As part of the regular quarterly index review process that takes effect as of the close of business on December 21, 2018, China Singyes Solar Technologies (750 HK) will be removed from the index. There are no other changes.
Read full report in PDF with graphs: MAC-Solar-Sector-Update-Oct-2018
Solar Index Performance
The MAC Solar Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN), has fallen sharply from May’s 1-3/4 year low to post a new 14-month low. The index is currently down -24.2% on the year, reversing part of the annual +52% gain seen in 2017.
Bearish factors for solar stocks include (1) China’s sharply reduced subsidy support for solar that was announced on May 31, 2018, which caused an inventory overhang and sharply lower solar panel pricing, (2) the Trump administration’s 4-year 30% tariff on imported cells and tariffs that took effect in February, which dampened U.S. solar install growth, and (3) ongoing solar trade disputes that have resulted in tariffs and various market dislocations.
Bullish factors for solar stocks include (1) the improved solar project economics that have resulted from the sharp drop in solar panel prices, (2) Europe’s decision to end its duties and minimum price scheme on Chinese solar panels, which will improve European solar growth, (3) broadening solar growth from India, Turkey, Latin America, the Middle East, and Southeast Asia (see page 5 for the world solar growth outlook), (5) strong demand for solar power as solar reaches grid parity and as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (6) low valuation levels that indicate that solar stocks are very cheaply priced.
Solar stocks are trading at very low valuation levels compared with the broad market. The median trailing P/E for the companies in the MAC Solar Index is currently 14.6, which is far below the comparable figure of 20.0 for the S&P 500 index. Meanwhile, the median forecasted 2018 P/E of 15.5 for the companies in the MAC Solar Index is well below the comparable figure of 17.0 for the S&P 500 index. The median price-to-book ratio of 1.21 for the companies in the MAC Solar Index is well below the 3.34 ratio for the S&P 500. The median price-to-sales ratio of 1.12 for the MAC Solar Index is well below the 2.16 ratio for the S&P 500.
Solar stocks are undercut by reduced Chinese subsidies
Solar stocks have fallen sharply since the Chinese government on May 31, 2018, surprised the industry with a sharp cut in its subsidy support for solar. That resulted in a sharp overhang of excess panel supplies and a sharp decline in solar cell and panel pricing, which in turn put downward pressure on the profits of solar manufacturers.
However, the lower pricing is bullish for the solar industry as a whole on a longer-term basis since it means that solar is becoming even more competitive against alternatives and can increasingly stand on its own without government support. The lower pricing is supportive for solar developers and installers who can boost their profit margins and who will see increased demand due to more attractive project economics.
Solar stocks also saw weakness in early October as the broad market fell into a sharp downward correction and as Chinese stocks fell to a 3-3/4 year low. On the bullish side, solar stocks are now priced at very cheap levels that should attract value buyers. Solar stocks should be able to recover in coming months as the industry works down the excess inventories and as demand strengthens.
UN IPCC says renewables growth must greatly accelerate to curb climate change
The UN Intergovernmental Panel on Climate Change (IPCC) in early October released a report saying that the annual growth of renewables needs to accelerate by seven-fold from current levels if the world wants to come close to halting the worst effects of climate change.
The IPCC report was written by 91 scientists from 40 countries drawing upon more than 6,000 scientific studies. Commenting on the IPCC report, former Norwegian Prime Minister Gro Harlem said, “This report is not a wakeup call. It is a ticking time bomb. Climate activists have been calling for decades for leaders to show responsibility and take urgent action, but we have barely scratched the surface of what needs to be done.”
The world has already warmed by 1 degree Celsius (1.8 degrees Fahrenheit) since pre-industrial times and the effects of climate change are already being felt. The Paris Climate agreement seeks to limit global warming to “well below” 2 degrees Celsius (3.6 F). However, the fact that the world is not living up to its Paris commitments suggests that the world is on its way to a temperature rise of at least 4 degrees (7.2 F) by 2100.
A temperature rise of just 2 degrees Celsius (3.6 F) would be bad enough with IPCC forecasting that: (1) coral reefs would mostly disappear, (2) the sea level would rise by nearly three feet and subject 32-80 million people to flooding, (3) about 37% of the world’s population would be exposed to severe heat waves, (4) 411 million more people would be exposed to the effects of severe drought, and (5) the need would arise for a “disproportionately rapid evacuation” of people from the tropics. CarbonBrief.org has an informative factsheet on the impact of climate change at various temperature increases.
In order to avoid the worst effects of climate change, the IPCC concludes that the world must limit warming to 1.5 degrees Celsius (2.7 F). The IPCC says that this would require CO2 emissions to be cut by 45% by 2030 from 2010 levels and to zero by 2050.
The IPCC’s middle-range recommendation to meet that 1.5 degree Celsius goal is that (1) renewables should supply 70-85% of power generation by 2050, (2) coal should be cut to 2% of power generation capacity or less, and (3) natural gas should be cut to 8% of total capacity if sufficient carbon capture technologies can be deployed to offset the emissions from burning natural gas.
To get to that goal, the world would need to boost annual investment in clean energy to $2.4 trillion per year through 2035, representing a seven-fold increase from current levels.
If the global temperature continues to rise unchecked, the IPCC estimates the damage at $54 trillion from 1.5 degrees Celsius (2.7 F) of warming and $69 trillion from 2 degrees Celsius (3.6 F) of warming.
Subsidy-free solar is spreading quickly as solar reaches grid parity
With its subsidy cut in May, China became the latest country to realize that it is no longer necessary to provide big subsidies to the solar industry since solar pricing has reached grid parity in many areas.
Recent competitive auctions, for example, have produced extremely low subsidy-free solar pricing of under 2.5 cents/kWh in Jordan and under 3 cents/kWh in Egypt for projects financed by the European Bank for Reconstruction and Development.
Indeed, subsidy-free solar is spreading quickly throughout the world in Europe, Latin America, Middle East, and southeast Asia. The U.S. and Japan are now the only major countries that are still providing strong subsidy support to solar, although both of those countries are progressively stepping down that support. The U.S. solar investment tax credit (ITC), for example, is already scheduled to largely phase out by 2022.
The move to subsidy-free solar is being seen in Europe where governments have largely dropped their previous solar support via generous feed-in tariff (FIT) programs. Europe is moving quickly towards competitive auctions and private development without subsidies. SolarPlaza reports that 2.5 GW of subsidy-free solar has been announced in the last six months just in Portugal, Spain, Italy and France.
In Spain, there is a pipeline of 29 GW of subsidy-free solar projects in the planning or construction stage, including 3.9 GW tendered by the government, according to Spain’s national solar trade group, UNEF.
UNEF chief Jose Donoso said, “The market has realized that they can expect very little from the government and they aren’t going to wait around for a new support scheme. With the degree of competitiveness that solar has, we can go straight to the market on a merchant basis or we can look for PPAs, without any need for input from the government.”
Spain’s Energy Minister Jose Dominguez Abascal said at a recent London conference, “We are not thinking of subsidies at all. At this moment the cheapest way of producing electricity in Spain is the sun. It’s much cheaper than any other form of energy. At this moment in Spain there are gigawatts that are under construction without any knowledge of the government.”
The growing use of power-purchase agreements (PPAs) is accelerating the ability of solar developers to build and finance subsidy-free solar projects. When a large corporation or utility signs a long-term contract to buy electricity from a solar facility with a PPA, the solar developer can then use that PPA to help guarantee the bank financing. Subsidy-free solar projects are also being built on a merchant power basis where the owner of the solar facility takes on the risk of electricity price fluctuations and sells electricity directly to the wholesale electricity market.
Chinese solar shake-out results from government’s “China-531” subsidy cut
The Chinese government on May 31, 2018 surprised the industry by announcing a dramatic cut in its subsidy support for solar. The Chinese government’s policy action has become known as “China-531” since it was announced on May 31.
Before May, the Chinese government had been providing generous subsidy support to the industry, thus causing runaway solar production and demand. In addition, the Chinese government’s subsidy backlog reached an unsustainable $17 billion. The government in May therefore bowed to reality by cutting subsidy support and forcing the industry to downsize to more sustainable long-term levels.
The Chinese government’s 531 order was contained in the “2018 Solar PV Power Generation Notice” issued jointly by the China’s state planner The National Development and Reform Commission (NDRC), the Ministry of Finance, and the National Energy Administration. The order removed subsidy support for utility-scale solar until further notice. For roof-top distributed generation (DG), the order capped support at 10 GW for 2018 (which was already reached by mid-2018), and also shifted responsibility for the feed-in tariff (FIT) to the local level from the central government level.
The government also cut the tariff for ordinary solar farms by -9% and cut the subsidy for DG projects by -14% or 0.3 yuan/kWh. The government instructed utility-scale solar projects to use competitive bidding to choose developers. The government left its solar Poverty Alleviation and Top Runner programs unchanged. The government also left residential solar policies unchanged.
The Chinese government clearly intends to move over time to subsidy-free auctions for providing solar resources, which is a strategy that is working well in many other countries. While the Chinese solar industry is currently experiencing a serious dislocation from this policy switch, the industry will come out on the other side as a much more sustainable and competitive industry.
The China-531 action caused a sharp drop in forecasts for China’s 2018 solar installs to about 30-40 GW from previous forecasts near the 2017 install rate of 53 GW, indicating an expected year-on-year decline of 25%-40%. China already installed 24 GW of solar in the first half of 2018, according to the China Photovoltaic Industry Association, which indicates that Chinese installs will be very low in the second half of 2018.
The cut in forecasts for Chinese solar installs caused a cut in forecasts for global installs as well since China in 2017 accounted for 54% of global market share. Indeed, BNEF, as a result of China-531, cut its 2018 global install forecast by 12 GW to 95 GW from its January forecast of 107 GW, implying a -3% year-on-year drop in 2018 installs.
The sharp slow-down in Chinese installs in the second half of 2018 means that the industry must work off a big overhang of excess inventories, which is driving down solar prices. In addition, there is no doubt that a significant number of smaller solar companies with me-too technology and a lack of scale will be forced to shut down. Over the medium-term, that will force the inefficient players out of the market and allow the Tier 1 solar companies to stabilize their pricing and profitability.
China-531 has caused silicon module prices to plunge by -20% since May to a record low of 23.3 cents/watt, according to PV Insights. Meanwhile, multicrystalline silicon solar cell prices have plunged by -52% since May to the current record low of 11 cents/watt, according to BNEF. Polysilicon prices have plunged by -30% since May to a record low of $10.87/kg.
The main impact of the Chinese government’s cut in solar subsidies is being felt by domestic producers in mainland China. However, China-531 is having a major impact on the world solar markets as well due to the sharp drop in solar pricing and the attempt by Chinese solar companies to off-load excess panels overseas.
The current solar shake-out is somewhat similar to the last major solar shake-out in 2012/2013, which was also driven by excess subsidies and temporary overcapacity. However, the current shake-out should be substantially less severe since the solar industry is now spread out across the whole world and there are now many countries that can absorb solar inventories, particularly at such low and economically attractive prices.
California mandates 100% carbon-free electricity by 2045
California in September passed a law that requires 100% carbon-free power for the state by 2045. That made California the second state after Hawaii to adopt a 100% carbon-free mandate.
The mandate is expected to allow large-hydro and nuclear to qualify for the carbon-free goal, which is important since large-hydro currently accounts for 15% of California’s electricity and nuclear accounts for 9% of California’s electricity. The main goal of the legislation is to phase out fossil fuels, which currently account for 47% of California’s electricity (natural gas 34%, coal and other 13%).
The need for California to meet its carbon-free goals means that California will significantly step up its efforts to build solar and wind facilities. In addition, California will step up its focus on using batteries to compensate for the intermittent nature of solar and wind resources, thus allowing solar and wind plus storage to provide 24/7 base-load electricity to the grid.
U.S. solar industry adjusts to import tariffs
The U.S. solar industry since the beginning of this year has been buffeted by import tariff challenges but is adapting and moving forward.
The biggest challenge came from the Section 201 safeguard 30% tariff on imported solar cells and modules that took effect on February 7, 2018. That tariff started 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 tariff has been a negative factor 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 is putting upward pressure on the cost of solar installs, thus making solar project economics less attractive. However, the good news is that the sharp drop in solar panel pricing seen from the China-531 policy move has partially offset the upward price effects from the U.S. 201 tariff.
The U.S. solar installation industry is adjusting to the tariff by using stockpiled or non-tariffed panels, such as those produced by First Solar (FSLR) and those imported from countries not covered by the tariff. SunPower (SPWR) can now also supply non-tariffed panels since it received an exemption from the tariff for its IBC panels.
In addition, several Chinese companies have announced plans to build manufacturing facilities in the U.S. so that they can sell panels not subject to the tariff. Unfortunately, those new factories will take time to build and will be highly automated, which means they will not produce a large number of new jobs.
In some good news related to the Section 201 safeguard tariff, the IRS in June announced that solar developers will be able to qualify for the Investment Tax Credit (ITC) in the year in which “construction” begins, which is defined as either the beginning of physical work or upon the expenditure of at least 5% of the total project cost. That means that developers of big utility solar plants that take multiple years to complete will be able to qualify for a 2018-2021 ITC credit while delaying the actual purchase of their panels until later years when the 201 safeguard tariff will be lower or phased out.
Aside from the 201 safeguard tariff, the U.S. solar industry was also hurt by the Trump administration’s tariffs on imported steel and aluminum implemented on May 31. Those tariffs sparked higher prices for the steel and aluminum that is used in the ground and roof racking systems that are used to support solar panels.
Another challenge emerged when the Trump administration placed a 10% tariff on Chinese inverters as part of its move to place tariffs on $200 billion of Chinese goods effective September 24. That tariff will rise to 25% on January 1, 2019. The inverter tariff will make it difficult for the big Chinese inverter companies such as Huawei and Sungrow to achieve market penetration into the U.S, with inverters they manufacture in China.
The good news for U.S. solar industry is that there are already plenty of inverter sources for U.S. installers other than China. Major inverter companies such as Enphase (ENPH) and SolarEdge (SEDG) are expected to see little impact from the tariffs on Chinese-built inverters since they can shift what production they have out of China to other countries in order to avoid the tariffs.
Europe ends its failed anti-dumping program
The EU ended its anti-dumping duties against solar panels imported from China and the associated minimum import price (MIP) scheme effective September 3. That MIP scheme had been in place since 2013 when the EU tried to protect local European solar manufacturers from Chinese competition.
The EU was forced to finally end the MIP scheme as its failure became clear. The scheme did not lead to a flourishing European solar manufacturing base. The MIP instead only caused higher solar panel prices for European solar projects, thus curbing the growth of solar power installs in Europe. The failure of Europe’s MIP is a lesson to other countries that protectionist measures are unlikely to meet their intended goals.
Commenting on the end of the EU’s MIP scheme, the president of SolarPower Europe, Dr. Christian Westermeier, said, “This is a watershed moment for the European solar industry. By removing the trade duties, the European Commission has today lifted the single biggest barrier to solar growth in Europe. The Commission’s move to end the trade measures is unquestionably the right one for Europe. We expect to see a significant increase in solar jobs and deployment — which will only propel the energy transition in Europe.”
The end of the European MIP scheme is a bright spot for the global solar industry since European solar installs should now see a significant increase due to more attractive project economics.
There will be no changes in the constituent stock list as part of the regular quarterly index review process that will take effect as of the close of business on September 21, 2018.
As part of the regular quarterly index review process that takes effect as of the close of business on June 15, 2018, Beijing Enterprises Clean Energy Group Ltd (1250 HK) will be added to the Index with an exposure factor of 1.0.
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).
As part of the regular quarterly index review process that takes effect as of the close of business on March 16, 2018, the following two stocks will be added to the index: Enphase Energy Inc (ENPH US) and Solaria Energia (SLR SM), both with an Exposure Factor of 1.0. Also, the following two stocks will be removed from the index due to acquisition activity: Ja Solar Holdings Co Ltd ADR (JASO US) and 8point3 Energy Partners LP (CAFD US). Also, Shunfeng International Clean Energy Ltd (1165 HK) will be removed from the index.
TerraForm Global Inc (GLBL US) will be dropped from the index effective on the close of December 29, 2017, and the weight will be distributed on a pro-rata basis to the other index constituents. TerraForm Global is being acquired by Brookfield Asset Management.
Read report in PDF with graphs: MAC-Solar-Sector-Update-Dec-2017
Solar Index Performance
The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has rallied sharply since May and is up +45% year-to-date.
Recent bullish factors for solar stocks include (1) a surge in Chinese solar installs in 2017 and broadening solar strength coming from India, Latin America, the Middle East, and Southeast Asia (see page 5 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) continued low valuation levels that indicate that solar stocks are conservatively priced even after the recent rally.
Bearish factors for solar stocks include (1) uncertainty about whether the Republicans’ U.S. tax reform plan will hurt the availability of tax equity financing for the U.S. solar industry, (2) uncertainty about whether the Trump administration in January will impose U.S. import tariffs on solar cells and panels as a remedy for Suniva’s Section 201 trade complaint, (3) continued downward pressure on solar pricing caused by ample global production capacity, (4) uncertainty about the strength of global climate policy after the Trump administration earlier this year withdrew from the Paris climate agreement, and (5) ongoing solar trade disputes that have resulted in tariffs and various market dislocations.
Solar stocks are still trading at low valuation levels compared with the broad market even after the recent rally in solar stocks. The median forward P/E of companies in the MAC Solar Index is currently 13.9, which is well below the forward P/E of 19.8 for the S&P 500 index. In addition, the median price-to-book ratio of 1.30 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 1.55 for the MAC Solar Index is well below the 2.22 ratio for the S&P 500.
Solar stocks see a sharp recovery rally
Solar stocks have rallied sharply since May on signs of improved solar industry fundamentals and reduced concerns about Trump administration policies. The oversupply of panels that plagued the market in late 2016 has eased and company profit fundamentals are improving. In addition, the market was very encouraged to see a surge of about +45% in Chinese solar demand installs in 2017.
Solar stocks have also been boosted by the stabilization of solar cell and panel prices, which has helped company profit results. Part of the reason for the recovery in U.S. solar panel prices, however, is stockpiling and strong demand ahead of a decision in January on Suniva’s trade complaint, which could result in tariffs or import curbs (see discussion on page 2).
Regarding U.S. politics, the solar market has already absorbed the negative moves that President Trump took earlier this year, including his intention to exit the Paris climate agreement and to rescind the EPA’s Clean Power Plan. There was relief, however, that the Trump administration did not go so far as to pull the U.S. out of the entire UN climate treaty framework nor to rescind the EPA’s legal obligation to regulate CO2 emissions.
Chinese PV growth surges
Forecasts for 2017 global solar installs have risen substantially because of a surge in Chinese installs. The China PV Industry Association (CPIA) reported that Chinese PV installs in the first half of 2017 were stronger than expected at 24.4 GW, up +19% year-on-year. The unexpected strength is mainly coming from distributed solar as opposed to utility solar.
CPIA said that Chinese solar installs for 2017 will likely reach 50 GW, which would be up by a blistering +45% from the 2016 install amount of 34.5 GW. In response to the first-half strength, Bloomberg New Energy Finance (BNEF) raised its 2017 Chinese solar forecast to 54 GW from its July forecast of 30 GW. IHS Markit is forecasting 45 GW of Chinese solar installs in 2017.
In July, China met the government’s 13th Five-Year-Plan (2016-2020) target for cumulative solar installations of 105 GW. As a result, the government raised its target to 150 GW. However, total Chinese installs are likely to be significantly higher than the target since the target does not include rooftop solar, which is booming.
Utility solar costs are now comparable to natural gas and have fallen below coal and nuclear
The levelized-cost-of-energy (LCOE) for utility-scale solar PV has dropped by -86% over the last eight years, by -36% over the last four years, and by -9% in 2017, according to Lazard’s latest LCOE report (link). Lazard’s report is the most comprehensive LCOE analysis available for alternative and conventional energy sources.
The latest Lazard report found that unsubsidized utility solar PV costs now have fallen by so much that solar is now competitive with new natural gas plants and is cheaper than new coal or nuclear plants.
Specifically, Lazard pegs the unsubsidized utility solar LCOE cost of 4.6-5.3 cents per kWh as comparable to the 4.2-7.8 cent cost of natural gas (combined cycle) and lower than cost of 6.0-14.3 cents for coal and 11.2-18.3 cents for nuclear.
U.S. is now the lone holdout from the Paris climate agreement
The U.S. is now the only country in the world that has refused to abide by the Paris COP 21 global climate accord. The only other holdouts, Syria and Nicaragua, recently acceded to the agreement. Nicaragua signed the Paris climate agreement in October and Syria in November announced its intention to sign the agreement.
The rest of the world is continuing with the Paris climate agreement without the United States. China and Europe have flatly rejected the Trump administration’s request for a renegotiation of the agreement. It makes little sense to renegotiate the agreement since the emission reduction targets are voluntary, which means that any country including the U.S. can simply change their goals if they wish.
Even though President Trump on June 1 announced that the U.S. plans to leave the Paris climate agreement, the U.S. exit will not actually occur until the end of President Trump’s term. The Paris agreement is binding on the U.S. for the next three years and then requires a 1-year notice to withdraw. The earliest date for a U.S. exit is November 4, 2020, one day after the next presidential election. At any time during that period, the U.S. could drop the exit process and recommit to the Paris agreement. The U.S. could also recommit to the agreement at any time in the future if desired by a new president.
The Obama administration originally signed the Paris climate agreement with a voluntary goal of reducing U.S. carbon emissions by 17% by 2020, by 26%-28% by 2025, and an intent to reduce emissions by 80% by 2050. Most climate experts believe the Paris agreement was not tough enough in the first place to meet its goal of limiting global warning to two degrees Celsius (3.6 degrees Fahrenheit) from pre-industrial levels.
Trump administration’s Section 201 trade remedy decision is due by January
The U.S. solar industry is on edge as it waits for the Trump administration’s decision on the remedy, if any, to the decision by the U.S. International Trade Commission (ITC) that U.S. solar cell and panel manufacturers have been harmed by foreign competition.
The Section 201 solar trade case began in spring 2017 after two foreign-owned solar manufacturing companies based in the U.S., Suniva and Solarworld, pursued a Section 201 trade case with the ITC. The companies alleged that they had been driven into bankruptcy by foreign competition. Section 201 is a little-used U.S. trade complaint that was last used by the steel industry in 2001.
ITC commissioners on Sep 22 ruled by a vote of 4-0 that American solar manufacturers were in fact harmed by foreign competition. The ITC on Oct 31 then released its remedy recommendations, which were less severe than the markets had feared. The ITC recommended tariffs of 30-35% on imported cells and panels and a possible import quantity limit. The tariff recommendation was substantially weaker than Suniva’s request for an import duty of 40 cents per watt and a minimum price of 78 cents per watt. Suniva’s requested remedy would have more than doubled the cost of imported panels from the current price of about 32 cents per watt.
The Trump administration currently faces a deadline of January 26, 2018 to announce its decision on remedies, although that deadline could slip. The Trump administration is not bound by the ITC’s recommendations and is free to choose whatever remedy it wishes, or even decline to apply any remedy at all. The Trump administration has given no indication of what remedy it might choose.
If the Trump administration does impose tariffs under Section 201, there is a chance that those tariffs will eventually be struck down by the World Trade Organization (WTO). President Trump’s U.S. Trade Representative Robert Lighthizer recently asked the ITC to identify any “unforeseen developments” that might come from tariffs, such as the impact on the solar install industry or a challenge to the tariffs at the WTO.
Section 201 solar import tariffs would be negative overall for the U.S. solar industry, which is heavily dependent on imported solar panels to support the rapid installation of solar in the U.S. Indeed, U.S. factories manufactured fewer than 10% of the solar panels that were installed in the U.S. in 2016, according to Bloomberg New Energy Finance. In fact, U.S. installers in 2016 heavily relied on imported panels for more than 90% of their U.S. solar installs.
Any increase in the after-tariff price of imported panels would make U.S. solar projects less economical in the U.S. and would therefore hurt the U.S. solar install growth rate. GTM Research estimates that U.S. solar installs would be cut by -9% from what they would otherwise be if the Trump administration levies a tariff of 10 cents per watt, which would be close to the ITC’s recommendation of a 30-35% tariff.
The problem for the Trump administration is that any tariff on imported solar panels will likely result in a net reduction of U.S. solar jobs. Of the 260,000 solar jobs in the U.S., 85% are in installation and only 15% are in manufacturing, according to the Solar Energy Industry Association (SEIA). Import tariffs might give a small boost to U.S. solar manufacturing jobs, but that small boost would be swamped by the number of jobs that could be lost in the solar install industry. For that reason, the Solar Energy Industry Association (SEIA) strongly opposes any tariff or trade restrictions on imported cells and panels.
The Section 201 trade case has been a positive factor for First Solar (FSLR) because the ITC decision exempted thin-film manufacturers from any trade remedies or tariffs. The ITC decision also exempted manufacturers from Canada and Singapore. By contrast, the ITC decision was negative for Chinese and other global solar manufacturers because they could see a tariff slapped on the solar panels that they export to the U.S. The decision was also negative for U.S. companies that specialize in installing solar panels, such as SunRun (RUN) and Vivent (VSLR), since they would face higher prices for imported solar panels.
The Section 201 trade case has already hurt the U.S. solar install industry by pushing solar panel prices as high as 52 cents per watt since installers are hoarding what panels they can find. In addition, many solar projects have been delayed, waiting for the remedy decision and to see how solar pricing shakes out in 2018.
While the Section 201 trade case has been a negative factor for the U.S. solar industry, the industry will nevertheless survive what would be the latest example of governmental trade interference in the solar industry. A 30-35% tariff on imported panels would push up the price of imported solar panels to the 43-44 cent per watt area from the current 32 cent level, but many solar projects can still be economical at that level. In addition, installers would try to adapt to the tariff by buying domestically-produced panels or otherwise exempted panels. Moreover, some Chinese solar manufacturers are already talking about setting up solar panel factories in the U.S. to avoid the tariffs.
Regarding the impact of the Section 201 trade case on the global solar industry, it is worth remembering that the U.S. market in 2016 accounted for only 18% of global solar installs, according to BNEF. That means that a drop in U.S. installs from tariffs would have a limited effect on the overall global solar market. For example, if the U.S. solar installs suffered a -10% hit from Section 201 remedies, that would translate to a decline of only about -2% in worldwide installs (i.e., a -10% U.S. decline multiplied by the 18% U.S. market share).
Trump administration moves to rescind Clean Power Plan
The EPA on October 10 took formal steps to repeal the Obama administration’s Clean Power Plan (CPP), which was designed to cut CO2 emissions from U.S. power plants. That action, however, was in line with the Trump administration’s well-known intentions and had little stock market impact.
When President Trump was elected in November 2016, the markets were already aware that the CPP would not go into effect during the Trump administration’s watch. The CPP, in any case, was already bottled up with a legal challenge at the U.S. Supreme Court when Mr. Trump took office. There was a chance that the Supreme Court would have struck down the plan anyway as an overreach of regulatory authority even if Hillary Clinton had been elected as president.
Nevertheless, the loss of the CPP is a blow for U.S. efforts to reduce its carbon emissions. Without the CPP, the U.S. is unlikely to meet the Obama administration’s former goal under the Paris climate agreement of reducing U.S. carbon emissions by 17% by 2020, by 26-28% by 2025, and by 80% by 2050.
The EPA’s repeal of the CPP will be a long and torturous process since the repeal must go through the EPA’s regular rule-making procedures from scratch. The repeal is then likely to be challenged by environmental supporters in court. That whole process is likely to extend well past the end of the Trump administration’s first term. In the meantime, the CPP will not be implemented and will have no effect.
The good news for the solar industry is that the EPA is still under a legal requirement to regulate CO2. The EPA’s obligation to regulate CO2 emissions has already been litigated all the way up to the U.S. Supreme Court and would be extremely difficult to reverse. The Trump administration has already decided not to challenge President Obama’s 2009 CO2 endangerment finding, which established the legal structure by which the EPA is legally obligated to regulate CO2 emissions.
The EPA said it plans to issue a replacement rule for the CPP in order to meet its legal obligation to regulate CO2 emissions. The EPA has requested ideas from stakeholders about the content of a replacement rule. However, few believe that a significant CO2 emission reduction rule is likely to emerge during the Trump administration.
Republicans’ tax reform plan may have negative implications for tax equity financing
The Republicans have not yet finalized their tax reform plan, which means the implications of the plan for solar are not yet clear.
In a very positive development for solar, Republicans appear to be headed towards leaving intact the existing solar investment tax credit (ITC) provisions through 2021, which is an important support measure for the U.S. solar industry. The solar ITC is currently set at 30% through 2019 and is set to step down to 26% in 2020 and 22% in 2021.
The ITC in 2022 will expire entirely for direct-owned residential projects, but will permanently remain at 10% for utility PV projects, non-residential, and third-party-owned residential solar installations. The Republican tax bill, however, may end that permanent tax credit at some date in the future such as 2027. The elimination of the permanent tax credit would be mildly negative for the U.S. solar industry, but would only take effect far out into the future.
The solar industry’s main area of concern about the Republicans’ tax bill is the impact on tax equity, which is an important source for financing for solar projects. Tax equity accounted for about 21% of the $58.5 billion of U.S. renewable energy investment in 2016, according to BNEF.
Through tax equity, an investor can take passive partial ownership of a solar project to capture the tax benefits, which might not otherwise be available to the developer. Tax equity helps reduce the overall financing costs of a solar project.
The Republican tax bill aims to reduce the corporate tax rate to 20% from 35%, which by itself means that companies may allocate less capital to tax equity since they will be paying lower taxes. Moreover, there is major concern that tax equity could take a heavy hit depending on whether Republicans go through with ideas to impose a tough alternative minimum tax (AMT) on U.S. corporations and/or put what amounts to an AMT on U.S. affiliates of foreign corporations with a Base Erosion Anti-Abuse Tax (BEAT).
The effect of alternative minimum taxes is to reduce or eliminate the benefit of tax equity financing. The reduction of tax equity financing would mean that some solar projects would have higher overall financing costs, which would translate to less advantageous project economics.
See PDF for more commentary and graphs…
TerraForm Power Inc (TERP US) will be added to the index with an Exposure Factor of 0.5 as part of the regular quarterly index review process that will take effect as of the close of business on December 15, 2017.
Hanwha Q Cells (HQCL:US) will be dropped from the index as part of the regular quarterly index review process that will take effect as of the close of business on September 15, 2017.