Read full report in PDF with graphs: MAC-Solar-Sector-Update-Jan-2019
Solar Index Performance
The MAC Solar Energy Stock Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN), rebounded sharply higher in January from the 1-3/4 year low posted in October 2018. The index is currently up +18% on the year, reversing part of the -27% decline seen in 2018. The index in 2017 showed a strong gain of +52%.
Bullish factors for solar stocks include (1) the improved global solar demand picture that has resulted from the sharp drop in solar module prices in 2018 and the fact that solar has now reached grid parity in many places, (2) the stabilization of solar cell and module prices in late 2018 that helped the profitability of solar manufacturers, (3) expectations for strong solar growth in Europe in 2019 as unsubsidized solar grows due to lower solar pricing and the end of Europe’s minimum import price (MIP) scheme, (4) broadening solar growth from India, Turkey, Latin America, Middle East, and Southeast Asia (see page 5 for the world solar growth outlook), (5) strong demand for renewable energy in general as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (6) the low valuation level of the solar sector.
Bearish factors for solar stocks include (1) the tail-end impact of China’s reduced subsidy support for solar that was announced in May 2018, which caused a big solar module inventory overhang and sharply lower solar module pricing during mid-2018, (2) the continued negative effect on U.S. solar from the Section 201 tariff of 30% on imported cells and modules that took effect in February 2018, and (3) the obstacle to India’s solar growth from the government’s safeguard tariff on solar modules.
Solar stocks continue to trade at low valuation levels compared with the broad market. The forecasted 2019 P/E of 14.6 for the companies in the MAC Solar Index is below the comparable figure of 15.8 for the S&P 500 index. The price-to-book ratio of 1.11 for the companies in the MAC Solar Index is well below the 3.17 ratio for the S&P 500. The price-to-sales ratio of 0.86 for the MAC Solar Index is well below the 2.03 ratio for the S&P 500.
Solar stocks recover in January with expectations for solid 2019 solar growth
Solar stocks in January recovered due to (1) the partial recovery of global stock markets in January after the downside correction seen during October-December, (2) the recovery of the global solar industry after the blow from China’s subsidy cut in May 2018, and (3) expectations for solid global solar growth in 2019.
Solar stocks were hit hard in mid-2018 after the Chinese government in May 2018 announced a sharp cut in its subsidy support, which caused a big drop in Chinese solar demand and a big drop in global solar pricing. However, the drop in Chinese demand was less severe than initially expected and solar pricing stabilized in late 2018, which helped to stabilize the profitability of solar manufacturers. Meanwhile, the sharp drop in solar pricing in 2018 was a windfall for solar developers, who can now bring more projects to market since solar is now even more competitive against alternatives like wind and natural gas.
The sharp drop in solar pricing in 2018 has made large-scale solar very competitive and is drawing major purchasing interest from utilities and corporations. A big pipeline of global solar projects has built up over the past year, which supports expectations for a strong year for solar in 2019. In China, the new year has brought the return of China’s solar subsidy programs as well as a pilot program for unsubsidized solar projects. In the U.S., solar is expected to be strong over the next several years as developers seek to take advantage of the investment tax credit (ITC) before it steps down to 10% in 2022. In Europe, utility-scale project pipelines are filling up now that solar has become competitive on an unsubsidized basis.
Solar’s electricity cost falls 12% and becomes even more competitive vs fossil fuels and nuclear
The levelized cost of electricity (LCOE) for newly-built utility-scale solar PV plants in late 2018 fell by -13% yr/yr to a midpoint of $43 per MWh ($40-46 range) for crystalline PV on an unsubsidized basis, according to Lazard in the latest annual edition of its comprehensive “Levelized Cost of Energy Analysis-Version 12.0” released in November 2018. The LCOE for thin-film solar fell by a similar -12% yr/yr to a lower mid-point price of $40 per MWh ($36-44 range).
While the cost of residential and corporate solar PV systems remains substantially higher than the cost of utility-scale solar, it also fell from year-earlier levels. The Lazard report found that the unsubsidized mid-point LCOEs are as follows: Community Solar -4% yr/yr to $109/MWh ($73-145 range), Roof-Top Commercial and Industrial -10% yr/yr to $125.5/MWh ($81-170), and Rooftop Residential -16% yr/yr to $213.5/MWh ($160-267).
Lazard’s latest LCOE report shows that solar PV now easily beats the cost of newly-built coal plants ($60-143/MWh), nuclear plants ($112-189/MWh), and gas-peaking plants (($152-206/MWh). The Lazard data shows that in most areas it is no longer economical for a utility to build any new coal or nuclear plants.
Regarding the natural gas comparison, the crystalline solar PV cost range of $40-46/MWh is now at the lower end of the range of $41-74 for gas combined cycle plants, illustrating how solar either beats or at least matches natural gas, depending on the parameters of a specific project. The $43/MWh mid-point of solar crystalline PV is actually -25% below the mid-point of $57.5/MWh for natural gas for an average project.
While solar clearly wins against coal and nuclear for newly-built plants, the fact remains that existing coal and nuclear plants are still relatively cheap to operate. Lazard estimates the average marginal cost for running a nuclear plant is only $28/MWh for nuclear and $36/MWh for coal.
That comparison shows that solar and wind are not yet cheap enough that utilities have an economic incentive to mothball all their existing nuclear and coal plants and build new solar, wind and gas plants. However, as coal and nuclear plants reach the end of their useful life, utilities will clearly decide to switch to building new gas, solar and wind plants based on economics, with gas being their preference for baseload until storage starts to play a bigger role.
The average age of power plants in the U.S. is 39 years for coal plants and 37 years for nuclear plants, illustrating that utilities are facing pressure to build new electricity plants as old coal and nuclear plants reach the end of their useful life and must be retired. In addition, increased pollution and carbon constraints mean that the marginal cost of operating coal plants will be headed higher over the long run, thus encouraging utilities to phase out their aging coal plants sooner rather than later.
NextEra Energy is going big on Florida solar
Utility-giant NextEra Energy Inc. is planning $10 billion worth of utility-scale solar PV farms in Florida. The program would be the world’s largest-ever solar build-out by a regulated utility. The plan involves building about 130 solar farms through 2030 with a total of 30 million solar modules generating 10 GW of electricity.
The utility is asking regulators to approve the plan based on its estimate that the solar plants will substantially reduce electricity costs for Florida’s electricity users. The utility says that each of the 130 solar farms could save electricity rate-payers some $40 million in fuel costs over its life.
Solar beats wind in head-to-head auctions in Europe
Solar has consistently beat wind on cost in recent head-to-head contests in European power auctions. In Germany, for example, solar parks took all of the 201 MW of renewable power tendered in October. The only wind proposal that was submitted in that German tender was dropped because of its high price. The average winning solar bid was an impressively low 52.7 euros ($60.1) per MWh.
In France, solar was awarded all of the 200 MW of capacity in a renewable power auction that was held in November. A total of 16 solar projects were chosen. No wind projects were chosen because of higher wind pricing. The average price of the accepted solar projects in the auction was 54.9 euros ($62.6) per MWh.
Separately, Germany in 2018 received more of its electricity from renewables than it did from coal for the first time ever. Renewables (wind, solar, hydro and biomass) generated just over 40% of Germany’s electricity in 2018, beating coal’s 39% share, according to the Fraunhofer Institute. Solar’s electricity-generation share grew by 20% in 2018. Coal lost ground as old plants were mothballed. Germany is working on a plan to eventually phase out its nuclear plants.
U.S. National Climate Assessment sees grim future
The U.S. “Fourth National Climate Assessment” offered a grim warning for the U.S. if action is not taken on global warming. The report found that global warming is already negatively affecting the U.S. with a 1.8 degree Fahrenheit rise in temperatures in the last 100 years, a 9-inch rise in ocean levels on the coasts, and far worse heat waves than have been experienced as recently as 50 years ago. The report said that damage from climate change is “intensifying across the country.”
The report warns that millions of people may have to be relocated away from the coasts. The report says, “The potential need for millions of people and billions of dollars of coastal infrastructure to be relocated in the future creates challenging legal, financial, and equity issues that have not yet been addressed.”
The report estimates the dollar costs related to global warming. The report says that in the worst-case climate-change scenario, labor-related losses as a result of extreme heat could rise to $155 billion annually by 2090, deaths from temperature extremes could represent an economic toll of $141 billion, and coastal property damage could total $118 billion annually.
The report notes that other effects of climate change include reduced snow and water supplies in the western U.S. mountain ranges, bleached coral reefs, increased wildfire damage, and disruption to Alaska’s ecosystems such as ice-clogged coastlines and thawing permafrost.
The report is the U.S. government’s fourth comprehensive assessment of U.S. climate-change impact issued since 2000. The report is mandated by Congress and is issued every four years. The November report was compiled by 13 federal departments and agencies and by the U.S. Global Change Research program. The report was compiled independently of the White House and a NOAA spokeswoman said the report was not “altered or revised in any way because of political considerations.”
IEA forecasts that solar will become second largest electricity source by late-2030’s
The International Energy Agency (IEA) in its latest annual “World Energy Outlook” published in November predicted that solar by the late-2030s will become the world’s second largest electricity source behind natural gas, as seen in the above graph. The IEA predicted annual growth for solar of +8% through 2040, reaching 2,500 GW in 2040 from about 400 GW in 2017.
The IEA in the past has woefully under-estimated solar’s actual growth rates. Indeed, the IEA in its latest report was forced to raise its solar forecasts by 20% from the year-earlier report. Even after that hike, the IEA is still lagging far behind solar forecasts by Bloomberg New Energy Finance (BNEF). BNEF is forecasting that solar will beat even natural gas to become the largest source of electricity by 2032 and that solar will show an annual growth rate of +12% through 2040.
The IEA report also warned that “unprecedented” investment action is needed to avert a climate crisis. The IEA says that global CO2 emissions rose by +1.6% in 2017 and will continue to rise slowly through 2040.
Solar-plus-storage takes off in Hawaii
The Hawaiian utility company Hawaiian Electric in early January sent seven solar-plus-storage contracts to state regulators for approval with a record-low average price of 9 cents per kWh ($90/MWh). Two of the projects came in at 8 cents/kWh. The combined size of the seven solar-plus-storage systems is 262 MW of solar and 1.048 GWh of storage. The projects will be built on three different Hawaiian islands.
The average price of 9 cents/kWh for the Hawaiian solar-plus-storage projects is well below Hawaii’s cost of about 15 cents per kWh for generating electricity by burning oil. Hawaii is heavily dependent on burning oil for its electricity since oil accounts for 74% of Hawaii’s total electricity generation, according to the U.S. Energy Information Administration (EIA). Hawaii has adopted a goal of going 100% renewable by 2045. Hawaii currently generates about 14% of its power from renewable sources with the rest being oil (74%) and coal (12%), according to the EIA.
Meanwhile, a solar-plus-storage project on the island of Kauai that is owned and operated by AES Corp is ready to go on line with power-purchase-agreement (PPA) pricing of 11 cents/kWh. The size of the plant is 28 MW of solar PV and 100 MWh of lithium-ion battery capacity.
The 8-11 cent/kWh pricing of these various Hawaiian solar-plus-storage projects is at or below Lazard’s LCOE estimate for a solar-plus-lithium-battery system of 10.8-14.0 cents/kWh in its November “Levelized Cost of Storage Analysis V4.0” report. The low prices of the recent solar-plus-storage projects in Hawaii are particularly impressive given the relatively high construction costs on islands in Hawaii.
On the U.S. mainland, solar-plus-storage systems are coming in at significantly lower prices. A solicitation last year by Xcel Energy for a solar-plus-storage plant in Colorado saw a median bid of an extremely low 3.6 cents/kWh for delivery in 2023. That was lower than a deal signed by Tucson Electric in May 2017 of 4.5 cents/kWh.
Solar-plus-storage will become even cheaper in coming years. Lithium-battery prices have already plunged by 85% since 2010 and will fall by another 52% by 2030, according to BNEF.
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