Read report in PDF with graphs: MAC-Solar-Sector-Update-Apr-2015
Solar Index Performance
The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has rallied sharply by +32% so far this year, regaining strength after falling by -2% in 2014. The MAC solar index in 2013 soared by 127%.
Solar stocks surged during the first quarter of 2015 on bullish factors including (1) broadly positive Q4 earnings news across the solar sector and positive guidance for 2015, (2) announcements by more solar companies that plan to form yieldcos, (3) indications of strong world solar demand that has solar companies running at high utilization rates and planning more capacity, (4) news that China boosted its 2015 PV installation target by 19% to 17.8 GW from the preliminary figure of 15 GW, (5) the stabilization of crude oil prices and the broader realization that crude oil prices and solar stocks have little connection, and (6) heavy short-covering.
Negative factors for solar stocks included (1) continued solar trade disputes, (2) the need for solar profit margins to improve further, and (3) a shaky overall U.S. stock market picture due to high valuations and weaker earnings tied to the strong dollar.
The fundamentals of the solar industry remain favorable with strong end-user demand, stable polysilicon and solar panel pricing (see charts on p. 3), right-sized industry capacity, and improving profitability among solar manufacturers.
U.S. solar grew 30% in 2014 and more than 500 MW of residential solar was without state support
The U.S. installed 6.2 GW of solar PV in 2014, up 30% yr/yr, according to a report by GTM Research and SEIA (link). Notably, residential solar reached a record annual install level of 1.2 GW in 2014 and more than 500 MW of that was installed without any state-level support. That indicates how U.S. residential solar is spreading beyond states that provide strong solar support such as California due to falling solar costs. Solar accounted for 32% of new U.S. electricity generation capacity in 2014, coming in second behind natural gas but ahead of coal and wind. For 2015, GTM Research is forecasting a further 31% increase in solar installs to 8.1 GW.
Meanwhile, California became the first state to obtain more than 5% of its utility-scale electricity from solar. The total solar-generation figure is even higher after taking into account California’s 2.3 GW of roof-top solar. California has aggressively promoted solar with its 33% renewable portfolio standard and other rebate incentives and net-metering policies to support smaller-scale solar.
First Solar and SunPower surprise the markets with a joint yieldco
First Solar (FSLR) and SunPower (SPWR) surprised the markets in February by announcing a joint yieldco named “8point3 Energy Partners” for the number of minutes it takes for light to reach earth from the sun. The firms filed an IPO prospectus for the yieldco. The stock prices of both First Solar and SunPower rallied on the news. The two companies apparently went into a joint-venture yieldco in order to boost the number of the projects available for the yieldco and create some economies of scale.
In a yieldco model, a solar company spins off a self-contained development subsidiary that owns and operates large-scale solar farms under long-term power purchase agreements with investment-grade utilities or corporations. Yieldcos pay an attractive and predictable dividend flow to investors. The low-risk yieldco typically has a low cost of capital to finance the project purchases. The yieldco model allows the parent company to free up its balance sheet to focus on manufacturing, services, installation, and project development, but the solar parent still receives long-term cash flow from those projects via its partial ownership of the publicly-traded yieldco.
The yieldco model has quickly proven itself in the solar energy industry. SunEdison in July 2014 launched its TerraForm Power (TERP) yieldco and has filed a prospectus for a second yieldco for overseas projects. Abengoa in June 2014 spun off its yieldco Abengoa Yield (ABY). Many of the other major solar companies have indicated an interest in spinning off their own yieldcos.
Apple’s $848 million solar purchase is largest ever for U.S. corporation
Apple in early February announced a deal to purchase $848 million worth of electricity from a First Solar solar plant in Monterey County, California on a 25-year power purchase agreement (PPA). Apple’s purchase of 130 MW of electricity is enough to power its headquarter offices, its California retail stores, and one of its data centers. This is the largest solar power purchase yet by any U.S. corporation, other than utilities. Apple CEO Tim Cook said, “We’re doing this because it’s the right thing to do, but you may also be interested to know that it’s good financially to do it. We expect to have a very significant savings because we have a fixed price for the renewable energy.”
Solar gains popularity among institutional investors
Google announced a $300 million investment in a $750 million SolarCity (SCTY) fund that will finance roof-top solar projects. Google expects to earn a return as high as 8% on its investment. SolarCity is currently the only sponsor for solar asset-backed securities (ABS) based on roof-top solar, but Moody’s in January released a report saying that “Solar ABS” is emerging as a distinct asset class. Meanwhile, some institutional investors are investing in solar by owning the actual solar farms. For example, two Canadian pension funds, the Ontario Teachers’ Pension Plan and the Public Sector Pension Investment Board, are teaming up with Santander in a joint venture to own $2 billion worth of solar, wind and water infrastructure assets. The renewable infrastructure assets are attractive to institutional investors due to low risk, attractive long-term cash flows, and portfolio diversification.
Solar homes fetch $15,000 premium
U.S. homes outfitted with rooftop solar PV fetched an average premium of $15,000 upon the home’s resale, according to an in-depth study by the U.S. Department of Energy’s Berkeley Lab in partnership with Sandia National Labs (link). The study bolstered the case for homeowners to install solar since the solar system boosts the value of their home as well as reduces their electricity costs and insulates them from rising utility electricity prices.
Residential solar is going mass market
SolarCity (SCTY) in March announced a partnership deal with DirecTV that allows DirecTV service reps to sell SolarCity solar power systems. This gives SolarCity access to DirecTV’s 37 million customers in the U.S. and Latin America. SolarCity already has sales partnership deals with Home Depot and Honda. The DirecTV deal is another example of how residential solar is going mass market.
U.S. solar jobs grow at 20 times the national average and now outstrip coal industry
U.S. solar jobs in 2014 grew at nearly 20 times the national average rate and accounted for 1.3% of all new jobs in the U.S., according to the Solar Foundation’s National Solar Jobs Census 2014 (link). U.S. solar jobs have grown by roughly 20% in each of the last two years and the forecast is for further 21% job growth in 2015. The solar sector now employs 173,807 workers, which is nearly double the 93,185 jobs in the coal mining industry and not far behind 215,700 jobs in the oil & gas extraction industry.
Americans support solar more than any other energy source
Americans support solar development more than any other energy source, according to a Gallup poll released in March (Gallup link) (SEIA article). The poll found that 91% of Americans favor the same or more emphasis on solar, higher than 87% for natural gas, 84% for wind, 68% for oil, 63% for nuclear, and 55% for coal. The poll suggests strong grass-roots political support for solar among American voters even if some Congressional representatives aren’t reflecting that grass-roots support.
China raises its 2015 solar target to 17.8 GW to achieve world’s largest installed solar base
China’s energy regulator, the National Energy Administration, in mid-March raised its national 2015 solar installation target to 17.8 GW, which was 19% higher than its preliminary target of 15 GW announced in January. The announcement gave a boost to Chinese solar stocks in March. The 2015 target of 17.8 GW represents 27% growth from the 2014 target of 14 GW. If the target is reached, China by the end of 2014 will have about 45 GW of installed solar capacity, leapfrogging Germany as the world’s largest installed-solar country. Germany had about 38 GW of solar capacity at the end of 2014.
China’s “Under the Dome” film goes viral and increases pressure on Chinese government to address pollution
The online documentary film “Under the Dome,” made by well-known China Central Television newscaster Chai Jing, was seen online by more than 150 million people in just its first days, which certainly qualifies as “going viral” (link). The impact of the film in China has been likened to America’s “Inconvenient Truth” film and the 1962 book on pesticides named “Silent Spring” by Rachel Carson that led to the ban on DDT and was instrumental in the creation of the U.S. Environmental Protection Agency.
The film highlights Chai Jing’s investigation into China’s major pollution problems as a means of understanding the risks from pollution to her young child, whom had a benign tumor at birth and whom she had to keep inside “like a prisoner” on extremely bad air days that amounted to nearly half of the days in 2014.
“Under the Dome” provided some support for Chinese solar stocks in March with the theme that China’s horrendous air pollution means the Chinese government has no choice but to reduce the country’s dependence on coal and increase its reliance on clean sources of electricity such as solar. Some Wall Street analysts went so far as to say that the film represents a watershed moment for China’s environmental policy and the awakening of the Chinese public to the need for solutions to China’s pollution problems.
Middle East is shocked at solar potential after 5.85 cent/kWh Dubai project
The Middle East was shocked to learn that the Dubai Electricity & Water Authority in Nov 2014 accepted a bid for a 200 MW solar power plant with a price of 5.85 U.S. cents/kWh (without subsidies) under a 25-year power purchase agreement. Various Middle East countries are in the midst of a big push to install solar to meet the strong growth in electricity demand. Middle East and North African countries will announce $2.7 billion worth of solar projects this year, according to the Middle East Solar Industry Association. Saudi Arabia has pushed back its solar plans due to reduced government revenue after the plunge in oil prices, but Saudi Arabia still plans to install 41 GW of solar capacity by 2040.
Middle East countries can now install large-scale solar power for the equivalent of only $25-30 per barrel of oil in a new oil-burning electricity plant, according to a report for the National Bank of Abu Dhabi written by the University of Cambridge and PwC (link). That means that it makes much more economic sense for oil producers to install solar and then sell their oil on the world markets at current prices near $56/bbl, or retain oil reserves in the ground for future sale, rather than burn that oil to generate electricity. Saudi Arabia currently obtains about 65% of its electricity from burning oil.
U.S.-Chinese solar duties are finalized while EU enforces previous trade agreement
The U.S. International Trade Commission (ITC) on Jan 21 finalized the duties levied by the U.S. Commerce Commission against Chinese solar companies that evaded the previous ruling by sourcing solar cells from Taiwanese suppliers. The ITC ruling finalized the latest round of the long-running U.S.-Chinese solar trade spat. Meanwhile, the EU announced that it planned to apply tariffs to three Chinese PV firms (Canadian Solar, ReneSolar, and ET Solar) that the EU says violated the 2013 EU-China trade agreement. ReneSolar responded by saying it will withdraw from the agreement while Canadian Solar and ET Solar pleaded innocent and said they plan to fight the proposed order. Canadian Solar said it does not see the EU order having a “significant impact” in its 2015 guidance.
SolarCity sues Arizona utility that is trying to slow solar by imposing surcharges
Many utilities have grown comfortable with their monopoly power and co-opted regulatory commissions. However, utilities are now becoming very concerned about the inroads that solar is making into their customer base and reducing demand for their product.
One utility in Arizona, Salt River Project (SRP), thinks it found a solution for battling solar by imposing surcharges on customers who install solar, thus replacing their lost revenue and making solar less economically attractive. The regulatory commission in SRP’s service area approved the utility’s surcharge plan despite the fact that about 500 solar users showed up at a commission hearing to protest the plan. However, SolarCity then sued the utility, charging that the surcharges are discriminatory and anti-competitive.
This is only the beginning of what will be a long war as the utility industry tries to fend off the disruptive technology offered by solar. As seen with other disruptive technologies, legacy companies can sometimes use their money and political clout to slow the new technology, but better customer solutions nearly always win in the end.
Meanwhile, the residential solar industry had a big win in red-state Georgia where the Georgia Senate passed a bill allowing third-party solar leasing for homes and businesses. Georgia’s governor is expected to sign the legislation. House Bill 57, “Solar Power Free-Market Financing Act of 2015,” allows third-party lessors to sell electricity to homeowners and businesses which was previously the privilege of only monopoly electric utilities. Florida is one of the few other states that does not allow third-party leasing, which is a key reason why Florida has been a laggard in installing solar.
Solar plane is nearly half-way through its around-the-world flight
Solar Impulse 2 has successfully completed 5 of the 12 legs on its around-the-world trip (see www.solarimpulse.com). The plane is flying solely on power generated by solar panels on its wings and fuselage. The plane is not using any fuel or emitting any pollution. The founders of the project do not expect commercial airliners to convert to solar panels, but they are seeking to “demonstrate that the actual alternative energy sources and new technologies can achieve what some consider impossible.” The project illustrates how solar power can be suitable for even a mission-critical operation such as plane flight.