Read report in PDF with graphs: MAC-Solar-Sector-Update-Apr-2017
Solar Index Performance
The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has moved mildly higher so far this year and is up +4.0% year-to-date.
Recent bullish factors for solar stocks include (1) continued strong overall world demand for solar with particular new strength coming from India, Latin America, the Middle East, and Southeast Asia (see page 4 for the world solar growth outlook), (2) stronger demand for solar power due to the increasingly competitive price of solar versus alternatives as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (3) low valuation levels that indicate that solar stocks are very conservatively priced.
Bearish factors for solar stocks include (1) downward pressure on solar pricing and panel oversupply caused largely by a hangover from the solar install spikes seen in China and the U.S. in 2016, (2) uncertainty about U.S. clean energy policy and global climate change initiatives due to the new 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 solar trade disputes that have resulted in tariffs and various market dislocations.
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 11.9, which is well below the forward P/E of 18.1 for the S&P 500 index. In addition, the median price-to-book ratio of 1.19 for the companies in the MAC Solar Index is well below the 3.04 ratio for the S&P 500 and the median price-to-sales ratio of 0.98 for the MAC Solar Index is well below the 2.05 ratio for the S&P 500.
Solar industry rolls on despite Trump administration
Solar panel company stocks continue to see general weakness mainly because of concern about panel oversupply and falling solar prices, which have pressured the profit margins of polysilicon, cell, and module producers. However, supply and demand is slowly rebalancing and most observers expect tighter supplies and more supportive pricing as 2017 wears on. Moreover, the decline in solar prices is boosting demand and is creating bullish opportunities for independent solar project developers as well as for the project-development units of the large integrated solar companies.
While the Trump administration has caused some policy anxiety for the solar industry, there has been no Trump effect on the ground thus far. Canadian Solar CEO Shawn Qu said in mid-March, for example, that President Trump’s energy policies have not had “any impact into either project development or the project sales process.” He said, “People are chasing solar deals like crazy.”
There are three main reasons why the Trump administration presents only a temporary obstacle for solar. The first reason is simply economics. Solar power has become dramatically cheaper in recent years and no longer needs the government support that it once needed. Solar in many areas of the world is now able to compete head-to-head with other sources of electricity generation.
For example, 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, according to Bloomberg News. Most utility-scale solar power plants across the world now cost as little as 4-6 cents per kWh on an unsubsidized basis. Many utilities are starting to choose solar mainly because of its low cost, not for policy reasons. The world record low for solar at present is 2.42 cents/kWh at an auction in Abu Dhabi in September.
In the U.S., the unsubsidized levelized cost of utility solar is now 4.6-6.1 cents/kWh, which is roughly equal to the cost of natural gas of 4.8-7.8 cents, according to comprehensive analysis by Lazard’s “Levelized Cost of Energy Analysis – Version 10.0.”
“I don’t think politics are needed to support these [renewable energy] asset classes. They will do just fine because they are economically viable and they make sense,” according to Sachin Shah, head of Brookfield Asset Management’s renewable energy unit.
The second reason why the Trump administration presents only a temporary obstacle for solar is that the solar industry is a global business in which the U.S. plays a limited role. The U.S. accounted for only 18% of world installs in 2016. That means that even if the Trump administration somehow made the entire U.S. solar market disappear overnight, the global solar industry would see a one-time drop of 18% and would then start to grow again by its usual rate of about 15-20%. Moreover, there is strong government policy support for solar in much of the rest of the world even if the U.S. federal government becomes a policy laggard during any particular 4-year presidential term.
Third, the federal government is certainly not the only game in town when it comes to U.S. solar support. There is strong support for solar from many other quarters such as states, cities, municipalities, corporations, and homeowners.
At the state level, for example, solar will continue to see support from the Renewable Portfolio Standards (RPS), which require utilities to derive certain percentages of their electricity generation from renewable sources. There are RPS mandates in 38 states that require in total that 10.2% of U.S. electricity will have to come from renewable energy by 2020 and 12.9% by 2030, according to Bloomberg New Energy Finance (BNEF). In addition, California and New York, for example, have very aggressive goals to source 50% of their electricity from clean energy by 2030.
Corporations will 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 adopted 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.
After President Trump issued his executive order to rescind the Clean Power Plan, GE CEO Jeff Immelt expressed regret, saying that GE supports the Paris climate agreement and that corporations need to rise above national politics and do what is good for customers and society. He said, “Companies must have their own ‘foreign policy’ and create technology and solutions that address local needs for our customers and society.”
Markets await Trump policy plans
The markets are waiting for more clarity on the Trump administration’s renewable energy policy. President Trump has already ordered the EPA to rescind its Clean Power Plan (CPP), which was a plan to force utilities to reduce their carbon emissions. On the more positive side, however, EPA Director Scott Pruitt has said that the EPA will not try to overturn President Obama’s 2009 CO2 endangerment finding, which provided the legal basis for the EPA to regulate CO2. On other key issues, the markets are waiting to see if the Trump administration withdraws from the Paris climate agreement and whether there will be any changes to the U.S. solar investment tax credit that is due to last until 2021.
EPA Director Scott Pruitt has taken fire from climate deniers for not overturning former President Obama’s CO2 endangerment finding. However, Mr. Pruitt has reportedly concluded that the EPA would lose that legal battle and does not want to waste the time. The CO2 endangerment finding has already been affirmed all the way up to the U.S. Supreme Court. In order to overturn the finding, the EPA would have to provide scientific evidence that global warming is a hoax, evidence which of course does not exist.
The fact that the EPA’s CO2 endangerment finding will remain in place is very important for future climate regulation because it means that the EPA remains legally bound to regulate CO2. While the Trump Administration may have no intention of carrying out its legal duty to regulate CO2, the legal requirement will remain in place as the legal foundation for future presidential administrations to regulate CO2.
Regarding the Paris COP21 climate agreement, the Trump administration has said that it will decide before the May 26 G7 summit in Italy whether the U.S. will stay in the Paris agreement. Politico reported that President Trump’s advisors will have a showdown meeting on Tuesday, April 18, to hash out a decision. President Trump’s advisors are reportedly split on whether the U.S. should stay in the Paris agreement.
Under the Paris 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. There are 195 nations that have agreed to the Paris climate agreement as the culmination of decades of climate negotiations.
If the Trump administration does decide to withdraw from the Paris agreement, it will not be an immediate process. The agreement is binding for the next three years and the agreement after that requires a 1-year notice to withdraw, meaning that the Trump administration could not fully withdraw from the COP21 agreement until President Trump’s 4-year term is essentially over.
However, President Trump could withdraw faster if he takes the more drastic action 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. That withdrawal would also effectively cancel U.S. participation in the Paris COP21 agreement.
Alternatively, as a kind of back-door exit, Mr. Trump could send the Paris agreement to Congress to be approved as a treaty. That approval would not be likely in the Republican-dominated Senate, shifting the blame to Congress for killing the agreement.
Instead of announcing an official withdrawal from the COP21 agreement, Mr. Trump could stay in the agreement but ignore the U.S. carbon reduction targets or seek to revise the targets. The targets are voluntary in any case and there are no penalties if the targets are not met. There is little chance that the U.S. will meet the targets anyway since Mr. Trump plans to rescind the Clean Power Plan, which was the main vehicle for the U.S. to meet its Paris targets.
Whether the U.S. stays in the Paris agreement or not, it is clear that 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. Key world leaders have already said they will stick with the Paris agreement regardless of what the Trump administration does and will stick to their voluntary COP21 carbon reduction goals.
China, for example, has already enshrined its Paris carbon-reduction targets into its domestic Five-Year plan. China’s Vice Foreign Minister said after Mr. Trump’s election that China plans to continue addressing climate change “whatever the circumstances.”
Europe’s top climate official, European commissioner Miguel Arias Canete, expressed regret about the Trump administration’s intent to rescind the Clean Power Plan, but said, “Despite all the current geopolitical uncertainties, the world can count on Europe to maintain global leadership in the fight against climate change. We will stand by Paris, we will defend Paris, and we will implement Paris.”
U.S. solar ITC rolls on
The Trump administration has not mentioned any intent to repeal or curb the already-existing solar investment tax credit (ITC), which provides a 30% tax credit on solar installs. Congress in late 2015 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 installations.
If Republicans do make a move to curb the solar ITC, Senate Democrats could filibuster the attempt. Nevertheless, a repeal of the solar ITC could be wrapped up in a big tax reform package that bypasses a filibuster through reconciliation. 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 try to repeal solar ITC legislation. First, a majority of Republicans now believe that climate change is real and favors clean energy. 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 an up-and-running jobs program with solar since the number of solar jobs 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. 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. In fact, solar already constitutes an energy infrastructure program.
U.S. solar jobs have soared by an annual rate of 22% over the last four years to 260,077 jobs at the end of 2016, according to the “National Solar Jobs Census 2016” published by The Solar Foundation (link). That shows that direct solar jobs now exceed the latest figures of 180,700 direct jobs in the oil/gas extraction industry and 50,300 direct 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.