Read full report in PDF with graphs: MAC-Solar-Sector-Update-May-2018
Solar Index Performance
The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), rallied to a new 2-1/4 year high in May, extending the rally seen in 2017. The index is currently up +6% on the year, adding to the annual gain of +52% seen in 2017.
Bullish factors for solar stocks include (1) broadening solar growth coming from India, Turkey, 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) modest valuation levels that indicate that solar stocks are conservatively priced.
Bearish factors for solar stocks include (1) reduced subsidy support as countries move more towards using competitive auctions to acquire solar power now that solar has become grid-competitive in many areas, (2) the Trump administration’s 4-year 30% tariff on imported cells and tariffs that will dampen U.S. solar install growth, and (3) ongoing solar trade disputes that have resulted in tariffs and various market dislocations.
Solar stocks are trading at modest valuation levels compared with the broad market. The median trailing P/E for the companies in the MAC Solar Index is currently 17.0, which is below the comparable figure of 20.9 for the S&P 500 index. Meanwhile, the median forecasted 2018 P/E of 17.1 for the companies in the MAC Solar Index is slightly below the comparable figure of 17.2 for the S&P 500 index. The median price-to-book ratio of 1.48 for the companies in the MAC Solar Index is well below the 3.27 ratio for the S&P 500. The median price-to-sales ratio of 1.93 for the MAC Solar Index is below the 2.19 ratio for the S&P 500.
Solar stocks rally to 2-1/4 year high
Solar stocks in mid-May rallied to a 2-1/4 year high due to improved company fundamentals and reduced policy uncertainty. The solar market is also encouraged about the strong growth of solar demand in the emerging world, which is reducing the industry’s reliance on a few key areas such as China, the U.S., Japan and Europe. Solar stocks have also been boosted by the stabilization of solar cell and panel prices, which has helped profits for solar manufacturers.
Solar stocks also received a boost in early May after California announced that all new homes and low-rise multi-family units built after January 1, 2020, will be required to have solar systems installed. That announcement illustrated how solar is becoming a mainstream solution for the world’s energy problems.
The U.S. solar market is still adjusting after recent government policy moves on tariffs and taxes. The markets now have clarity on the Trump administration’s 30% tariff on imported solar cells and panels, with some possible good news if the administration happens to grant exemptions to the tariff for particular companies or products such as 72-cell solar panels for utility solar plants.
Solar continues to receive generally favorable treatment from U.S. grid regulators. In addition, the Trump administration has made little progress thus far on trying to provide artificial support for coal-fired plants, which could dampen solar adoption.
Solar-plus-battery is quickly gaining momentum
The main knock on solar, of course, is that it produces electricity only during the day. However, that situation is quickly changing as battery costs drop sharply and allow developers to offer price-competitive solar-plus-battery systems. The result is a plant that can provide 24/7 base load electricity such as that provided by nuclear, coal, and natural gas plants. Solar has the added advantage of having zero safety risk (vs nuclear) and zero emissions and zero fuel-cost risk (vs natural gas and coal).
The solar-plus-battery combination also solves the so-called “duck curve” pricing problem whereby wholesale power prices in areas with heavy solar resources experience depressed prices during mid-day due to the large amount of solar power on the grid. Adding a battery storage system allows a solar-plus-battery plant to produce a smoother flow of electricity over a 24-hour period, thus avoiding a disruption of wholesale electricity pricing.
The sharp drop in battery prices has made the solar-plus-battery combination more economically attractive. The price of lithium-ion battery packs last year fell sharply by -24%, according to Bloomberg New Energy Finance (BNEF). In fact, battery storage has become cheap enough that California is starting to require utilities to use battery storage as a substitute for natural gas peaker plants.
The solar-plus-battery solution is quickly becoming more popular among utilities. Lightsource, a solar developer backed by BP, recently said that it is not submitting any utility-scale solar proposals without battery storage to any utilities west of Colorado where sun resources are high.
The reduced cost of a solar-plus-battery system was recently seen in an electricity plant solicitation by Minnesota-headquartered Xcel Energy. The solicitation received a median bid for solar-plus-battery plants of only 3.6 cents/kWh for facilities scheduled to go online in 2023.
Battery and solar costs have fallen to the extent that a “solar peaker plant” has become a reality. A “peaker plant,” which in the past has typically been driven by natural gas turbines, is a plant that can be quickly fired up to temporarily provide electricity to a utility during times of peak demand.
In fact, First Solar (FSLR) recently won a 15-year power-purchase agreement (PPA) to provide NextEra Energy, Arizona’s largest utility, with electricity during its peak demand period of 3-8 p.m. The plant includes a 65 MW solar panel system that will charge a 50 MW battery system, allowing the battery system to provide the electricity during the needed period of 3-8 p.m.
The solar-plus-battery peaker plant was less expensive than competing natural gas peakers and thereby won the contract. The solar-battery peaker plant is due to begin running in 2021. Pricing on the contract was not made public.
California mandates solar on newly-built homes
California in early May announced that most new homes built after January 1, 2020, will be required to have solar power systems. The mandate applies to all single-family homes and multi-family units of three stories or less. There is an exception for homes built on a shady plot.
The announcement was important as a sign of how solar is quickly becoming a mainstream solution for clean and cost-effective electricity generation.
The solar system will add an average of about $9,500 to the up-front cost of a home but will save the homeowner about $19,000 in energy savings over 30 years, leading to a net benefit of about $9,500 for the homeowner, according to the California Energy Commission.
The new mandate means that residential solar installs in California in 2020 will receive an extra boost of 200-300 MW (23-34%), adding to the already expected growth rate of 9%, according to BNEF.
U.S. homebuilders should have no problem adding solar systems to newly-built homes since many large homebuilders already offer solar power as an option. Most solar systems are likely to include batteries, which will further reduce the homeowner’s need to pay for grid electricity and reduce the homeowner’s exposure to any change in state net metering policies.
U.S. solar industry adjusts to Section 201 tariff
The U.S. solar industry is adjusting to the 30% tariff on imported solar cells and modules that the Trump administration announced on January 22. The 4-year tariff was less severe than feared but will nevertheless dampen U.S. solar growth over the next several years due to the increased cost of imported solar cells and panels.
The 30% tariff on imported crystalline solar cells and panels took effect on February 7. The tariff starts at 30% in 2018 and then steps down by 5 percentage points per year to 25% in 2019, 20% in 2020, and 15% in 2021, expiring in 2022. The first 2.5 GW of solar imports are exempt from the tariff. Thin-film solar panels, such as those produced by First Solar, are exempt from the tariff even if those panels are imported from overseas factories.
The tariff applies to imports from all major countries in which solar cells and panels are produced, including U.S. free-trade partners Canada and Mexico. There are a number of countries that are exempt from the tariffs, including India, Turkey, Brazil, and South Africa. However, imports from those exempted nations are capped at 300 MW each and at 900 MW as a group.
The Trump administration’s tariff decision was a response to the Section 201 safeguard trade case brought by foreign-owned manufacturers Suniva and SolarWorld, which had U.S. solar manufacturing plants that went bankrupt because they could not compete with non-U.S. factories.
The tariff is a net negative for the U.S. solar industry, which is dominated by installation companies and has very few American-based solar factories. In fact, the U.S. has so few manufacturers that it needs to import more than 80% of the solar panels that are installed in the U.S. The tariff will raise the average cost of solar installs, thus undercutting solar project economics and reducing the amount of solar installs.
The tariff will raise the cost of solar panels by 10 cents/watt to an average of 42 cents/watt in 2018, according to BNEF. That cost will fall over the next four years as the tariff steps down. Since the cost of a panel is only one part of an overall solar installation, BNEF expects the tariff to raise the total system cost by 8-10% for utility scale plants and by about 4% for residential rooftop systems.
Because of the tariff, BNEF reduced its forecast by an average of 16 percentage points per year during 2018-2021 for U.S. utility-scale solar installs. BNEF forecasts a smaller negative effect of 7 percentage points for the residential market during 2018-2021 because the panel cost is a smaller percentage of the overall system cost in residential solar systems.
The tariff will result in a net loss of about 23,000 U.S. solar jobs from the current total of about 250,000 solar jobs, according to Solar Energy Industry Association (SEIA). The SEIA points out that about 85% of the solar jobs in the U.S. are involved with installing solar installation systems. SEIA expects the tariff to reduce the number of solar installations and by extension the number of jobs involved with installations.
The tariff should marginally increase the number of solar manufacturing jobs, but not by nearly enough to offset the number of lost installation jobs. The SEIA estimates that there are about 38,000 solar manufacturing jobs in the U.S. but that only 2,000 of those jobs are involved with manufacturing solar cells and modules. The other 36,000 jobs are involved with manufacturing other solar products such as metal racking systems, tracking systems, and inverters.
The tariff is not expected to produce any big increase in the number of U.S. solar factories because the tariff provides only modest protection from foreign competition and lasts for only four years. The tariff does not provide enough protection for a company to justify sinking millions of dollars into a new U.S. solar manufacturing plant that over the long-term may have higher operating costs than overseas plants.
While the Section 201 tariff is a negative factor for the U.S. solar industry, the industry will nevertheless survive the latest of the many instances across the world of governmental trade interference in the solar industry. The tariff will reduce the U.S. solar growth rate from what it otherwise would have been. However, most U.S. solar projects will still have attractive economics and the U.S. solar industry will continue to grow at a solid clip.
Moreover, it is possible that the tariff could eventually be eliminated as part of a trade deal or by Congressional legislation. It is also possible that certain companies, or categories of solar imports, could be exempted from the tariff. For example, a group of eight Republican Senators from five solar-heavy states recently asked the Trump administration to provide a tariff exemption for the 72-cell, 1,500-volt panels that are typically used in large utility-scale solar farms.
From a global perspective, it is important to note that the U.S. solar tariff will have only a minor effect on the overall global solar growth rate. The U.S. accounted for only 11% of global solar installs in 2017, according to BNEF. That means that slower U.S. solar installs will have only a modest effect on the overall global solar growth rate. For example, if overall U.S. solar installs in 2018 suffer by an average of 15 percentage points from the Section 201 tariff, that would translate to a decline of only about 2% in worldwide installs (i.e., the 15 point U.S. decline multiplied by the 11% U.S. market share).