As of the close of business on Dec 16, 2016, Hannon Armstrong Sustainable Infrastructure Capital Inc (HASI US) will be added to the index with an Exposure Factor of 0.5.
Read report in PDF with graphs: MAC-Solar-Sector-Update-Dec-2016
Solar Index Performance
The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has sold off sharply this year and is currently down -41% year-to-date. The MAC index in 2015 closed -15% lower after the -2% decline seen in 2014 and the +127% gain seen in 2013.
Solar stocks have recently seen weakness due to (1) downward pressure on solar pricing and panel oversupply caused largely by a hangover from solar install spikes seen in 1H-2016 in China and the U.S., (2) uncertainty about U.S. clean energy policy and global climate change initiatives with the incoming Trump administration, (3) uncertainty for the U.S. residential solar market amidst a shift to purchase/loans from leases and cutbacks in net metering in some states, and (4) ongoing trade disputes that have resulted in tariffs and various market dislocations.
Recent bullish factors for solar stocks include (1) strong overall world demand for solar with the sector set to grow by at least 20% this year (see page 6 for the world solar growth outlook), (2) strong demand for solar power worldwide due to the increasingly competitive price of solar versus alternatives and due to the need for countries to meet their carbon-reduction targets under last December’s Paris COP21 global climate agreement, and (3) low valuation levels that indicate that solar stocks are very conservatively priced.
Solar stocks are currently trading at very low valuation levels compared with the broad market. The median forward P/E of companies in the MAC Solar Index is currently 8.7, which is far below the forward P/E of 19.0 for the S&P 500 index. In addition, the median price-to-book ratio of 0.84 for the companies in the MAC Solar Index is well below the 2.92 ratio for the S&P 500 and the median price-to-sales ratio of 0.76 for the MAC Solar Index is well below the 2.00 ratio for the S&P 500.
Trump victory will be only a temporary obstacle for global solar
Solar stocks have been weak in recent months mainly because of concern about module oversupply and falling solar prices, which has pressured the profit margins of polysilicon, cell, and module producers. So far this year, average polysilicon solar module prices have fallen by -29% to a record low of 39.3 cents/watt (according to PV Insights) and solar cell prices have fallen by -27% to 25 cents/watt (according to Bloomberg New Energy Finance). Polysilicon prices posted a record low of $12.76/kg in mid-October but then recovered slightly to $12.88. Polysilicon prices are down -5.5% on a year-to-date basis (see pricing commentary and charts on page 10).
Solar stocks then saw some additional downward pressure after the November 8 U.S. election in which Donald Trump won the presidential contest and Republicans maintained control of both the House and the Senate. The Democrats will still have filibuster power in the Senate but their power will be very limited with Mr. Trump winning the White House and gaining control over the executive branch of the government.
Mr. Trump’s victory was clearly negative for solar and the clean energy industry in general. However, there are several caveats to consider: (1) the U.S. solar market accounts for only about 13% of the overall global solar market, which means that the global solar market can still do well even if the U.S. solar market slows due to Trump administration policies, (2) there is still strong support for solar in many U.S. states where electricity is mostly regulated, and (3) solar pricing has fallen dramatically in the past several years and solar increasingly competes on its own merits regardless of government support.
The first thing to remember regarding the impact of the Trump administration is that U.S. solar demand is only a limited component of the global solar industry. The U.S. accounted for only 13.0% of world solar installations in 2015, third behind China at 28.6% and Japan at 20.7%, as seen in the graph above.
If U.S. solar completely disappeared, the global solar industry would see a one-time growth drop of only 13.0% and then growth would resume from there. Moreover, the importance of U.S. solar on the global stage is fading on a relative basis given how quickly solar is spreading to other countries across the world.
Trump administration seems likely to cancel Clean Power Plan
There seems to be little doubt that the Trump administration will cancel President Obama’s Clean Power Plan (CPP), which was designed to reduce carbon output from utilities and help the U.S. meet its overall carbon reduction targets. The likely cancelation of the CPP would be disappointing for the solar market, although it was never guaranteed that the CPP would survive its court challenges anyway.
The Court of Appeals for the DC Circuit in late September held oral arguments on the CPP and a decision is still expected by late 2016 or early 2017. The U.S. Supreme Court was then expected to hear the case on appeal by spring or fall 2017. However, if the Trump administration cancels the CPP as expected, then the court cases will be moot and the litigation will be dropped.
The likelihood increased that the Clean Power Plan will be canceled after President-elect Trump nominated Oklahoma Attorney General Scott Pruitt to be the new EPA chief. Mr. Pruitt has been a leader among state attorney generals in challenging nearly all of President Obama’s regulatory initiatives, including the Clean Power Plan (CPP). Of the CPP, Mr. Pruitt said: “This is an effort that I think is extraordinary in cost, extraordinary in scope, and I think extraordinary as it relates to the intrusion into the sovereignty of the states.” Mr. Pruitt has made comments suggesting that he is a climate denier and a big supporter of the fossil fuel industry.
If the CPP is in fact canceled, then states will no longer be under a federal EPA requirement to reduce carbon emissions from their electricity utility sector. This will be a relief for states that are heavily dependent on fossil-fuel-driven electricity plants and that opposed the CPP in the first place.
However, there are still many states that will voluntarily continue their carbon-reduction plans because they believe it is the right thing to do. Indeed, three-quarters of the states that are suing to block the CPP are already on track to meet their 2024 targets, according to the Environmental Defense Fund. In addition, the nine states in the Regional Greenhouse Gas Initiative (www.rggi.org) could easily hit their 2030 targets without any significant changes, according to the Natural Resources Defense Council. Indeed, significant progress has already been made considering that carbon emissions from the U.S. power sector have already fallen to levels last seen back in the early 1990’s.
Other U.S. solar drivers will shine regardless of CPP’s fate
Even if there is no extra utility demand for solar sparked by the CPP in coming years, utilities will still be installing solar to meet state-level Renewable Portfolio Standards (RPS). State-level RPS rules require utilities to derive certain percentages of their electricity generation from renewable sources. The RPS mandates that already exist in 38 states require that 7.2% of U.S. electricity demand in 2016 must come from renewable energy and that the requirement will grow to 10.2% by 2020 and 12.9% by 2030, according to Bloomberg New Energy Finance (BNEF). In addition, California and New York have very aggressive goals to source 50% of their electricity from clean energy by 2030.
Aside from regulatory mandates, solar is increasingly being driven by favorable economics. Bloomberg News reports that solar projects in the Arizona and Nevada deserts can be built for less than 4 cents per kWh versus the higher average lifetime cost for natural gas plants of 5.2 cents and 6.5 cents for coal. There are many solar power plants across the world that now cost as little as 4-5 cents per kWh on an unsubsidized basis, illustrating how many utilities often choose solar in part because of its low cost.
In fact, about one-third of the U.S. utility solar pipeline consists of voluntary projects rather than those driven by RPS requirements, according to GTM Research. A spokesman for Duke Energy, the second largest U.S. utility owner, said that “We said before the election that whoever is elected president, we would be continuing our efforts to go to a low-carbon fleet and also pursue renewables.”
Corporations will also continue to be big drivers of solar regardless of whether or not the federal government supports solar. Many large U.S. corporations believe in the need to address global warming and have aggressive sustainability goals. Large U.S. corporations such as Apple, Google, Wal-Mart, Amazon.com and many others signed 2.3 GW of power purchase agreements (PPAs) for clean energy in 2015 alone, according to BNEF. U.S. companies will buy another 17.4 GW of clean energy PPAs over the next nine years, according to BNEF.
Trump’s approach to COP21 Paris agreement remains uncertain
Mr. Trump’s victory will almost certainly have negative implications for the Paris COP21 global climate agreement, which has already gone into effect with the U.S. as a signatory. Under the COP21 agreement, the U.S. agreed to meet a voluntary goal of reducing carbon emissions by 17% by 2020, by 26-28% by 2025, and an intent to reduce emissions by 80% by 2050.
Mr. Trump during his campaign said he would “cancel” U.S. participation in the Paris COP21 agreement and stop paying any money into UN climate programs. If the U.S. refuses to pay its share of climate change programs, then those programs could collapse since there would not be enough cash to meet their commitments and since other developed countries might refuse to make their payments as well. A linchpin of the Paris agreement is that developed nations agreed to contribute to a fund to help less-developed countries meet their climate goals. Without that funding, the less-developed countries may simply stop working on meeting their carbon reduction commitments.
Even though Mr. Trump said during the campaign that he would cancel U.S. participation in the Paris agreement, he said after the election that he has an “open mind” about the Paris agreement. No less a personality that Bill O’Reilly from Fox News said, “President-elect Trump should accept the Paris treaty on climate to buy some goodwill overseas. It doesn’t amount to much anyway. Let it go.”
There are 195 nations that have agreed to the Paris climate agreement after decades of climate negotiations. If Mr. Trump were to pull the U.S. out of the COP21 agreement, he would be isolated as virtually the only world leader to reject the need to address climate change. The U.S. would suffer diplomatic damage from withdrawing from the COP21 agreement and might find that the rest of the world would be less willing to cooperate with the U.S. on other issues of geopolitical importance to Mr. Trump.
The Trump administration would also face opposition from the corporate world if he were to withdraw from COP21. For example, more than 300 U.S. companies recently signed a letter supporting global climate initiatives and saying that a withdrawal from the Paris agreement would put “American prosperity at risk” (see www.lowcarbonusa.org).
The Trump administration in any case will find that it is not easy to withdraw from the Paris agreement. The agreement is binding for the next three years and the agreement after that requires a 1-year notice to withdraw, meaning that the U.S. could not fully withdraw from the COP21 agreement until Mr. Trump’s 4-year term is essentially over.
However, there is a way that Mr. Trump could withdraw faster if he takes the so-called “nuclear option” of withdrawing altogether from United Nations Framework Convention on Climate Change. That treaty established the overall UN climate process and was unanimously adopted by the Senate in 1992 and signed into law by President H.W. Bush. The U.S. could withdraw from that treaty on one year’s notice, i.e., by 2018. That withdrawal would also effectively cancel U.S. participation in the COP21 Paris agreement.
Instead of announcing an official withdrawal from the COP21 agreement, Mr. Trump could also simply refuse to participate in ongoing talks and refuse to make any serious attempt to meet the U.S. carbon reduction targets. The carbon reduction targets are voluntary and there are no penalties if the U.S. fails to meet its targets. Alternatively, as a “delay-and-defer” tactic, Mr. Trump could also send the Paris agreement to Congress to be approved, which is not likely to happen in the Republican-dominated Senate. He could then blame Congress for killing the agreement.
In any case, there seems to be little chance of the U.S. meeting its COP21 carbon reduction targets if the Trump administration cancels the Clean Power Plan as expected. The Obama administration was relying on the CPP as the primary driver for meeting the COP21 carbon reduction targets.
Regardless of whether Mr. Trump officially withdraws from the Paris climate agreement, the U.S. will certainly no longer be considered a world leader on addressing climate change when Mr. Trump is inaugurated in January, at least based on Mr. Trump’s stance on climate change thus far.
Other countries will need to take over the mantle of climate leadership if the world wants to meet the Paris goal of limiting global warning to 2 degrees Celsius by 2030. World leaders may simply decide to stick to their voluntary COP21 carbon reduction goals and hope that the Trump phenomenon blows over in four years, at which time the world can rededicate itself to tackling climate change.
If the U.S. withdraws from the COP21 agreement or simply ignores its obligations, there has been some speculation about whether China might also withdraw from COP21, possibly then causing the overall agreement to collapse. However, Bloomberg New Energy Finance says that its China research team believes that there is essentially a zero chance that China will abandon the climate process.
BNEF points out that China has already enshrined its Paris COP21 commitment into its domestic Five-Year plan. China’s Vice Foreign Minister after Mr. Trump’s election said on Nov 16 that China plans to continue addressing climate change “whatever the circumstances.” BNEF also says that if U.S. cedes its leadership on climate, then China will gladly step into the breach and take one of the greatest economic opportunities of the 21st century “straight to the bank.”
There are currently reports that Mr. Trump wants to appoint ExxonMobil CEO Rex Tillerson as his Secretary of State. If true, Mr. Tillerson’s appointment would be another negative factor for clean energy since a fossil fuel CEO would then oversee U.S. climate negotiations. Mr. Tillerson appears to believe that climate change is real but there are doubts about whether he would make any serious effort to address the problem.
On energy in general, Mr. Trump seems to be mainly interested in supporting the fossil fuel industry rather than damaging the advanced energy industry. It wouldn’t make much sense to purposely damage the U.S. advanced energy market ((i.e., renewable energy, building efficiency, and energy storage), which is now worth $200 billion, more than the pharmaceutical industry and almost as much as the consumer electronics industry, according to the Advanced Energy Economy.
Mr. Trump says he will reduce regulation on coal plants and open up more mining leases, but the reality is that Mr. Trump can do little to save the coal industry which is dying of its own accord due to high extraction costs and competition from natural gas. Moreover, even with Mr. Trump in charge of U.S. energy policy, utilities will not be particularly interested in building dirty and expensive coal plants, which might be under renewed environment attack in four years depending on the outcome of the 2020 presidential election. Utilities already generally understand that coal has a limited future.
On natural gas, Trump administration support will not make much difference since oil and gas companies already have a glut of wells and drilling opportunities. Fracking is currently only lightly regulated at the federal level due to legislation passed during the Bush era. Any push by the Trump administration for more natural gas extraction will simply push natural gas prices lower, helping utilities but hurting revenues at oil/gas companies and hurting the coal industry with even tougher competition from natural gas. Lower natural gas prices, however, would make natural gas a tougher competitor for solar in the electricity generation space.
The Trump administration’s promotion of the oil industry, by contrast, won’t have much effect on the solar industry since solar does not directly compete with oil. Oil is mainly used as fuel in the transportation sector and virtually no oil is used to generate electricity in the U.S. The oil and solar industries operate largely independently of each other.
U.S. solar ITC likely to remain in place
The most immediate issue for the U.S. solar market is whether there will be any change in the already-existing solar investment tax credit (ITC), which provides a 30% tax credit on solar installs. Congress just a year ago, extended the solar federal ITC for 5 years at 30% through 2019 with a step down to 26% in 2020 and 22% in 2021. The ITC in 2022 will expire entirely for direct-owned residential, but will remain at 10% indefinitely for utility PV projects, non-residential, and third-party-owned residential solar.
Mr. Trump has so far made no mention of a desire to repeal the solar ITC. Even if there is a move in Congress to repeal the solar ITC, Senate Democrats could filibuster that attempt. Nevertheless, a repeal of the solar ITC could be wrapped up in a big tax reform package that bypasses a filibuster through reconciliation. There is also the possibility that the Senate might change its rules and no longer allow the minority party to have a filibuster right for legislation. Therefore, there is still a risk of a solar ITC repeal, which would put a big dent in U.S. solar demand over the next few years. Greentech Media estimates that solar installs in the U.S. could be cut in half if Congress were to repeal the solar ITC.
Despite these risks, there are reasons to suspect that Mr. Trump and the Republican Congress will not repeal solar ITC legislation. First, there is a growing number of self-identified Republicans who believe that climate change is real and who are in favor of clean energy. In fact, a recent Pew Research poll found that 84% of Trump supporters favor expanding solar panel farms and 77% support expanding wind turbine farms.
Second, Washington already has a built-in jobs program with solar since the number of jobs in solar has already exceeded the number of jobs in the U.S. oil/gas extraction sector and in the U.S. coal mining sector, as seen in the above chart. Moreover, many of those solar jobs are in Republican-dominated states.
U.S. solar jobs have soared by an annual rate of 20% over the last four years to 208,859 jobs at the end of 2015, according to the “National Solar Jobs Census 2015″ published by The Solar Foundation (link). That shows that solar jobs now exceed the latest figures of 173,400 jobs in the oil/gas extraction industry and 53,700 jobs in the coal mining industry, according to figures from the U.S. Bureau of Labor Statistics.”
Globally, solar is an even bigger employer with 2.8 million solar jobs worldwide in 2015, up 11% from 2014, according to the “Renewable Energy and Jobs – Annual Review 2016” from the International Renewable Energy Agency (IRENA) (link). China is way ahead of the U.S. in solar jobs with 1.7 million jobs in 2015 due to larger installation and manufacturing solar operations, according to the IRENA report. Japan also has more solar jobs than the U.S. at 377,100, according to IRENA.
It would not make much sense to repeal the solar ITC and cause job layoffs in the solar sector while trying to stimulate new jobs elsewhere with an infrastructure spending program. Indeed, since solar energy projects qualify as energy infrastructure, Republican leaders should perhaps consider putting solar into the mix for their infrastructure stimulus program.
The global solar opportunity is much larger than the U.S. federal government
Mr. Trump’s presidential victory clearly represented a setback for the clean energy industry and was a big victory for the fossil fuel industry. However, it is important to keep an eye on the sweep of history rather than on temporary deviations. Mr. Trump can choose to play the role of climate denier and fossil-fuel supporter, but he cannot change the scientific facts on the ground. All he can do is slow down progress on addressing climate change and create the need to play catch-up once his presidency is over.
Moreover, as outlined earlier, there are many drivers for the global solar industry other than the U.S. federal government, including (1) increasingly favorable solar economics, (2) U.S. support for solar at the state, city, community and corporate level, and (3) support across much of the rest of the world for solar and the need to address climate change. Global solar is much bigger than the U.S. federal government and will prevail regardless of the Trump administration.
Florida voters again show support for solar by voting down Amendment 1
Florida voters in the November 8 election again showed support for solar by voting down Amendment 1, which would have outlawed third-party ownership of solar in Florida. The measure would have significantly damaged solar potential in Florida by outlawing the leasing of solar equipment to homeowners, businesses, or government entities.
Florida voters voted down the measure even though utility interests spent more than $20 million to promote the measure and despite the deceptive wording of the amendment. The Amendment 1 measure was formally called “Rights of Electricity Consumers Regarding Solar Energy Choice,” which on its face sounds like a good thing for solar, when in fact the opposite was true.
The fact that anti-solar utility interests needed to use a deceptive title for their anti-solar measure showed that they knew they were on the wrong side of the public on solar. Moreover, it was encouraging that Florida voters saw through the deceptive advertising technique and voted to support solar.
Florida has been one of the very few states in the country that makes third-party leasing effectively impossible because the solar owner/lessor would need to register as a utility. Florida has been a tough place for solar to flourish due to anti-solar regulation and the lack of a renewable portfolio standard (RPS) for utilities. Florida ranks only 14th in installed solar capacity among U.S. states despite having the 3rd best solar potential in the nation, according to the Solar Energy Industries Association (SEIA).