considerably during the second half of last year, and we have developed a strong pipeline of transactions, which would secure the remainder of our 2026 needs with corporate ITC buyers and traditional tax equity investors engaging in their 2026 planning. We also have over $600 million in unused commitments available in our nonrecourse senior revolving warehouse loan to fund over 230 megawatts of projects for retained subscribers as of the end of Q4. Our recent amendment to the warehouse loan extends its availability period through 2029 and maturity date to 2030, upsizing this commitment by $70 million and incorporating the new component in the borrowing base that provides partial advances against expected future ITC proceeds. Our strong debt capital runway has allowed us to be selective in timing term-out transactions. We did not go to the securitization market during the fourth quarter following a very active Q3 in which Sunrun priced 3 transactions. The securitization market has shown favorable conditions so far this year, and we expect to place several transactions in the market this year. As noted earlier, in Q4, Sunrun increased its mix of outright sales of newly originated assets, representing 51% of subscriber additions during the quarter. As these sales are recognized as upfront revenue, the benefit to our GAAP financials was immediately felt during the quarter as Sunrun posted positive operating profit, net income, and cash flow from operations. In Q4, we also closed a new innovative joint venture with Hannon Armstrong Sustainable Infrastructure Capital, or HASI. The partnership is expected to ultimately finance over 300 megawatts of capacity across more than 40,000 homes across the country. HASI will invest up to $500 million over an 18-month period into the joint venture, which is a structured equity investment that monetizes a portion of the long-term customer cash flows, while enabling Sunrun to retain a significant long-term ownership position and greater flexibility in structuring an efficient capital stack. We anticipate this will allow aggregate proceeds that are equal to or better than our traditional financing arrangements. On the parent capital side, we continue to pay down recourse debt, paying down $81 million during the fourth quarter and $148 million during full year 2025. During the quarter, we amended our recourse working capital facility to extend the facility's maturity date by 1 year to March 2028. The amendment additionally provides for further reductions in commitments in line with our goal of continued reduction of parent recourse debt as we deliver significant cash generation. With this amendment and the full payoff of our 2026 convertible notes earlier this month, we have no recourse debt maturities until March 2028. Over the course of 2025, we also increased our unrestricted cash balance by $248 million and grew net earning assets by $1.8 billion. Turning now to our outlook on Slide 22. We're positioned to grow volume in our direct business by high single to low double digits in 2026, expecting Q1 to mark the low point, followed by strong sequential growth during the year. We are confident that our ability to execute through complexity in our vertically integrated model will enable this growth. At the same time, the growing complexity of execution, as examples, integrating storage, navigating evolving utility rate structures, operating distributed power plants, and compliance with ITC rules means that very few companies in the affiliate universe today are able to meet our stringent requirements. As a result, we made a proactive decision to dramatically reduce affiliate partner volumes by over 40% in 2026, which will impact our results. In addition to these volume trends, budget bill and tariff uncertainty last year resulted in us reducing direct sales activity in certain routes and geographies in order to increase our mix toward higher unit margins, which cut volumes during the second half of 2025 and into early 2026. Now with an even stronger base of unit margins and resolution of some of these uncertainties, we have expanded certain sales activities and expect strong sequential volume and margin growth through the year. For the full year 2025, we expect aggregate subscriber value to be between $4.8 billion and $5.2 billion. We expect contracted net value creation to be in a range of $650 million to $1.05 billion. The year-over-year decline in these value creation metrics is driven by lower volume and the dilutive effects from a higher mix of assets sold to the infrastructure investor or financed through our new joint venture together. It is important to note, however, that we do not expect the higher asset sale or JV mix to dilute upfront net subscriber value and cash generation because this activity also drives our average advance rate higher. We expect the impact from asset sales to reduce under the joint venture structure and for year-over-year comparisons to improve during the second half of this year. We expect cash generation to be between $250 million to $450 million for the full year. In addition to the volume and mix factors I noted, we expect key drivers to include lower proceeds from ITC transfers due to lower prices, higher insurance costs, and higher solar module prices, offset partially by continued operational efficiency improvements. Incremental ITC safe harboring investments are not included in our cash generation outlook. We are working to finalize plans to execute additional safe harbor investments prior to the early July deadline. This year's activity would augment the activities we undertook last year, to further extend our coverage through 2030, provide a buffer for more growth, and diversify our approaches and equipment use to maximize flexibility around system configurations when the equipment is utilized. We estimate cash allocation to these activities may be in the range of $50 million to $100 million, a figure we will update once our plans are final. For the first quarter, we expect aggregate subscriber value to be approximately $850 million to $950 million. We expect contracted net value creation to be between $25 million and $125 million in Q1. Incremental to the factors I just mentioned, the expected decline is driven by adverse fixed cost absorption in what is typically the lowest volume quarter of the year. We expect cash generation to increase sequentially throughout the year following our typical seasonal pattern and financing activity cadence. We expect Q1 to be positive, but timing for execution of project financing transactions scheduled for March will influence the Q1 outcome. We expect to repay over $100 million in our parent recourse debt in 2026 and to be below our target recourse leverage of 2x cash generation. Over time, we will explore further capital allocation options to maximize shareholder value based on market conditions and our long-term outlook. Operator, let's open the line for questions.
Questions and answers
Our first question comes from Brian Lee with Goldman Sachs.
Kudos on the cash generation here and the guidance for 2026. You're implying basically a stable guidance range for cash generation as the range you started with in 2025. I know in the past, you've kind of given us a bridge with cash generation drivers, lower interest rates, higher ITC weighting, more storage, et cetera. I mean it seems like the drivers are in place for cash generation to go higher. Maybe the offset there is less volume. But can you kind of speak to some of the moving pieces around cash generation maybe not having more upside off the range you started with in '25?
Sure, Brian. Nice to talk to you. We still have the typical factors. The primary variables we've talked about in the past include interest rates, the ITC percentage, the storage attachment rate. I'll go through a few details, particular to 2026 as we try to bridge the year-over-year comparison. So we did talk a bit about volume on the call. Some factors in play there with modest growth in the Sunrun direct side, contraction on the affiliate side. So that is a net negative effect on volume that kind of bears into the comparison. I would say the other factors, a little bit of, I would say, on a year-on-year comp, a little bit of overperformance in '25 relative to our expectation. That was small items that were favorable in timing in 2025. More largely speaking, we've taken a slightly lower view on potential ITC pricing in the market, some supply/demand dynamics largely across the market, weighing down pricing. We've incorporated into the forecast. We're also seeing higher insurance costs as the insurance market is also dealing with the increase in the amount of insurance volume. And then equipment prices are also weighing as we continue to shift to domestic. I would say those are the primary factors impacting the year-over-year bridge.
That's very helpful information. I appreciate it. I have a follow-up regarding the asset sales model, which is new and we're all trying to understand how to model it. It has fluctuated quite a bit over the past two quarters. It seems like you might have more insight into the mix for 2026. Is there an average level it should trend at each quarter? And does the 40,000 homes capacity under the HASI joint venture suggest the volume you expect to achieve under that structure in 2026?
There are a couple of structures. We previously discussed the asset sale last quarter, which has seen a significant increase from 10% to around 50% from Q3 to Q4. This is likely to fluctuate, but we generally anticipate a decline from the 50% level. As is common with tax equity funds, we expect to see some quarter-to-quarter variations. Certain periods may have funds recently closed with a higher allocation, while others may feature a different funding mix. Overall, we expect this activity in the joint venture format to remain part of our operations for the year, but at a lower level than the recent 50% pace. Additionally, we announced the closing of the partnership with Hannon Armstrong in early January, which is another joint venture that adds to the mix we discussed earlier, and both will play a significant role in our operations for the remainder of the year. Looking ahead, we intend to continue using such structures as part of our strategy for diversifying funding sources and enhancing efficiency and capital costs.
Our next question comes from Moses Sutton with BNP Paribas.
Congratulations on a strong finish to 2025. Regarding the retained versus non-retained assets, could you elaborate on that? Looking beyond 2026, if tax credit monetization metrics improve with retained advance rates possibly returning to 88% or 90%, would you consider increasing retained assets? Also, will you disclose the available capacity in dollar terms for non-retained asset sales moving forward, similar to how you discuss tax equity and capacity for future quarters?
Yes. We are providing insights on both retained and non-retained aspects. When considering tax equity or tax credit capacity, it encompasses both categories. Although we don't break it out specifically, both retained and non-retained elements will be part of our strategy. Regarding asset sales, particularly the non-retained aspect, we believe it's beneficial to include this within our broader approach that still incorporates traditional tax equity, hybrid tax equity, and actively engaging in the tax credit transfer market. This approach offers advantages such as transaction simplicity, full stack capital involvement, partial deconsolidation leading to clearer GAAP presentation, and more favorable GAAP dynamics. As for our partnership with Hannon Armstrong, it will continue to consolidate and will also tap into tax credit transfers and the ABS market, representing an advancement compared to traditional tax equity structures. Our mix is evolving, providing us with more efficient capital market access. However, I don’t anticipate offering a detailed long-range outlook regarding specific mix details, aside from noting that we achieved 50% in Q4. For the overall asset sale transaction structure this year, we expect that figure to decrease.
Our next question comes from Ameet Thakkar with BMO Capital Markets.
Just on the cash generation outlook for the year for 2026, I think your press release talks about that it excludes some potential safe harbor investments. Did your cash generation numbers for 2025 actually already net those out? And if you do kind of move forward with those investments, can you just kind of give us an idea of the magnitude on how much that might impact the cash generation figure thereafter?
We have projected a cash allocation of $50 million to $100 million for the entire year. The 2026 activities will allow us to protect up to four tax years following 2026, extending our safe harbor activity through the end of 2030. We've already begun some initiatives at the start of the year and anticipate undertaking more before the July deadline, as we finalize our plans, some of which are already quite advanced. We intend to complete these activities before revealing a specific number, but for now, our allocation remains in the $50 million to $100 million range.
Our next question comes from Chris Dendrinos with RBC Capital Markets.
I guess I wanted to just ask about the demand environment and how you're kind of seeing the TPO, non-TPO, I guess, maybe more of the non-TPO market play out? And is that turning into an opportunity for you all to take more customers? And then maybe just on the affiliate side of things, I mean, previously, I guess, they were a partner, but now would you consider them a bit more of a competitor? And is there an opportunity to take share there as well?
Yes. So as the 25D market wound down, I think there was some consideration that, that volume would immediately flow to us. And we've been articulating previously; the cohort of organizations that typically sold under the loan model have tried to migrate to the most simple sales processes and the highest paying partners. And so as we've been talking about more complex rate environments, ever-increasing complexity around compliance, and the need for improved controls and fiscal responsibility, we've seen that, that volume has largely migrated to other places. As we watch that play out, we anticipate seeing the same thing that we've seen play out time and time again over the last 2 years. The financing shops that attract volume by focusing more on simplicity of underwriting or lack of underwriting and excessive pay typically don't last long, and those people eventually, we anticipate will migrate if they want to stay in the industry to a place that's been investing heavily around controls, prudent financial processes and deep training on complex rate environments and a focus on evolving into an independent power producer, thoughtfully underwriting these distributed assets.
Our next question comes from Philip Shen with ROTH Capital Partners.
As a follow-up to that last point, talking about the complexity with everything that's happening. The rules or guidelines came out recently. It seems like that wasn't enough. We need more clarity on PFEs and FIEs and so forth. And so there was an article out from Bloomberg about how certain large tax equity investors, I think JPMorgan was named, may have paused some investments in tax equity. And you said in your prepared remarks that compliance with ITC rules was important or part of the package of tax equity and so forth. Just was wondering if you guys could give us some color on the challenges that you're seeing for residential solar out there because of the delayed release of the guidelines? And then how you guys specifically are navigating it? And do you see risk that there could be even challenges for you guys if the rules take longer than expected to come out. So let's say it's after the midterms, for example, which is a possibility. And then this also impacts the transfer market. I know you guys have these other structures, which are fantastic and unique, but I was wondering if you could talk through these impacts from the delayed guidelines.
It's great to connect. This is Mary. I'll respond first and then turn it over to Danny to discuss the market in more detail. We want to emphasize that we're currently leveraging Sunrun's strengths in the business. Sunrun is a sophisticated vertically integrated entity with comprehensive visibility. We've become adept at simplifying complex issues for consumers, which is very effective and aids us in expanding our distributed power plants. The initial guidance we received was in line with our expectations and fit our outlook. While it didn't offer specific guidance for financers, everyone anticipated that there would be a subsequent rule-making process. The first phase unfolded as we anticipated and was favorable for Sunrun. We are indeed satisfied with the strategic partnerships we've established and the diversification of our capital structure. Danny, please provide more details on that aspect as well.
Sure. I'll start with the guidelines considerations, then discuss the dynamics in the tax equity and tax credit transfer market. On the guidelines, we find them incrementally helpful and supportive of our expectations regarding the rules and approaches under the material assistance portions. However, we did not receive further clarity on prohibited foreign entity and foreign influence entity rules, which are still forthcoming. This lack of clarity has left some market participants hesitant to invest more in tax credits. Regarding the broader conditions in the tax credit and overall tax equity space, last year was somewhat mixed. The tax credit transfer space experienced approximately 50% growth year-over-year from 2024. While there continues to be growth in the tax equity market, some tax effects from the budget bill diminished corporate appetite for tax credits in the second half of the year, resulting in a tighter market in terms of supply and demand. Despite this, the flow of dollars remained adequate for us. We observed a softening of price expectations in the market due to supply-demand fundamentals, even within a $50 billion-plus scale when considering both the tax credit transfer market and the traditional tax equity space. There was significant capital deployed and a wide variety of credits and demands, which kept the market closely balanced between supply and demand, though there was a bit more sluggishness in the second half of the year. At the same time, we managed to accelerate our activities during the second half, culminating in a 499-megawatt figure noted in our tax equity monthly report. In summary, while pricing has decreased and some participants have yet to return to the market, many remain active enough to meet our needs. We expect this trend to continue, having made good progress at the end of last year in securing more tax equity and further advancing our pipeline as we move through this year.
Great. Danny and Mary, thank you for that color. I know it's a complex topic and also dynamic. Shifting to the outlook for shareholder return. I was wondering if you could give an update on the outlook for a potential buyback or the latest in terms of how you're thinking about capital allocation. It likely hasn't changed much, but wanted to get a refresh on that.
Yes. I think it's the same positioning in terms of continuing to pay down parent debt. We said $100 million or more for this year and with an expectation that, that would get us below our overall leverage target that we've been managing towards over the last several years. So that kind of in our mind, like marks the completion of the deleveraging period. But as far as beyond that, I think the same kind of expectation in terms of looking to maximize shareholder return with capital allocation. And this year, in particular, we're also real-time going through that exercise we mentioned around finalizing the magnitude of our safe harboring activity, which is a very high returning long-term use of cash.
Our next question comes from Colin Rusch with Oppenheimer.
This is Andre Adams on for Colin. I was just hoping you could quantify on an apples-to-apples basis, how much labor costs increased year-over-year?
We had the installed cost comparison, and I want to clarify that the install cost increased year-over-year by about 8%, although I want to ensure I'm accurately representing that figure. This figure includes installed labor, but it does not detail the combined costs of installed labor and equipment. Additionally, our sales and marketing expenses rose by 4% year-over-year, yet we continued to see an increase in the storage attachment rate, which contributed to healthy margins and drove our top line. And the creation cost is the 8% number. That includes everything, just to get that right.
Yes. All right. I appreciate it. And can you just speak on the DPP side about whether utilities are looking to leverage the asset base to drive some grid stability outcomes in addition to kind of basic power availability and how that might vary by geography?
Yes. So depending on the market, we're seeing varied levels of activity, but overall, massive increases in interest in our assets. When you think about like the next generation of power plant and access to power, it needs to happen quickly. The expansion and growth of AI data center energy consumption is growing rapidly and is pent-up. And so a power plant solution that can be brought online quickly is critical. And so as utilities are realizing the quick deployment nature of our assets, there's growing interest in them. As we talked about in Mary's remarks, we talked about exciting programs with both NRG and Tesla in the Texas market, for example, where we're essentially pledging assets to those partners to be able to dispatch as needed to be able to stabilize the grid and control costs for consumers.
Yes. As we mentioned, we have 18 different programs in place, and the success of these programs has generated considerable interest, leading to engaging discussions with several partners nationwide.
And just to maybe conclude with that point. By the end of 2028, we've communicated we plan to have over 10 gigawatts of dispatchable capacity that's 0.75 million batteries across the country that can be dispatched and have communicated $2,000 net subscriber value per customer on those and are very excited about what we're building out.
Our next question comes from Julien Dumoulin-Smith with Jefferies.
I appreciate it. Look, maybe just to follow-up a little bit on the last one here and press a little bit further. As you think about the backdrop here, your comments about capital markets at large, how do you think about returning cash here? I just want to press you a little bit. I know at times; there have been conversations about dividends and buybacks and things. But I just want to make sure I'm hearing you very clear about where you stand in terms of being offensive or defensive in the current environment. Has your thinking evolved at all? Obviously, kind of more of a flattish overall cash generation profile? And any comments you'd make as to what you need to see to kind of get more offensive, if you will, if you want to take a foot forward?
Yes. We're expecting to generate $350 million in cash at the midpoint, with $100 million allocated to reducing debt. This means we'll likely fall below our previously stated 2x leverage target by the end of the year. We're focused on this goal throughout the year, and there will also be an available $250 million surplus after addressing that debt. We've discussed using some of that surplus within Safe Harbor. This puts us in a position to consider future capital allocation strategies, but for now, our primary focus remains on the $100 million debt repayment and further investment in Safe Harbor.
Our next question comes from Maheep Mandloi with Mandloi.
Perfect. Sorry about that. A quick clarification on the buyback. The leverage ratio you're targeting, is that still 2x debt to cash generation is the metric here? Or is that changing in this environment?
With this year's activity of at least $100 million in paydown, we expect to manage below that number. That's our current outlook.
Yes. And just a quick clarification on the creation cost, and I might have missed this earlier. The change between OpEx versus CapEx and OpEx seems more than 60% of the cash generation here. Is that structural? Or should that reverse going forward over here?
You're observing the impact of the 40 percentage point increase in our mix from 10% to 50% from Q3 to Q4, which is related to asset sale activity. This shift in the financing mix is leading to a full expensing of a greater portion of asset origination costs that were previously capitalized. You can see this change, which aligns with the notable increase in revenue from those asset sales. That explains the rise in our margins, operating income, and other related metrics.
Our next question comes from Robert Zolper with Raymond James.
What's the significance of changing the default rate measurement in the metric sensitivities?
Yes. I think this is consistent with the trends we've been observing, ensuring we capture the entire range of sensitivity. The proceeds we raised from our transactions involve default assumptions made by capital providers. This is to reflect the changing dynamics we've been noticing and to ensure comprehensive coverage. Additionally, you may have observed a change in our presentation of the numbers; we previously reported them as cumulative, but now we are presenting them as annual figures for greater clarity in modeling.
Okay. Understood. And I guess on your more seasoned securitizations, which bucket of default rate would they typically fall into?
Yes. It really depends on the performance of the assets, the vintages, and the types, as there is some variation. Cumulatively, I'm not sure if we've shared the latest updates, but the rating agencies definitely consider this in our deals. On average, we've noticed about 50 to 75 basis points annually. In the past, we used cumulative figures, so there might be slight differences when comparing to previous disclosures. But typically, it's around 50 to 75 basis points, and it can vary based on factors like FICO score, geography, and product type. The rating agencies take long-term assumptions when they're rating transactions. And generally, when they updated on our performance, they've been able to maintain or in a limited case or two upgrade our ratings.
Okay. Very helpful.
We have reached the end of our question-and-answer session, which concludes today's teleconference. You may disconnect your lines at this time. Everyone else has left the call.