Author Archives: Richard Asplund

Solar stocks see a sharp recovery rally; World (ex-U.S.) continues with Paris agreement; Climate change warnings abound – Aug 2017
 

Read report in PDF with graphs: MAC-Solar-Sector-Update-Aug-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 +30.0% year-to-date.

Recent bullish factors for solar stocks include (1) continued strong overall world demand for solar with particular new strength coming from India, Latin America, the Middle East, and Southeast Asia (see page 4 for the world solar growth outlook), (2) stronger demand for solar power due to the increasingly competitive price of solar versus alternatives as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (3) continued low valuation levels that indicate that solar stocks are conservatively priced even after the recent rally.

Bearish factors for solar stocks include (1) continued downward pressure on solar pricing and panel oversupply caused largely by a hangover from the solar install spikes seen in China and the U.S. in 2016, (2) uncertainty about U.S. clean energy policy and global climate change initiatives due to the new Trump administration, (3) uncertainty for the U.S. residential solar market amidst a shift to purchase/loans from leases and cutbacks in net metering in some states, and (4) ongoing solar trade disputes that have resulted in tariffs and various market dislocations.

Solar stocks are 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 15.3, which is well below the forward P/E of 19.0 for the S&P 500 index. In addition, the median price-to-book ratio of 1.18 for the companies in the MAC Solar Index is well below the 3.15 ratio for the S&P 500 and the median price-to-sales ratio of 1.63 for the MAC Solar Index is well below the 2.11 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 over the last two years has eased and company profit fundamentals are improving. In addition, the market was encouraged to learn that Chinese solar demand remains very strong with 24 GW of solar installed in the first half, indicating that China should be able to easily exceed forecasts for full-year installs of 30 GW.

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 later this year on Suniva’s trade complaint, which could result in import curbs or duties (see discussion on page 3).

Regarding U.S. politics, the solar market has already absorbed the negative moves that President Trump took earlier this year, which included exiting the Paris climate agreement and moving 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 nor did the administration try to rescind the EPA’s legal obligation to regulate CO2 emissions. The solar market has also been relieved that the Trump administration has not mentioned any desire to curb or repeal the solar investment tax credit that lasts through 2021.

Indeed, there was an indication that President Trump may be favorably disposed to solar in general since he has now suggested on several occasions that his Mexico border wall should include solar panels to help defray the wall’s cost.

World (ex-U.S.) continues with Paris agreement

President Trump on June 1 announced that the U.S. will leave the COP21 Paris climate agreement. That exit process will not be completed until the end of President Trump’s term since the Paris agreement is binding for the next three years and then requires a 1-year notice to withdraw. The earliest date for an exit is November 4, 2020, one day after the next presidential election. At any time during that 4-year period, the U.S. could drop the exit process and recommit to the Paris agreement if Mr. Trump should have a change of heart. A Post-ABC poll taken in early June showed that nearly 6 in 10 American citizens opposed Mr. Trump’s exit from the climate agreement.

There was some good news, however, in that President Trump did not take the more drastic action of withdrawing altogether from United Nations Framework Convention on Climate Change. That treaty established the overall UN climate negotiation process and was unanimously adopted by the Senate in 1992 and signed into law by President H.W. Bush. The U.S. can withdraw from that treaty on one year’s notice. The U.S. therefore remains within the structure of UN climate negotiations even if it plans to relinquish its Paris commitments.

The White House on August 4 sent a formal notification letter to the UN of its intent to withdraw from the COP21 Paris climate agreement. However, the statement left open the option for the U.S. to “re-engage” on the accord at some point in the future if the U.S. can negotiate more favorable terms. The statement also said that the U.S. will continue to participate in UN climate discussions aimed at fleshing out the details of the Paris agreement in order to “protect U.S. interests and ensure all future policy options remain open to the administration.”

Under the Paris COP21 agreement, the U.S. agreed to meet a voluntary goal of reducing carbon emissions by 17% by 2020, by 26-28% by 2025, and an intent to reduce emissions by 80% by 2050. There are 195 nations that agreed to the Paris climate agreement in the culmination of decades of climate negotiations. President Trump joined Syria and Nicaragua as the only nations in the world that are not part of the Paris agreement, and Nicaragua didn’t join the Paris agreement because of its view that the agreement is not tough enough.

The question now is whether the rest of the world will uphold their respective carbon emission reduction targets even though the U.S. has rejected its targets. German Chancellor Merkel, French President Macron, and Chinese President Xi Jinping all recommitted to the Paris agreement after Mr. Trump’s exit announcement.

Ms. Merkel said, “Since the withdrawal of the U.S. [from the Paris climate accord], we’re more determined than ever that this be a success. We can’t wait for the last man on Earth to be convinced by the scientific evidence for climate change.” The world’s strategy is to proceed with emission reduction as best as possible without the U.S. and hope that the next U.S. president will bring the U.S. back into the climate fold.

There appears to be no chance that the Paris agreement will be renegotiated, as Mr. Trump has suggested. First, there is no real point in renegotiating the agreement since individual nation targets are voluntary. Nations can already change their targets if they wish and there is no penalty if nations do not meet their targets. Second, European leaders have already made clear that renegotiation is out of the question and that the Paris climate agreement is “irreversible.”

Mr. Trump’s exit from the Paris climate agreement is clearly a major setback for the global effort to address climate change. 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. Without the U.S. in the agreement, meeting that 2-degree goal is even less likely. Global warming is now likely to become an even bigger problem that will likely result in panicky reaction down the road as the world realizes it must dramatically slash carbon emissions in order to avoid the worst effects of climate change.

Global warming of 2 degrees might seem minor, but the earth’s environment is very sensitive to changes in temperature. The last time the earth was 4 degrees warmer, the oceans were hundreds of feet higher, according to Peter Brannen in “The Ends of the World.” When the earth was 5 degrees warmer 252 million years ago due to greenhouse gas warming from the release of methane from the Arctic, 97% of all life on Earth was extinguished.

Climate change warnings abound

Just six weeks after President Trump announced the exit from the Paris agreement, an iceberg the size of Delaware broke off from the Antarctica Larsen C ice shelf, one of the largest icebergs ever recorded. There isn’t enough data to scientifically conclude that the iceberg broke off directly because of global warming. In addition, the breakup of the Larsen C ice shelf will not raise sea levels because a floating ice shelf is already submerged in the water. However, the breakup of ice shelves can in fact raise ocean levels by allowing glaciers behind the ice shelves to speed up their descent into the ocean.

The breakup of the Larsen C ice shelf could be a sign of a bigger breakup of Western Antarctica, according to the “The Doomsday Glacier” by Jeff Goodell. Ohio State glaciologist John Mercer back in 1978 wrote a paper entitled “West Antarctic Ice Sheet and the CO2 Greenhouse Effect: A Threat of Disaster.” He postulated that the western Antarctic ice shelves were much less stable than anyone realized due to melting from underneath and that deglaciation of the West Antarctica would cause a 16-foot rise in sea levels. His said that the breakup of the Larsen ice shelves, which is occurring now, would be the first sign of impending disaster.

More generally on the topic of climate change, an article entitled “The Uninhabitable Earth” by David Wallace-Wells went viral in July as the most dramatic warning yet of climate change. In an alarmist tone, the author lays out a series of events that could happen on earth absent aggressive action to curb carbon emissions.

In his introduction, the author says, “It is, I promise, worse than you think. If your anxiety about global warming is dominated by fears of sea-level rise, you are barely scratching the surface of what terrors are possible, even within the lifetime of a teenager today. And yet the swelling seas — and the cities that will drown — have so dominated the picture of global warming, and so overwhelmed our capacity for climate panic, that they have occluded our perception of other threats, many much closer at hand. Rising oceans are bad, in fact very bad; but fleeing the coastline will not be enough.” The author goes on to define a list of climate change effects that could include heat death, the end of food, climate plagues, perpetual war, permanent economic collapse, and poisoned oceans.

Trump administration shows hand on domestic clean energy policy

On the domestic front, the Trump administration has already taken its main action of moving towards rescinding the EPA’s Clean Power Plan (CPP), which was designed to cut carbon emissions from the U.S. power sector. However, the good news was that the Trump administration left in place President Obama’s 2009 CO2 endangerment finding, which means that the legal structure remains in place whereby the EPA is legally obligated to regulate CO2 emissions. The EPA’s obligation to regulate CO2 emissions has already been litigated all the way up to the U.S. Supreme Court.

The Trump administration still hasn’t mentioned any desire for Congress to repeal or curb the already-existing solar investment tax credit (ITC), which provides a 30% tax credit on solar installs. Congress in late 2015 extended the solar federal ITC for 5 years at 30% through 2019 with a step down to 26% in 2020 and 22% in 2021. The ITC in 2022 will expire entirely for direct-owned residential, but will remain at 10% indefinitely for utility PV projects, non-residential, and third-party-owned residential solar installations. The extension of the solar ITC was part of a bipartisan grand energy bargain in which the decades-old prohibition on exporting crude oil was dropped in return for extending alternative energy credits.

U.S. Energy Secretary Rick Perry created a stir in mid-April when he ordered a 60-day study of the U.S. electric grid with the purpose of analyzing whether the increase in renewable electricity is accelerating the retirement of baseload coal and nuclear plants. Solar currently supplies about 1.6% of U.S. electricity and wind supplies about 6%.

There was concern that the Trump administration might be looking for an excuse to try to curb the amount of alternative energy on the grid. However, an early draft of the report that was leaked in mid-July concluded that the decline in baseload power has been caused by low natural gas prices and the flattening of customer peak demand, not by rising amounts of alternative energy on the grid. The final report has yet to be released, however, and it is possible that the report’s conclusions will be revised.

Suniva case raises worries about U.S. solar trade sanctions

Suniva, a bankrupt solar manufacturing company located in the U.S. but owned by a Chinese company, filed a Section 201 trade complaint with the U.S. International Trade Commission claiming that low-cost solar panels made mainly in China severely damaged its business. The ITC is scheduled to issue a decision by September 22, 2017, about whether U.S. solar manufacturers have been “seriously injured” by solar panel imports.

If the ITC does find evidence of serious injury, it can recommend various remedies for President Trump to take such as a blanket halt to imports or large duties on solar cells and panels. That could seriously damage the U.S. solar installation sector since U.S. installers use mostly imported solar panels. The U.S. solar manufacturing industry is relatively small and can supply only about 15% of the panels installed in the U.S., according to Bloomberg New Energy Finance.

Any trade sanctions that push up the price of solar panels or restrict their access could severely damage U.S. solar installation companies. Indeed, the Solar Energy Industry Association (SEIA), with over 1000 solar installers and manufacturers as members, expressed alarm about the trade complaint and said that any trade sanctions would “cause wide-scale economic hardships on thousands of American workers and their families.” SEIA said that as much as 260,000 jobs could be endangered by trade sanctions. SEIA said that bankrupt Suniva is not representative of other U.S. solar manufacturers and pointed out that no other U.S.-based solar manufacturers, except for bankrupt SolarWorld (owned by a German company), supported Suniva’s trade complaint.

The U.S. solar industry is hoping that the trade complaint will be denied. Any trade sanctions that are imposed to try to protect U.S. solar manufacturers will do more harm than good because there are many more solar jobs involved with installing solar panels in the U.S. than with manufacturing solar panels.

Global solar installs surge in 2016; Solar industry rolls on despite Trump administration; US 2016 solar jobs jump by another +24% – April 2017
 

Read report in PDF with graphs: MAC-Solar-Sector-Update-Apr-2017

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has moved mildly higher so far this year and is up +4.0% year-to-date.

Recent bullish factors for solar stocks include (1) continued strong overall world demand for solar with particular new strength coming from India, Latin America, the Middle East, and Southeast Asia (see page 4 for the world solar growth outlook), (2) stronger demand for solar power due to the increasingly competitive price of solar versus alternatives as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (3) low valuation levels that indicate that solar stocks are very conservatively priced.

Bearish factors for solar stocks include (1) downward pressure on solar pricing and panel oversupply caused largely by a hangover from the solar install spikes seen in China and the U.S. in 2016, (2) uncertainty about U.S. clean energy policy and global climate change initiatives due to the new Trump administration, (3) uncertainty for the U.S. residential solar market amidst a shift to purchase/loans from leases and cutbacks in net metering in some states, and (4) ongoing solar trade disputes that have resulted in tariffs and various market dislocations.

Solar stocks are currently trading at very low valuation levels compared with the broad market. The median forward P/E of companies in the MAC Solar Index is currently 11.9, which is well below the forward P/E of 18.1 for the S&P 500 index. In addition, the median price-to-book ratio of 1.19 for the companies in the MAC Solar Index is well below the 3.04 ratio for the S&P 500 and the median price-to-sales ratio of 0.98 for the MAC Solar Index is well below the 2.05 ratio for the S&P 500.

Solar industry rolls on despite Trump administration

Solar panel company stocks continue to see general weakness mainly because of concern about panel oversupply and falling solar prices, which have pressured the profit margins of polysilicon, cell, and module producers. However, supply and demand is slowly rebalancing and most observers expect tighter supplies and more supportive pricing as 2017 wears on. Moreover, the decline in solar prices is boosting demand and is creating bullish opportunities for independent solar project developers as well as for the project-development units of the large integrated solar companies.

While the Trump administration has caused some policy anxiety for the solar industry, there has been no Trump effect on the ground thus far. Canadian Solar CEO Shawn Qu said in mid-March, for example, that President Trump’s energy policies have not had “any impact into either project development or the project sales process.” He said, “People are chasing solar deals like crazy.”

There are three main reasons why the Trump administration presents only a temporary obstacle for solar. The first reason is simply economics. Solar power has become dramatically cheaper in recent years and no longer needs the government support that it once needed. Solar in many areas of the world is now able to compete head-to-head with other sources of electricity generation.

For example, solar projects in the Arizona and Nevada deserts can be built for less than 4 cents per kWh versus the higher average lifetime cost for natural gas plants of 5.2 cents and 6.5 cents for coal, according to Bloomberg News. Most utility-scale solar power plants across the world now cost as little as 4-6 cents per kWh on an unsubsidized basis. Many utilities are starting to choose solar mainly because of its low cost, not for policy reasons. The world record low for solar at present is 2.42 cents/kWh at an auction in Abu Dhabi in September.

In the U.S., the unsubsidized levelized cost of utility solar is now 4.6-6.1 cents/kWh, which is roughly equal to the cost of natural gas of 4.8-7.8 cents, according to comprehensive analysis by Lazard’s “Levelized Cost of Energy Analysis – Version 10.0.”

“I don’t think politics are needed to support these [renewable energy] asset classes. They will do just fine because they are economically viable and they make sense,” according to Sachin Shah, head of Brookfield Asset Management’s renewable energy unit.

The second reason why the Trump administration presents only a temporary obstacle for solar is that the solar industry is a global business in which the U.S. plays a limited role. The U.S. accounted for only 18% of world installs in 2016. That means that even if the Trump administration somehow made the entire U.S. solar market disappear overnight, the global solar industry would see a one-time drop of 18% and would then start to grow again by its usual rate of about 15-20%. Moreover, there is strong government policy support for solar in much of the rest of the world even if the U.S. federal government becomes a policy laggard during any particular 4-year presidential term.

Third, the federal government is certainly not the only game in town when it comes to U.S. solar support. There is strong support for solar from many other quarters such as states, cities, municipalities, corporations, and homeowners.

At the state level, for example, solar will continue to see support from the Renewable Portfolio Standards (RPS), which require utilities to derive certain percentages of their electricity generation from renewable sources. There are RPS mandates in 38 states that require in total that 10.2% of U.S. electricity will have to come from renewable energy by 2020 and 12.9% by 2030, according to Bloomberg New Energy Finance (BNEF). In addition, California and New York, for example, have very aggressive goals to source 50% of their electricity from clean energy by 2030.

Corporations will continue to be big drivers of solar regardless of whether or not the federal government supports solar. Many large U.S. corporations believe in the need to address global warming and have adopted aggressive sustainability goals. Large U.S. corporations such as Apple, Google, Wal-Mart, Amazon.com and many others signed 2.3 GW of power purchase agreements (PPAs) for clean energy in 2015 alone, according to BNEF. U.S. companies will buy another 17.4 GW of clean energy PPAs over the next nine years, according to BNEF.

After President Trump issued his executive order to rescind the Clean Power Plan, GE CEO Jeff Immelt expressed regret, saying that GE supports the Paris climate agreement and that corporations need to rise above national politics and do what is good for customers and society. He said, “Companies must have their own ‘foreign policy’ and create technology and solutions that address local needs for our customers and society.”

Markets await Trump policy plans

The markets are waiting for more clarity on the Trump administration’s renewable energy policy. President Trump has already ordered the EPA to rescind its Clean Power Plan (CPP), which was a plan to force utilities to reduce their carbon emissions. On the more positive side, however, EPA Director Scott Pruitt has said that the EPA will not try to overturn President Obama’s 2009 CO2 endangerment finding, which provided the legal basis for the EPA to regulate CO2. On other key issues, the markets are waiting to see if the Trump administration withdraws from the Paris climate agreement and whether there will be any changes to the U.S. solar investment tax credit that is due to last until 2021.

EPA Director Scott Pruitt has taken fire from climate deniers for not overturning former President Obama’s CO2 endangerment finding. However, Mr. Pruitt has reportedly concluded that the EPA would lose that legal battle and does not want to waste the time. The CO2 endangerment finding has already been affirmed all the way up to the U.S. Supreme Court. In order to overturn the finding, the EPA would have to provide scientific evidence that global warming is a hoax, evidence which of course does not exist.

The fact that the EPA’s CO2 endangerment finding will remain in place is very important for future climate regulation because it means that the EPA remains legally bound to regulate CO2. While the Trump Administration may have no intention of carrying out its legal duty to regulate CO2, the legal requirement will remain in place as the legal foundation for future presidential administrations to regulate CO2.

Regarding the Paris COP21 climate agreement, the Trump administration has said that it will decide before the May 26 G7 summit in Italy whether the U.S. will stay in the Paris agreement. Politico reported that President Trump’s advisors will have a showdown meeting on Tuesday, April 18, to hash out a decision. President Trump’s advisors are reportedly split on whether the U.S. should stay in the Paris agreement.

Under the Paris COP21 agreement, the U.S. agreed to meet a voluntary goal of reducing carbon emissions by 17% by 2020, by 26-28% by 2025, and an intent to reduce emissions by 80% by 2050. There are 195 nations that have agreed to the Paris climate agreement as the culmination of decades of climate negotiations.

If the Trump administration does decide to withdraw from the Paris agreement, it will not be an immediate process. The agreement is binding for the next three years and the agreement after that requires a 1-year notice to withdraw, meaning that the Trump administration could not fully withdraw from the COP21 agreement until President Trump’s 4-year term is essentially over.

However, President Trump could withdraw faster if he takes the more drastic action of withdrawing altogether from United Nations Framework Convention on Climate Change. That treaty established the overall UN climate process and was unanimously adopted by the Senate in 1992 and signed into law by President H.W. Bush. The U.S. could withdraw from that treaty on one year’s notice. That withdrawal would also effectively cancel U.S. participation in the Paris COP21 agreement.

Alternatively, as a kind of back-door exit, Mr. Trump could send the Paris agreement to Congress to be approved as a treaty. That approval would not be likely in the Republican-dominated Senate, shifting the blame to Congress for killing the agreement.

Instead of announcing an official withdrawal from the COP21 agreement, Mr. Trump could stay in the agreement but ignore the U.S. carbon reduction targets or seek to revise the targets. The targets are voluntary in any case and there are no penalties if the targets are not met. There is little chance that the U.S. will meet the targets anyway since Mr. Trump plans to rescind the Clean Power Plan, which was the main vehicle for the U.S. to meet its Paris targets.

Whether the U.S. stays in the Paris agreement or not, it is clear that other countries will need to take over the mantle of climate leadership if the world wants to meet the Paris goal of limiting global warning to 2 degrees Celsius by 2030. Key world leaders have already said they will stick with the Paris agreement regardless of what the Trump administration does and will stick to their voluntary COP21 carbon reduction goals.

China, for example, has already enshrined its Paris carbon-reduction targets into its domestic Five-Year plan. China’s Vice Foreign Minister said after Mr. Trump’s election that China plans to continue addressing climate change “whatever the circumstances.”

Europe’s top climate official, European commissioner Miguel Arias Canete, expressed regret about the Trump administration’s intent to rescind the Clean Power Plan, but said, “Despite all the current geopolitical uncertainties, the world can count on Europe to maintain global leadership in the fight against climate change. We will stand by Paris, we will defend Paris, and we will implement Paris.”

U.S. solar ITC rolls on

The Trump administration has not mentioned any intent to repeal or curb the already-existing solar investment tax credit (ITC), which provides a 30% tax credit on solar installs. Congress in late 2015 extended the solar federal ITC for 5 years at 30% through 2019 with a step down to 26% in 2020 and 22% in 2021. The ITC in 2022 will expire entirely for direct-owned residential, but will remain at 10% indefinitely for utility PV projects, non-residential, and third-party-owned residential solar installations.

If Republicans do make a move to curb the solar ITC, Senate Democrats could filibuster the attempt. Nevertheless, a repeal of the solar ITC could be wrapped up in a big tax reform package that bypasses a filibuster through reconciliation. Therefore, there is still a risk of a solar ITC repeal, which would put a big dent in U.S. solar demand over the next few years. Greentech Media estimates that solar installs in the U.S. could be cut in half if Congress were to repeal the solar ITC.

Despite these risks, there are reasons to suspect that Mr. Trump and the Republican Congress will not try to repeal solar ITC legislation. First, a majority of Republicans now believe that climate change is real and favors clean energy. A recent Pew Research poll found that 84% of Trump supporters favor expanding solar panel farms and 77% support expanding wind turbine farms.

Second, Washington already has an up-and-running jobs program with solar since the number of solar jobs has already exceeded the number of jobs in the U.S. oil/gas extraction sector and in the U.S. coal mining sector, as seen in the above chart. Moreover, many of those solar jobs are in Republican-dominated states. It would not make much sense to repeal the solar ITC and cause job layoffs in the solar sector while trying to stimulate new jobs elsewhere with an infrastructure spending program. In fact, solar already constitutes an energy infrastructure program.

U.S. solar jobs have soared by an annual rate of 22% over the last four years to 260,077 jobs at the end of 2016, according to the “National Solar Jobs Census 2016” published by The Solar Foundation (link). That shows that direct solar jobs now exceed the latest figures of 180,700 direct jobs in the oil/gas extraction industry and 50,300 direct jobs in the coal mining industry, according to figures from the U.S. Bureau of Labor Statistics.

Globally, solar is an even bigger employer with 2.8 million solar jobs worldwide in 2015, up 11% from 2014, according to the “Renewable Energy and Jobs – Annual Review 2016” from the International Renewable Energy Agency (IRENA) (link). China is way ahead of the U.S. in solar jobs with 1.7 million jobs in 2015 due to larger installation and manufacturing solar operations, according to the IRENA report. Japan also has more solar jobs than the U.S. at 377,100, according to IRENA.

Trump victory will be only a temporary obstacle for global solar; Florida voters again show support for solar by voting down Amendment 1 – Dec 2016
 

Read report in PDF with graphs: MAC-Solar-Sector-Update-Dec-2016

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has sold off sharply this year and is currently down -41% year-to-date. The MAC index in 2015 closed -15% lower after the -2% decline seen in 2014 and the +127% gain seen in 2013.

Solar stocks have recently seen weakness due to (1) downward pressure on solar pricing and panel oversupply caused largely by a hangover from solar install spikes seen in 1H-2016 in China and the U.S., (2) uncertainty about U.S. clean energy policy and global climate change initiatives with the incoming Trump administration, (3) uncertainty for the U.S. residential solar market amidst a shift to purchase/loans from leases and cutbacks in net metering in some states, and (4) ongoing trade disputes that have resulted in tariffs and various market dislocations.

Recent bullish factors for solar stocks include (1) strong overall world demand for solar with the sector set to grow by at least 20% this year (see page 6 for the world solar growth outlook), (2) strong demand for solar power worldwide due to the increasingly competitive price of solar versus alternatives and due to the need for countries to meet their carbon-reduction targets under last December’s Paris COP21 global climate agreement, and (3) low valuation levels that indicate that solar stocks are very conservatively priced.

Solar stocks are currently trading at very low valuation levels compared with the broad market. The median forward P/E of companies in the MAC Solar Index is currently 8.7, which is far below the forward P/E of 19.0 for the S&P 500 index. In addition, the median price-to-book ratio of 0.84 for the companies in the MAC Solar Index is well below the 2.92 ratio for the S&P 500 and the median price-to-sales ratio of 0.76 for the MAC Solar Index is well below the 2.00 ratio for the S&P 500.

Trump victory will be only a temporary obstacle for global solar

Solar stocks have been weak in recent months mainly because of concern about module oversupply and falling solar prices, which has pressured the profit margins of polysilicon, cell, and module producers. So far this year, average polysilicon solar module prices have fallen by -29% to a record low of 39.3 cents/watt (according to PV Insights) and solar cell prices have fallen by -27% to 25 cents/watt (according to Bloomberg New Energy Finance). Polysilicon prices posted a record low of $12.76/kg in mid-October but then recovered slightly to $12.88. Polysilicon prices are down -5.5% on a year-to-date basis (see pricing commentary and charts on page 10).

Solar stocks then saw some additional downward pressure after the November 8 U.S. election in which Donald Trump won the presidential contest and Republicans maintained control of both the House and the Senate. The Democrats will still have filibuster power in the Senate but their power will be very limited with Mr. Trump winning the White House and gaining control over the executive branch of the government.

Mr. Trump’s victory was clearly negative for solar and the clean energy industry in general. However, there are several caveats to consider: (1) the U.S. solar market accounts for only about 13% of the overall global solar market, which means that the global solar market can still do well even if the U.S. solar market slows due to Trump administration policies, (2) there is still strong support for solar in many U.S. states where electricity is mostly regulated, and (3) solar pricing has fallen dramatically in the past several years and solar increasingly competes on its own merits regardless of government support.

The first thing to remember regarding the impact of the Trump administration is that U.S. solar demand is only a limited component of the global solar industry. The U.S. accounted for only 13.0% of world solar installations in 2015, third behind China at 28.6% and Japan at 20.7%, as seen in the graph above.

If U.S. solar completely disappeared, the global solar industry would see a one-time growth drop of only 13.0% and then growth would resume from there. Moreover, the importance of U.S. solar on the global stage is fading on a relative basis given how quickly solar is spreading to other countries across the world.

Trump administration seems likely to cancel Clean Power Plan

There seems to be little doubt that the Trump administration will cancel President Obama’s Clean Power Plan (CPP), which was designed to reduce carbon output from utilities and help the U.S. meet its overall carbon reduction targets. The likely cancelation of the CPP would be disappointing for the solar market, although it was never guaranteed that the CPP would survive its court challenges anyway.

The Court of Appeals for the DC Circuit in late September held oral arguments on the CPP and a decision is still expected by late 2016 or early 2017. The U.S. Supreme Court was then expected to hear the case on appeal by spring or fall 2017. However, if the Trump administration cancels the CPP as expected, then the court cases will be moot and the litigation will be dropped.

The likelihood increased that the Clean Power Plan will be canceled after President-elect Trump nominated Oklahoma Attorney General Scott Pruitt to be the new EPA chief. Mr. Pruitt has been a leader among state attorney generals in challenging nearly all of President Obama’s regulatory initiatives, including the Clean Power Plan (CPP). Of the CPP, Mr. Pruitt said: “This is an effort that I think is extraordinary in cost, extraordinary in scope, and I think extraordinary as it relates to the intrusion into the sovereignty of the states.” Mr. Pruitt has made comments suggesting that he is a climate denier and a big supporter of the fossil fuel industry.

If the CPP is in fact canceled, then states will no longer be under a federal EPA requirement to reduce carbon emissions from their electricity utility sector. This will be a relief for states that are heavily dependent on fossil-fuel-driven electricity plants and that opposed the CPP in the first place.

However, there are still many states that will voluntarily continue their carbon-reduction plans because they believe it is the right thing to do. Indeed, three-quarters of the states that are suing to block the CPP are already on track to meet their 2024 targets, according to the Environmental Defense Fund. In addition, the nine states in the Regional Greenhouse Gas Initiative (www.rggi.org) could easily hit their 2030 targets without any significant changes, according to the Natural Resources Defense Council. Indeed, significant progress has already been made considering that carbon emissions from the U.S. power sector have already fallen to levels last seen back in the early 1990’s.

Other U.S. solar drivers will shine regardless of CPP’s fate

Even if there is no extra utility demand for solar sparked by the CPP in coming years, utilities will still be installing solar to meet state-level Renewable Portfolio Standards (RPS). State-level RPS rules require utilities to derive certain percentages of their electricity generation from renewable sources. The RPS mandates that already exist in 38 states require that 7.2% of U.S. electricity demand in 2016 must come from renewable energy and that the requirement will grow to 10.2% by 2020 and 12.9% by 2030, according to Bloomberg New Energy Finance (BNEF). In addition, California and New York have very aggressive goals to source 50% of their electricity from clean energy by 2030.

Aside from regulatory mandates, solar is increasingly being driven by favorable economics. Bloomberg News reports that solar projects in the Arizona and Nevada deserts can be built for less than 4 cents per kWh versus the higher average lifetime cost for natural gas plants of 5.2 cents and 6.5 cents for coal. There are many solar power plants across the world that now cost as little as 4-5 cents per kWh on an unsubsidized basis, illustrating how many utilities often choose solar in part because of its low cost.

In fact, about one-third of the U.S. utility solar pipeline consists of voluntary projects rather than those driven by RPS requirements, according to GTM Research. A spokesman for Duke Energy, the second largest U.S. utility owner, said that “We said before the election that whoever is elected president, we would be continuing our efforts to go to a low-carbon fleet and also pursue renewables.”

Corporations will also continue to be big drivers of solar regardless of whether or not the federal government supports solar. Many large U.S. corporations believe in the need to address global warming and have aggressive sustainability goals. Large U.S. corporations such as Apple, Google, Wal-Mart, Amazon.com and many others signed 2.3 GW of power purchase agreements (PPAs) for clean energy in 2015 alone, according to BNEF. U.S. companies will buy another 17.4 GW of clean energy PPAs over the next nine years, according to BNEF.

Trump’s approach to COP21 Paris agreement remains uncertain

Mr. Trump’s victory will almost certainly have negative implications for the Paris COP21 global climate agreement, which has already gone into effect with the U.S. as a signatory. Under the COP21 agreement, the U.S. agreed to meet a voluntary goal of reducing carbon emissions by 17% by 2020, by 26-28% by 2025, and an intent to reduce emissions by 80% by 2050.

Mr. Trump during his campaign said he would “cancel” U.S. participation in the Paris COP21 agreement and stop paying any money into UN climate programs. If the U.S. refuses to pay its share of climate change programs, then those programs could collapse since there would not be enough cash to meet their commitments and since other developed countries might refuse to make their payments as well. A linchpin of the Paris agreement is that developed nations agreed to contribute to a fund to help less-developed countries meet their climate goals. Without that funding, the less-developed countries may simply stop working on meeting their carbon reduction commitments.

Even though Mr. Trump said during the campaign that he would cancel U.S. participation in the Paris agreement, he said after the election that he has an “open mind” about the Paris agreement. No less a personality that Bill O’Reilly from Fox News said, “President-elect Trump should accept the Paris treaty on climate to buy some goodwill overseas. It doesn’t amount to much anyway. Let it go.”

There are 195 nations that have agreed to the Paris climate agreement after decades of climate negotiations. If Mr. Trump were to pull the U.S. out of the COP21 agreement, he would be isolated as virtually the only world leader to reject the need to address climate change. The U.S. would suffer diplomatic damage from withdrawing from the COP21 agreement and might find that the rest of the world would be less willing to cooperate with the U.S. on other issues of geopolitical importance to Mr. Trump.

The Trump administration would also face opposition from the corporate world if he were to withdraw from COP21. For example, more than 300 U.S. companies recently signed a letter supporting global climate initiatives and saying that a withdrawal from the Paris agreement would put “American prosperity at risk” (see www.lowcarbonusa.org).

The Trump administration in any case will find that it is not easy to withdraw from the Paris agreement. The agreement is binding for the next three years and the agreement after that requires a 1-year notice to withdraw, meaning that the U.S. could not fully withdraw from the COP21 agreement until Mr. Trump’s 4-year term is essentially over.

However, there is a way that Mr. Trump could withdraw faster if he takes the so-called “nuclear option” of withdrawing altogether from United Nations Framework Convention on Climate Change. That treaty established the overall UN climate process and was unanimously adopted by the Senate in 1992 and signed into law by President H.W. Bush. The U.S. could withdraw from that treaty on one year’s notice, i.e., by 2018. That withdrawal would also effectively cancel U.S. participation in the COP21 Paris agreement.

Instead of announcing an official withdrawal from the COP21 agreement, Mr. Trump could also simply refuse to participate in ongoing talks and refuse to make any serious attempt to meet the U.S. carbon reduction targets. The carbon reduction targets are voluntary and there are no penalties if the U.S. fails to meet its targets. Alternatively, as a “delay-and-defer” tactic, Mr. Trump could also send the Paris agreement to Congress to be approved, which is not likely to happen in the Republican-dominated Senate. He could then blame Congress for killing the agreement.

In any case, there seems to be little chance of the U.S. meeting its COP21 carbon reduction targets if the Trump administration cancels the Clean Power Plan as expected. The Obama administration was relying on the CPP as the primary driver for meeting the COP21 carbon reduction targets.

Regardless of whether Mr. Trump officially withdraws from the Paris climate agreement, the U.S. will certainly no longer be considered a world leader on addressing climate change when Mr. Trump is inaugurated in January, at least based on Mr. Trump’s stance on climate change thus far.

Other countries will need to take over the mantle of climate leadership if the world wants to meet the Paris goal of limiting global warning to 2 degrees Celsius by 2030. World leaders may simply decide to stick to their voluntary COP21 carbon reduction goals and hope that the Trump phenomenon blows over in four years, at which time the world can rededicate itself to tackling climate change.

If the U.S. withdraws from the COP21 agreement or simply ignores its obligations, there has been some speculation about whether China might also withdraw from COP21, possibly then causing the overall agreement to collapse. However, Bloomberg New Energy Finance says that its China research team believes that there is essentially a zero chance that China will abandon the climate process.

BNEF points out that China has already enshrined its Paris COP21 commitment into its domestic Five-Year plan. China’s Vice Foreign Minister after Mr. Trump’s election said on Nov 16 that China plans to continue addressing climate change “whatever the circumstances.” BNEF also says that if U.S. cedes its leadership on climate, then China will gladly step into the breach and take one of the greatest economic opportunities of the 21st century “straight to the bank.”

There are currently reports that Mr. Trump wants to appoint ExxonMobil CEO Rex Tillerson as his Secretary of State. If true, Mr. Tillerson’s appointment would be another negative factor for clean energy since a fossil fuel CEO would then oversee U.S. climate negotiations. Mr. Tillerson appears to believe that climate change is real but there are doubts about whether he would make any serious effort to address the problem.

On energy in general, Mr. Trump seems to be mainly interested in supporting the fossil fuel industry rather than damaging the advanced energy industry. It wouldn’t make much sense to purposely damage the U.S. advanced energy market ((i.e., renewable energy, building efficiency, and energy storage), which is now worth $200 billion, more than the pharmaceutical industry and almost as much as the consumer electronics industry, according to the Advanced Energy Economy.

Mr. Trump says he will reduce regulation on coal plants and open up more mining leases, but the reality is that Mr. Trump can do little to save the coal industry which is dying of its own accord due to high extraction costs and competition from natural gas. Moreover, even with Mr. Trump in charge of U.S. energy policy, utilities will not be particularly interested in building dirty and expensive coal plants, which might be under renewed environment attack in four years depending on the outcome of the 2020 presidential election. Utilities already generally understand that coal has a limited future.

On natural gas, Trump administration support will not make much difference since oil and gas companies already have a glut of wells and drilling opportunities. Fracking is currently only lightly regulated at the federal level due to legislation passed during the Bush era. Any push by the Trump administration for more natural gas extraction will simply push natural gas prices lower, helping utilities but hurting revenues at oil/gas companies and hurting the coal industry with even tougher competition from natural gas. Lower natural gas prices, however, would make natural gas a tougher competitor for solar in the electricity generation space.

The Trump administration’s promotion of the oil industry, by contrast, won’t have much effect on the solar industry since solar does not directly compete with oil. Oil is mainly used as fuel in the transportation sector and virtually no oil is used to generate electricity in the U.S. The oil and solar industries operate largely independently of each other.

U.S. solar ITC likely to remain in place

The most immediate issue for the U.S. solar market is whether there will be any change in the already-existing solar investment tax credit (ITC), which provides a 30% tax credit on solar installs. Congress just a year ago, extended the solar federal ITC for 5 years at 30% through 2019 with a step down to 26% in 2020 and 22% in 2021. The ITC in 2022 will expire entirely for direct-owned residential, but will remain at 10% indefinitely for utility PV projects, non-residential, and third-party-owned residential solar.

Mr. Trump has so far made no mention of a desire to repeal the solar ITC. Even if there is a move in Congress to repeal the solar ITC, Senate Democrats could filibuster that attempt. Nevertheless, a repeal of the solar ITC could be wrapped up in a big tax reform package that bypasses a filibuster through reconciliation. There is also the possibility that the Senate might change its rules and no longer allow the minority party to have a filibuster right for legislation. Therefore, there is still a risk of a solar ITC repeal, which would put a big dent in U.S. solar demand over the next few years. Greentech Media estimates that solar installs in the U.S. could be cut in half if Congress were to repeal the solar ITC.

Despite these risks, there are reasons to suspect that Mr. Trump and the Republican Congress will not repeal solar ITC legislation. First, there is a growing number of self-identified Republicans who believe that climate change is real and who are in favor of clean energy. In fact, a recent Pew Research poll found that 84% of Trump supporters favor expanding solar panel farms and 77% support expanding wind turbine farms.

Second, Washington already has a built-in jobs program with solar since the number of jobs in solar has already exceeded the number of jobs in the U.S. oil/gas extraction sector and in the U.S. coal mining sector, as seen in the above chart. Moreover, many of those solar jobs are in Republican-dominated states.

U.S. solar jobs have soared by an annual rate of 20% over the last four years to 208,859 jobs at the end of 2015, according to the “National Solar Jobs Census 2015″ published by The Solar Foundation (link). That shows that solar jobs now exceed the latest figures of 173,400 jobs in the oil/gas extraction industry and 53,700 jobs in the coal mining industry, according to figures from the U.S. Bureau of Labor Statistics.”

Globally, solar is an even bigger employer with 2.8 million solar jobs worldwide in 2015, up 11% from 2014, according to the “Renewable Energy and Jobs – Annual Review 2016” from the International Renewable Energy Agency (IRENA) (link). China is way ahead of the U.S. in solar jobs with 1.7 million jobs in 2015 due to larger installation and manufacturing solar operations, according to the IRENA report. Japan also has more solar jobs than the U.S. at 377,100, according to IRENA.

It would not make much sense to repeal the solar ITC and cause job layoffs in the solar sector while trying to stimulate new jobs elsewhere with an infrastructure spending program. Indeed, since solar energy projects qualify as energy infrastructure, Republican leaders should perhaps consider putting solar into the mix for their infrastructure stimulus program.

The global solar opportunity is much larger than the U.S. federal government

Mr. Trump’s presidential victory clearly represented a setback for the clean energy industry and was a big victory for the fossil fuel industry. However, it is important to keep an eye on the sweep of history rather than on temporary deviations. Mr. Trump can choose to play the role of climate denier and fossil-fuel supporter, but he cannot change the scientific facts on the ground. All he can do is slow down progress on addressing climate change and create the need to play catch-up once his presidency is over.

Moreover, as outlined earlier, there are many drivers for the global solar industry other than the U.S. federal government, including (1) increasingly favorable solar economics, (2) U.S. support for solar at the state, city, community and corporate level, and (3) support across much of the rest of the world for solar and the need to address climate change. Global solar is much bigger than the U.S. federal government and will prevail regardless of the Trump administration.

Florida voters again show support for solar by voting down Amendment 1

Florida voters in the November 8 election again showed support for solar by voting down Amendment 1, which would have outlawed third-party ownership of solar in Florida. The measure would have significantly damaged solar potential in Florida by outlawing the leasing of solar equipment to homeowners, businesses, or government entities.

Florida voters voted down the measure even though utility interests spent more than $20 million to promote the measure and despite the deceptive wording of the amendment. The Amendment 1 measure was formally called “Rights of Electricity Consumers Regarding Solar Energy Choice,” which on its face sounds like a good thing for solar, when in fact the opposite was true.

The fact that anti-solar utility interests needed to use a deceptive title for their anti-solar measure showed that they knew they were on the wrong side of the public on solar. Moreover, it was encouraging that Florida voters saw through the deceptive advertising technique and voted to support solar.

Florida has been one of the very few states in the country that makes third-party leasing effectively impossible because the solar owner/lessor would need to register as a utility. Florida has been a tough place for solar to flourish due to anti-solar regulation and the lack of a renewable portfolio standard (RPS) for utilities. Florida ranks only 14th in installed solar capacity among U.S. states despite having the 3rd best solar potential in the nation, according to the Solar Energy Industries Association (SEIA).

MAC Solar Index – Constituent Change
 

Solarcity Corp (SCTY US) will be dropped from the MAC Solar Index and the weight will be distributed on a pro rata basis to the other constituents in the index as of the close of business on Wednesday, November 23, 2016. Tesla Motors Inc (TSLA US) acquired Solarcity (SCTY US) and the combined entity does not have sufficient solar exposure at this time to meet the requirements for inclusion in the MAC Solar Index.