Author Archives: Richard Asplund

Solar stocks on the defensive with falling solar pricing and panel oversupply; Florida voters support solar; Nevada PUC bows to pressure on NEM grandfathering – Sep 2016
 

Read report in PDF with graphs: MAC-Solar-Sector-Update-Sep-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 -37% 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 whether the EPA’s Clean Power Plan will ultimately survive the presidential election and its court challenge, (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, (4) concern about the outcome of the Nov 8 U.S. presidential election and the post-election political climate for alternative energy, and (5) 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 4 for the world solar growth outlook), (2) the strong prospects for U.S. solar in coming years after Congress in December 2015 approved a 5-year extension of the U.S. solar investment tax credit (ITC), (3) strong demand for solar power worldwide due to the increasingly competitive price of solar versus alternatives and as countries seek to meet their carbon-reduction targets under December’s Paris COP21 global climate agreement, (4) the partial recovery in oil and natural gas prices from the early-2016 lows, (5) M&A activity in the solar sector after Tesla (TSLA) offered to buy SolarCity (SCTY) and Trina Solar (TSL) received a management go-private buyout offer, and (6) 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 well below the forward P/E of 18.6 for the S&P 500 index. In addition, the median price-to-book ratio of 0.86 for the companies in the MAC Solar Index is well below the 2.87 ratio for the S&P 500 and the median price-to-sales ratio of 0.83 for the MAC Solar Index is well below the 1.95 ratio for the S&P 500.

Solar stocks are on the defensive due to falling solar pricing and overcapacity concerns

Solar stocks have recently been on the defensive mainly because of concerns about module oversupply and falling solar pricing, which has pressured the profit margins of polysilicon, cell, and module producers. So far this year, average polysilicon solar module prices have fallen by -26% to a record low of 41 cents/watt (according to PV Insights) and solar cell prices have fallen by -38% to a record low of 21 cents/watt (according to Bloomberg New Energy Finance). Polysilicon prices posted a record low of $13.08/kg in February but have since recovered a bit and are +11% above that low at $14.52/kg and are up +6.5% on a year-to-date basis (see pricing commentary and charts on page 8).

In a diversified solar stock index such as the MAC Solar Index, the downward pressure on solar pricing has a mixed effect. Lower solar pricing is (1) negative for polysilicon, cell, and module producers, (2) positive for utility, commercial, and residential solar developers who pay lower module input prices and should be able to boost sales with a more price-competitive product compared with alternatives, (3) moderately negative for the large vertically integrated solar companies that manufacture modules and also install solar plants, and (4) slightly positive for yieldcos in that more solar projects should become available as solar falls to more competitive pricing levels versus alternatives such as wind and natural gas.

For the short-term, the decline in module pricing is clearly negative for solar manufacturers because of the downward pressure on margins. However, there is a benefit that emerges over time in that lower solar pricing should stimulate demand and eventually result in higher unit sales. The problem for the solar industry thus becomes cutting costs and waiting for increased demand to emerge from lower pricing.

In the bigger picture, the solar industry has no choice but for pricing to drop further so that it becomes the cheapest source of new electricity generation and easily beats its alternatives on an unsubsidized basis. There is clearly short-term pain involved with that downward pricing process but huge upside potential over the long-run as solar gets closer to becoming the cheapest source of electricity generation. In addition, once solar is cheap enough that subsidies disappear, then demand growth will be much more natural and the boom-bust days caused by the ups and downs of subsidies will be over.

Solar has already made dramatic progress in competing with alternatives such as wind and natural gas in some areas. According to Bloomberg New Energy Finance, coal plants generate electricity for about 3.4 cents per kilowatt-hour (kWh) and natural gas for 4.7 cents/kWh. However, there are a growing number of examples of solar projects that are being offered near, or even below, those coal and natural gas figures.

For example, a new record solar power purchase agreement (PPA) low was recently established when an Asian consortium that included JinkoSolar (JKS) bid 2.42 cents/kWh for a 350 MW solar plant to be built in Sweihan, Abu Dhabi. That beat the previous record low of 2.91 cents/kWh offered by Solarpack in Chile in August. Earlier this year, Enel agreed to provide electricity for only 3.5 cents/kWh on a solar PPA in Mexico totaling 1 GW. Most large solar PPA contracts are currently being bid in the area of 4-5 cents/watt.

The good news for the solar industry is that the industry has already proved over the course of its multi-decade history that it can drive down costs on a sustained basis, thus preserving profit margins even as solar pricing declines. The solar industry has driven solar costs lower through (1) technology innovation that allows manufacturers to produce higher-efficiency panels at lower costs, (2) lower manufacturing costs stemming from economies of scale and taking advantage of the manufacturing learning curve, (3) lower balance of system costs that involve lower costs for inverters, tracking systems, permitting, and installation, and (4) reduced financing costs as solar financing techniques mature and investors gain confidence about the safety of returns from solar plants with guaranteed PPA revenue.

As an example of how solar companies are reducing costs based on technology, First Solar (FSLR) with its latest S6 module technology will be able to reduce its module cost by about -37% to 25 cents/watt from the recent company average of about 40 cents/watt, according to analysts at Cowen and Company. Meanwhile, Daqo New Energy (DQ) with its latest technology and cost reduction efforts has cut its current polysilicon cost structure by -27% yr/yr to $9.43/kg in total cost and to $7.42/kg in cash cost, according to figures provided by the company.

In addition to progressively cutting production costs through technology, most large solar companies are responding to the latest drop in solar prices by cutting SG&A expenses (Selling, General and Administration Expenses), reducing employee head-counts, and shutting down older and higher-cost production lines.

The sharp decline in solar pricing seen so far this year is due to several factors: (1) an overhang of module supply in 2H-2016 since demand dried up in China after the June 2016 step-down in China’s FIT and since the 2016 U.S. utility solar surge is dissipating (that surge was caused by the former ITC expiration date at the end of 2016) (see page 4 for a more complete discussion of the solar growth outlook), (2) production increases and capacity expansion announcements from existing players and new entrants, particularly in China and India, (3) the reduced effect of trade tariffs in supporting solar pricing as producers implement work-arounds to move production away from high-tariff production locations, and (4) lower manufacturing costs that allow manufacturers to naturally reduce prices.

Solar pricing is likely to see continued downward pressure until inventory levels are brought down to normal levels and companies dial back on production and capacity additions to better match demand. The current downtrend in pricing is likely to cause somewhat of a shake-out among the smaller and weaker solar players that cannot cut production costs and are too small to compete. Meanwhile, some of the large solar companies have already cut back on their capacity expansion plans and are redoubling their efforts to cut costs to sustain profit margins even as pricing falls.

Florida voters show support for solar by approving a solar tax break for businesses

Florida voters on Aug 30 approved a solar tax break by the wide margin of 73% in favor, showing that public support for solar remains strong almost aside from political affiliation. Voters approved Amendment 4, which allows the Florida legislature to exempt solar installments from property tax for 20 years for businesses. Homeowners are already exempt from paying property tax on solar equipment. The measure is not a done deal, however, because the Florida legislature in 2017 needs to approve legislation to implement the measure.

Despite the good news for solar on Amendment 4, Florida continues to be 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).

Pro-solar advocates are currently worried about the upcoming Florida vote on November 8 on Amendment 1. Voter approval of Amendment 1 would outlaw third-party ownership of solar in Florida, which would significantly damage solar potential in Florida by not allowing leasing of solar equipment to homeowners, businesses, or government entities.

Florida is already 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. Pro-solar advocates are worried that Amendment 1 might pass because it is intentionally couched in language that makes it look to the voter as if he or she is voting in favor of solar when in fact a vote in favor of the measure would significantly damage solar potential in Florida.

The Amendment 1 measure is 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 is true. The fact that anti-solar utility interests need to use a deceptive title to try to get their anti-solar measure passed shows they know they are on the wrong side of the public on solar.

Nevada PUC bows to pressure and allows net metering grandfathering

In a boost for the U.S. residential solar sector, the Nevada Public Utilities Commission (PUC) earlier this month issued a ruling that solar customers who had already-installed solar systems or had active applications before Jan 1, 2016 will be grandfathered in to the original net energy metering program (NEM) that existed prior to a recent cut in the NEM program. Customers were outraged when the Nevada PUC unilaterally cut their NEM rates and hurt the economics upon which their system purchase was based. Large solar companies were also outraged and some withdrew altogether from the Nevada solar install market in protest.

The good news for the residential solar industry is that the pressure on Nevada’s PUC was so strong that it was forced to relent and grandfather in existing solar customers. That will act as a warning to public utility commissions in other states that they are likely to face some serious backlash if they try to cut NEM rates on existing solar customers.

Clean Power Plan oral arguments will be heard on Sep 27

Oral arguments on the case about whether the EPA overstepped its authority with the Clean Power Plan (CPP) are scheduled to be heard on Sep 27 by the Court of Appeals for the District of Columbia Circuit Court. Of the nine judges on that court who will hear the CPP case, five were appointed by Democratic presidents and four were appointed by Republican presidents, possibly giving the CPP the upper hand with a 5-4 decision if the case is decided along partisan lines. Based on the current time line, a decision by the Court of Appeals for the DC Circuit could come by late 2016 or early 2017. The case would then likely be heard by the U.S. Supreme Court on appeal by spring or fall 2017.

However, the fate of the CPP also depends on the outcome of the presidential election on November 8. If Donald Trump wins the White House and takes over as President in January, then all the court challenges would likely become moot because the Trump campaign has said he would rescind the EPA’s CPP.

On the other hand, if Hillary Clinton wins the White House, then the ultimate fate of the CPP would likely depend on the makeup of the U.S. Supreme Court at the time of a CPP decision. Ms. Clinton has already said that she strongly supports the CPP and would press for its implementation.

The presumption is that the U.S. Supreme Court at present is tied 4-4 on CPP since opponents to the CPP lost their 5-4 advantage on the Court when Antonin Scalia died in February 2016. If Ms. Clinton can get a new Supreme Court justice through the Senate in time for a CPP ruling and that judge supports CPP, then the chances would appear to be good for a 5-4 vote in favor of CPP.

On the other hand, if Ms. Clinton wins the White House but cannot get a new justice on to the Supreme Court bench in time for a CPP ruling, then the Supreme Court could end up deadlocked 4-4 on the CPP. In the case of a Supreme Court deadlock, the decision of the Court of Appeals of the DC Circuit would become the final ruling on the CPP case, illustrating the importance of the Court of Appeals decision.

The CPP is currently in a state of suspended animation since the U.S. Supreme Court on February 9, 2016, granted a stay for the states on complying with the EPA’s CPP until the merits of the plan are litigated in court. The Supreme Court’s stay means that states, if they wish, can stop the planning process on how they would comply with the CPP.

The CPP is not scheduled to come into effect in any case until 2022. Before the Supreme Court issued its stay, the states were required to submit their plans by 2018 on how they would comply with the CPP. If the EPA ultimately wins the CPP case, it not clear whether the EPA will give the states additional time to submit their plans since states that oppose CPP have stopped work on their plans. However, states that favor the plan have continued their work on adopting their plan to meet the requirements of the CPP.

The goal of the EPA’s CPP is to reduce national greenhouse gas emissions by 32% from 2005 through 2030 and for the U.S. to get 28% of its electricity from renewable energy sources by 2030, more than double the 2014 level of 13%. The CPP is the centerpiece of the Obama administration’s plan on how to comply with the Paris COP21 global climate agreement. If the CPP ultimately does come into effect, it would provide a big boost for solar power after the current solar Investment Tax Credit (ITC) largely expires in 2022.

Global solar growth slows; Solar accounts for 64% of U.S. electricty installs in Q1; Competitive auctions slowly push aside FITs and push solar pricing lower; CPP oral arguments pushed back to Sep 27 – June 2016
 

Global solar growth slows; Solar accounts for 64% of U.S. solar installs in Q1; Competitive auctions slowly push aside FITs and push solar pricing lower; CPP oral arguments pushed back to Sep 27 – June 2016

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

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), sold off sharply early this year and has since remained weak. The index is currently down -34% 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) the general risk-off equity trading mode with the upcoming Brexit vote and the ongoing concerns about the Chinese and global economies, (2) concern that a temporary drop-off in Chinese solar installs in the second half of 2016 could lead to supply overhang and downward pressure on solar pricing, (3) uncertainty about whether the EPA’s Clean Power Plan will ultimately survive the presidential election and its court challenge, (4) uncertainty for the U.S. residential solar market amidst a shift to loans from leases and cutbacks in net metering in some states, (5) investor uncertainty about the solar sector after SunEdison filed for Chapter 11 in April, and (6) ongoing trade disputes that have resulted in tariffs and various market dislocations.

Recent bullish factors for solar stocks include (1) the strong overall world demand for solar with the sector set to grow by 10%-20% this year, (2) the strong prospects for U.S. solar in coming years after Congress in December 2015 approved a 5-year extension of the U.S. solar investment tax credit (ITC), (3) strong demand for solar power as countries seek to meet their carbon-reduction targets under December’s Paris COP21 global climate agreement, (4) the sharp 89% rally in crude oil and 70% rally in natural gas prices from the recent lows, and (5) 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 9.4, which is well below the forward P/E of 17.7 for the companies in the S&P 500 index. The median price-to-book ratio of 0.98 for the companies in the MAC Solar Index is well below the 2.79 ratio for the S&P 500. The median price-to-sales ratio of 1.19 for the MAC Solar Index is well below the 1.86 ratio for the S&P 500.

Global solar growth slows

Despite the recent weakness in solar stock prices, the global solar industry itself continues to show strength. Global solar has grown at a very strong +25% compounded annual rate over the last five years. Meanwhile the long-term demand outlook for solar remains very strong since solar will account for 35% (3.439 GW) of all electricity capacity additions and a massive $3.7 trillion of solar spending through 2040, according to Bloomberg New Energy Finance (BNEF). Moreover, BNEF expects all-in project costs for solar to plunge by another 48% by 2040, thus making solar one of the cheapest sources of electricity.

Solar growth is currently expected to show slower growth in 2016 and 2017 but then regain a strong growth rate near 20% in 2018 and beyond. Weaker growth this year is tied in large part to the end of solar booms in Japan and the UK. However, these areas of weakness are outweighed by solar strength in the U.S. and India and emerging strength in Latin America and the Middle East.

China is expected to install up to 20 GW of solar in 2016, which would be up by 25% from 16 GW in 2015. However, developers accelerated most of their 2016 solar installs into the first half of 2016 in order to beat a step-down in China’s feed-in-tariff that takes effect on June 30. China installed some 13 GW of solar in the first half of 2016, which implies a sharp step-down in solar installs to 2-3 GW in Q3 and 3-4 GW in Q4, before growth resumes in 2017. There are market concerns that sharply lower solar Chinese installs in the second half of 2016 could result in a module oversupply situation (at least within China) that could also put downward pressure on solar panel pricing.

Meanwhile in Japan, solar surged after the Fukushima nuclear disaster in 2011 due to a generous government feed-in-tariff (FIT). Japan solar soared by 64% on an annual compounded basis in the five years through 2015. However, Japan is now set to bring nuclear capacity back on line and has cut its solar FIT, leading to expectations for substantially smaller Japanese solar installs over the next few years. GTM is forecasting that Japan’s solar installs in 2016 will fall by 12% to 10.2 GW from the peak of 11.644 GW in 2015 and in 2017 will fall by another 14% to 8.8 GW.

Despite the near-term weak spots for solar, there are strong spots that should still lead the industry to a healthy overall growth rate in 2016. U.S. solar is set to surge this year by 94%, according to GTM, due to the huge amount of utility solar that was brought forward into 2016 to take advantage of the previous ITC expiration at the end of this year. Meanwhile, solar in India this year is set to surge by +127%, according to GTM, as the country relies heavily on solar to expand its electricity capacity and modernize its infrastructure.

The solar industry in coming years will depend less on the big countries for growth. By 2020, GTM is forecasting that 21 GW of solar power growth will come from Latin America, 16 GW from the Middle East and Turkey, and 15 GW from Asia (apart from China, India, Japan and Australia).

Solar blows its competitors out of the water with 64% of new U.S. electricity capacity in Q1

The U.S. installed 1.665 GW of solar PV in Q1-2016, which accounted for 64% of new U.S. electricity generation capacity in Q1-2016, more than natural gas, coal, nuclear and wind combined, according to the U.S. Solar Market Insight Q2-2016 (link). Solar in Q1 sharply raised its market share from the 29.4% contribution to new electricity in 2015, which in any case edged out natural gas at 29.0%. The Q1 solar install rate represented a 24% year-on-year growth.

For all of 2016, GTM Research is forecasting that U.S. solar installs will surge by 94% y/y to 14.5 GW, mainly because of a surge in utility PV that will account for about two-thirds of all U.S. solar installs. Utility PV is seeing a big surge in 2016 because many solar projects were hurried into 2016 to take advantage of the Investment Tax Credit (ITC) that was previously scheduled to expire at the end of 2016. Congress in December 2015 extended the ITC by 5 years, but most of the projects that were already in planning will move ahead in 2016, thus causing the 2016 bulge. That also means, however, that utility PV will drop sharply in 2017 from the artificially high level seen in 2016.

The drop in utility PV growth to more normal levels starting in 2017 is expected to cause the overall U.S. solar growth rate to fall by about 17% in 2017 and by about 7% in 2018, according to GTM. However, GTM then expects the U.S. solar install rate to return to a strong annual growth rate averaging about 20% in the 2019-2021 period. Smoothing out the ITC effects results in an expected 6-year compounded annual growth rate of +19% from 7.5 GW of installs 2015 to 21.5 GW of installs in 2021, according to GTM.

Competitive auctions slowly push aside FITs and help push solar pricing to as low as 5-6 cents/kWh

Utility solar PV pricing worldwide has dropped in the past year to an average of 4.5 cents per kWh, according to GTM Research’s recent “Global Solar Demand Monitor” (link). GTM reports that solar PV won a whopping 72% of all electricity capacity awarded in 2015, beating wind, hydropower, cogeneration, combined-cycle natural gas, and geothermal. In the U.S., utility scale power purchase agreements fell to 6 cents/kWh in 2015 and could be headed for an average below 5 cents/kWh in 2016 (including the ITC), according to GTM Research.

A new record low for solar pricing was established in May when developers offered electricity prices at 2.99 cents per kWh for 800 MW of solar power projects for the Dubai Electricity & Water Authority. That was even lower than the 5.07 cents per kWh solar pricing that Mexico accepted at a clean energy auction in April for 1.9 GW of power for CFE, Mexico’s only utility.

The decline in solar PV pricing has been caused in part by the global move to competitive auctions whereby a government or utility just specifies the need for a certain-size electricity plant and then accepts bids from interested developers. The competitive nature of the auctions means that solar companies have a strong incentive to improve their technology and reduce installation and financing costs as a means to beat their competitors.

Competitive bidding is increasingly replacing the feed-in tariff (FIT) system whereby utilities are required to buy electricity from solar plants at specified fixed prices. The problem with the FIT system is that it is difficult for the government to set the FIT price correctly to achieve the desired amount of solar. There are many examples such as Spain where the government set the FIT price too high, thus causing a massive surge of solar that ended up costing too much in subsidies and leading to a subsequent cancellation of the entire program. Other key European markets also went through a boom-bust cycle by relying mainly on the FIT system. The FIT system has been complicit in causing boom-bust cycles in a number of geographical solar markets, which in turn causes chaos for the solar industry in trying to adjust investment and production to wildly fluctuating demand. The solar industry would be much better served over the long run by a smoother and more predictable demand curve.

For the long-term health of the industry, solar power in any case must become progressively cheaper over time so that it easily beats alternatives on price without subsidies. The competitive auction system aligns itself better with the needs of buyers as well as with the solar industry over the long-term as it seeks to reduce pricing while maintaining reasonable profit margins.

There has been some concern that competitive auctions might unduly hurt profit margins in the solar industry. Indeed, competitive pricing could force some high-cost producers out of the market unless they can find less competitive niches for their products. However, the competitive pricing system rewards the best solar companies with the best technology and the lowest-cost systems.

The issue of competitive auctions and profitability was recently addressed by Enel Green Power’s CEO Francesco Venturini whose company in April won a 992 MW project in Mexico with a bid of an extraordinarily low 3.5 cents per kWh. Mr. Venturini told Bloomberg News in a recent interview, “There is no value in winning without margin attached. I have two investment committees and two boards of directors I need to present my project to and they want to see the money attached to it. So trust me, there is margin.”

World renewable energy jobs soar to 8.1 million

Global renewable energy employment increased by 5% in 2015 to 8.1 million jobs, according to the annual review by the International Renewable Energy Agency (IRENA) (link). IRENA expects that renewable energy jobs will triple to 24 million by 2030, making renewable energy a key sector to help drive job growth as well as the world economy in the years ahead.

Solar PV was the largest renewable energy employer in the world in 2015 with an 11% increase in jobs to 2.8 million jobs, according to IRENA. Meanwhile, the number of U.S. solar jobs rose by 22% in 2015 to 209,000, according to the report, which means that there are now more people working in the solar industry than there are in either the U.S. coal or oil/gas extraction industries.

Clean Power Plan oral arguments are delayed until Sep 27

Oral arguments on the case about whether the EPA overstepped its authority with the Clean Power Plan (CPP) were delayed until September 27 from June 2. In addition, the case will now be heard by all the judges (en-banc) on the Court of Appeals for the District of Columbia Circuit Court rather than by the usual three-judge subset of the court. The court did not give a reason why the case will be heard by the entire court, but that will at least skip the step whereby a decision of a three-judge panel can first be appealed to the full en-banc court. Now, the decision of the Court of Appeals of the DC Circuit will go straight to the U.S. Supreme Court on appeal.

The Court of Appeals for the DC Circuit currently has eleven judges but two of those judges have recused themselves from the CPP case, i.e., judge Nina Pillard and Chief Judge Merrick Garland, who is awaiting Senate consideration for his nomination as a Supreme Court justice by President Obama. Of the nine judges who will hear the CPP case, five were appointed by Democratic presidents and four were appointed by Republican presidents, possibly giving the CPP the upper hand with a 5-4 decision if the case is decided along partisan lines.

Based on the current time line, a decision by the Court of Appeals for the DC Circuit could come by winter or early spring 2017. The case would then likely be heard by the U.S. Supreme Court by spring or fall 2017.

However, the fate of the CPP depends heavily on the outcome of the presidential election. If Donald Trump wins the White House in the November election and takes over as President in January, then the Court of Appeals of the DC Circuit and the U.S. Supreme Court might never even issue a decision on the CPP because the Trump administration would presumably retract the EPA’s CPP altogether, making a court ruling moot. Mr. Trump has not expressed a formal policy position on the CPP but it seems safe to assume that he would quickly retract the CPP based on his stated views that global warming is a hoax and that the entire EPA as an agency should be eliminated.

On the other hand, if Hillary Clinton or another Democrat wins the White House, then the ultimate fate of the CPP would likely depend on the makeup of the U.S. Supreme Court at the time of a CPP decision. The presumption is that the Supreme Court at present is tied 4-4 on CPP since opponents to the CPP lost their 5-4 advantage on the Court when Antonin Scalia died in February 2016. If Ms. Clinton can get a new Supreme Court justice through the Senate in time for a CPP ruling, then the chances would appear to be good for a 5-4 vote in favor of CPP. On the other hand, if Ms. Clinton wins the White House but cannot get a new justice on to the Supreme Court in time for a CPP ruling, then the Supreme Court could end up deadlocked 4-4 on the CPP. In the case of a Supreme Court deadlock, the decision of the Court of Appeals of the DC Circuit would become the final ruling on the CPP case, illustrating the importance of a Court of Appeals decision.

The CPP is currently in a state of suspended animation since the U.S. Supreme Court on February 9, 2016, granted a stay for the states on complying with the EPA’s CPP until the merits of the plan are litigated in court. The Supreme Court’s stay means that states, if they wish, can stop the planning process on how they would comply with the CPP. That stay was granted by the Supreme Court by a 5-4 vote when Antonin Scalia was still on the bench.

The CPP is not scheduled to come into full effect until 2022. Before the Supreme Court issued its stay, the states were required to submit their plans by 2018 on how they would comply with the CPP. If the EPA ultimately wins the CPP case, it not clear whether the EPA will give the states additional time to submit their plans since states that oppose CPP have stopped work on their plans. However, states that favor the plan have continued their work on adopting their plan to meet the requirements of the CPP.

The goal of the EPA’s CPP is to reduce national greenhouse gas emissions by 32% from 2005 through 2030 and for the U.S. to get 28% of its electricity from renewable energy sources by 2030, more than double the 2014 level of 13%. The CPP is the centerpiece of the Obama administration’s plan on how to comply with the Paris COP21 global climate agreement. If the CPP ultimately does come into effect, it would provide a big boost for solar power after the current solar Investment Tax Credit (ITC) drops to 10% in 2022 from 30% at present.

SunEdison files bankruptcy due to debt and corporate hubris but not solar industry conditions

SunEdison (SUNEQ) on April 21 filed for Chapter 11 bankruptcy protection. SunEdison was dropped from the MAC Solar Index about a month earlier on March 22 when DebtWire carried the first report that SunEdison was in discussions for bankruptcy financing.

SunEdison’s descent into bankruptcy was caused by the company’s overly aggressive expansion plans and its willingness to quickly run its debt up to as high as $16 billion. SunEdison’s attempted $2.2 billion acquisition of U.S. residential-solar-installer Vivent (VSLR) finally pushed the company over the edge as investors lost faith in the company’s strategic direction and as the company then faced a liquidity crunch. The company also ran into internal financial control problems that resulted in a delay in filing its annual report, which resulted in a breach of some loan covenants.

SunEdison has so far been moving smoothly through the Chapter 11 bankruptcy process and secured a $1.3 billion loan to continue its operations in an effort to eventually move out of bankruptcy and reestablish itself as a going concern. SunEdison at this point does not plan to liquidate although it will be selling off some of its solar and wind projects to raise cash and pay off creditors, which could put some temporary downward pressure on project prices.

SunEdison’s two affiliated yieldcos, Terraform Power (TERP) and TerraForm Global (GLBL) have stated that they have sufficient liquidity and that they have no intention of filing bankruptcy. The TerraForm yieldcos are standalone business entities with their own stock listings and boards. The TerraForm yieldcos, however, do face a period of uncertainty because their financial statements have been delayed by SunEdison’s delay in filing its financial statements and because there are a host of legal issues that need to be worked through. Nevertheless, the yieldcos have so far been able to successfully navigate SunEdison’s bankruptcy.

The process by which a yieldco can fully separate itself from an insolvent sponsor has already been charted by Abengoa YIeld (ABY). Abengoa Yield’s original sponsor, the Spanish engineering and construction company Abengoa S.A. (ABG SM), is currently working through preliminary insolvency proceedings in Spain. However, Abengoa Yield has so far successfully established itself as a standalone yieldco business and recently changed its name to Atlantica Yield to reflect its independence.

Yieldco model navigates current difficulties

The SunEdison saga exposed some weaknesses of the yieldco model but did not kill the concept as a whole. The SunEdison saga contained several key lessons: (1) a yieldco needs to have an independent board and management and must deal at arm’s length with a sponsor, (2) the yieldco’s cost of capital must remain low enough to ensure that it can profitably buy solar projects, and (3) the yieldco must set realistic dividend expectations for investors and cannot overpromise on dividend growth.

A yieldco is just one way in which a renewable energy company can monetize projects that it builds, aside from just selling the project outright when it is completed. In the yieldco model, the sponsor company first builds a solar plant and then sells that plant to the yieldco, retaining an ongoing financial interest through partial ownership and/or incentive distribution rights (IDRs). By getting the project off its balance sheet, the renewable energy developer keeps a leaner balance sheet and can recycle its project capital while still capturing the profits from building projects and retaining some financial incentive rights in the projects.

Meanwhile, the separately-listed yieldco company can become an attractive investment for investors because it typically pays little or no taxes (due to high non-cash expenses from amortizing the project purchase price) and pays a high dividend to investors from its high cash flow. The investor is getting a high-yield investment that is typically very safe because the yieldco’s electricity sales revenues are fixed in long-term power purchase agreements that are guaranteed by a highly-rated utility or large corporation. The yieldco structure is essentially just a modified version of the Master Limited Partnership (MLP) structure that has proved to be so successful in the fossil fuel industry. The yieldco name is new, but the concept is only a twist on the long-standing MLP model.

The SunEdison saga has caused most of the large solar companies to freeze their plans for their own yieldcos as they reevaluate the best ways to monetize the value of solar projects. However, the yieldco model is by no means dead. Indeed, 8point3 Energy Partners (CAFD), a yieldco formed by First Solar and SunPower, avoided the key problems seen at SunEdison’s yieldcos because it was more cautious on its dividend guidance and the yieldco was set up in the first place with more independence since it had two different sponsors.

Financial analyst Tom Konrad in a recent article entitled “The YieldCo Boom and Bust: The Consequences of Greed and a Return to Normalcy” (link) provides a good overview of recent yieldco developments. He notes that some normalcy has been returning to the yieldco market and that some yieldcos have returned to the market to sell equity. He concludes that the yieldco model “is not broken” but that “investor expectations have changed.”

In any case, the lessons of SunEdison will help the rest of the solar industry evolve on being more careful with debt and on choosing the best business models for maximizing value for shareholders.

U.S. installs more solar than natural gas in 2015; U.S. utility solar seeing strength outside mandates; CPP stayed by Supreme Court – April 2016
 

Read report in PDF with graphs:  MAC-Solar-Sector-Update-Apr-2016
Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has rebounded somewhat since mid-February after the sharp sell-off seen in the first six weeks of 2016. The index is currently down -28% 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) the downward U.S. stock market correction seen in early 2016 and the general risk-off trading environment, (2) the U.S. Supreme Court’s decision in February to stay the EPA’s Clean Power Plan until challenges to the program can be heard in court, (3) concern that slower economic growth in China may translate into reduced solar power growth in China, (4) weakness in crude oil and natural gas prices that have had a negative effect on solar stocks as well the U.S. stock market in general, and (5) continued solar trade disputes.

Recent bullish factors for solar stocks include (1) the 5-year extension of the U.S. solar investment tax credit (ITC) approved by Congress in December, (2) the Paris COP21 global climate agreement in December, which established a long-term framework for the world to reduce carbon emissions, and (3) a favorable extension of California’s net metering program where nearly half of U.S. residential solar is installed.

Solar stocks are currently trading at bargain-basement prices compared with the broad market. The median trailing P/E of companies in the MAC Solar Index is currently 11.6, which is well below the P/E of 18.8 for the companies in the S&P 500 index. The median price-to-book ratio of 1.04 for the companies in the MAC Solar Index is well below the 2.81 ratio for the S&P 500. The median price-to-sales ratio of 0.96 for the MAC Solar Index is well below the 1.84 ratio for the S&P 500.

Despite the recent weakness in solar stock prices, the global solar industry itself continues to show strength. Global solar has grown at a very strong +25% compounded annual rate over the last five years. Meanwhile the long-term demand outlook for solar remains very strong since solar will account for 35% (3.439 GW) of all electricity capacity additions and a massive $3.7 trillion of solar spending through 2040, according to Bloomberg New Energy Finance (BNEF). Moreover, BNEF expects all-in project costs for solar to plunge by another 48% by 2040, thus making solar one of the cheapest sources of electricity.

U.S. installed more solar than natural gas in 2015

The U.S. installed more new solar electricity generation capacity than natural gas capacity in 2015, meaning that solar flat out beat fossil fuels in 2015. Natural gas has an advantage over solar power as far as solar’s intermittency, but solar wins on avoiding the environmental damage of natural gas and also having a known and fixed up-front cost as opposed to exposure to the volatility of natural gas prices down the road.

Specifically, solar installations in 2015 accounted for 29.4% of all new U.S. electricity generation capacity, edging out natural gas at 29.0%, according to SEIA/GTM Research’s “U.S. Solar Market Insight report for 2015” (link). Wind actually beat both solar and natural gas with 39.0% of new generation. New nuclear and coal capacity was negligible. Solar and wind together accounted for more than two-thirds of new U.S. electricity generation capacity, together beating natural gas by a factor of 2-to-1.

U.S. solar growth is expected to soar by 120% in 2016

U.S. solar installs will see a banner year in 2016 with 120% growth to 16 GW, according to the SEIA/GTM report mentioned earlier. In 2015, U.S. solar installs grew by +15% to 7.3 GW from 6.3 GW in 2014, according to Bloomberg New Energy Finance. U.S. solar has grown by a compounded annual rate of +51% over the last five years.

U.S. solar growth will be temporarily boosted in 2016 by a large number of solar projects that were started early to beat what would have been the step-down of the investment tax credit (ITC) at the end of 2016, if Congress in late 2015 had not extended the ITC by another five years. GTM expects U.S. solar growth in 2017 to dip after the ITC-surge in 2016 but then resume strong growth again in 2018-19.

From a segment perspective, U.S. solar in 2015 received a big boost from +66% growth in residential PV to more than 2 GW, according to the SEIA/GTM report. Utility solar grew more slowly in 2015 by +6% to 4 GW but was still twice the size of residential solar installs. Utility solar will grow sharply in 2016 due to the huge 19.8 GW contracted project pipeline and will account for about three-quarters of U.S. solar installs in 2016, according to GTM . Non-residential solar (i.e., commercial and industrial) was little changed at 1.0 GW in 2015 but is expected to start growing again in 2016.

Geographically, solar installs were more broadly spread across the U.S. in 2015 with 13 states installing more than 100 MW of solar, up from 9 states in 2014, according to the SEIA/GTM report. There are now six states that have surpassed 1 GW in installed solar capacity, including California, North Carolina, Nevada, Arizona, New York, and New Jersey.

California installed the most solar in 2015 at 3.266 GW, accounting for 45% of all U.S. solar installs, according to the SEIA/GTM report. North Carolina installed the second most solar in 2015 at 1.134 GW (+186% yr/yr), accounting for 16% of all U.S. solar installs. The next largest amounts of solar installs in 2015 were Nevada (-12% yr/yr to 307 MW), Massachusetts (-10% to 286 MW), New York (+64% to 241 GW), and Arizona (-5% to 234 MW).

The SEIA/GTM report found that the average price of a solar system in the U.S. fell by -17% in 2015. The largest price declines were seen in the utility-scale solar. A steady decline in solar pricing is being caused by reduced hardware costs, installation costs, and financing costs.

World solar growth in 2016 is expected to slow somewhat from 2015’s strong +24% pace

Solar PV installs across the world in 2015 grew by +24% to 56 GW from 45 GW in 2014, according to Bloomberg New Energy Finance. World solar has now shown a compounded annual growth rate of +25% over the last five years and has risen by three-fold from 18.2 GW in 2010.

As for 2016, GTM Research is forecasting solar growth of +8.5% to 64 GW from GTM’s estimate of 59 GW of 2015 solar. However, IHS is forecasting much higher 2016 growth of +17% to 69 GW from IHS’s 2015 install figure of 59 GW. IHS expects 2016 growth to mainly come from the U.S., China, and India. The overall world solar growth rate in 2016 is expected to be somewhat slower than 2015 due to reduced subsidy support in Europe and Japan.

China was the top country for world solar installs in 2015 at 16.0 GW, up +23% from 2015. Japan was in second place with 11.6 W of installs (+13% yr/yr), the U.S. was third with 7.3 GW of installs (+15% yr/yr), and the UK was fourth with 3.7 GW of installs (+69% yr/yr). Solar in India holds great promise but has a long way to go with only 2.1 GW of installs in 2015 (+158% yr/yr). Due to reduced subsidy support, Germany solar installs fell by a double-digit rate for the third straight year to 1.0 GW, down from the peak of 7.6 GW in 2012. Further information on 2015 solar installs is available on pages 5-6 of this report.

U.S. utility scale solar is seeing strength outside mandated growth

The fact that solar is coming of age can be seen in a new report by GTM Research forecasting that more than half of U.S. utility-scale solar growth in 2016 will be outside state-mandated renewable portfolio standards (RPS) (see “The Next Wave of U.S. Utility Solar: Procurement beyond the RPS”). State RPS regulations require utilities to obtain a certain minimum proportion of their electricity from renewable sources. GTM reports that through 2015, RPS requirements in 36 states and Washington DC accounted for 61% of utility-scale solar installs. However, GTM now predicts that a majority of utility solar (52%) will be outside RPS requirements in 2016 with more than 6 GW of non-RPS utility solar. The report says that the two main drivers of utility solar are falling costs and the fact that utilities can lock in stable electricity generation prices on a multi-year basis as opposed to having exposure to the volatile costs of natural gas.

Clean Power Plan is stayed by Supreme Court while litigation on the merits progresses

The U.S. Supreme Court on February 9 surprised many observers by granting a stay for the states on complying with the EPA’s Clean Power Plan (CPP) until the merits of the plan are litigated in court. The Supreme Court’s stay means that states, if they wish, can stop the planning process on how they will comply with the CPP, which in any case does not require plans to be submitted until 2018 and does not come into full effect until 2022.

The goal of EPA’s CPP is to reduce national greenhouse gas emissions by -32% from 2005 through 2030 and for the U.S. to get 28% of its power from renewable energy sources by 2030, more than double the 2014 level of 13%. The CPP is the centerpiece of the Obama administration’s plan on how to comply with the Paris COP21 global climate agreement. The CPP encourages states to get more of their electricity from clean energy sources. If the CPP ultimately survives its legal challenges, it will provide a big boost for solar and wind power.

Attention on the CPP now shifts to the CPP court case on the merits that is currently being heard in the federal D.C. Circuit Court. Oral arguments on the case could be heard as early as June. Once the case is decided either way, it will undoubtedly be appealed all the way up to the Supreme Court.

The recent death of Supreme Court Justice Antonin Scalia potentially complicates the CPP situation. The Supreme Court issued the stay for the CPP when Mr. Scalia was still alive and the decision was 5-4 in favor of the stay. The fact that the Supreme Court granted the stay was a hint that the Court might be inclined to strike down the CPP altogether if the Court had been ruling on the merits of the CPP. However, conservatives have currently lost their 5-4 advantage on the court and much now depends on how a new Supreme Court justice would rule on the case, whenever a new justice might be approved by the Senate. In any case, it will likely be at least 2017 or 2018 before the legal status of the CPP receives a final determination in the Supreme Court if the CPP is not killed earlier in the event that a Republican president is elected in November.

Solar industry gets a final win on net metering in California

The U.S. solar industry received a big win when the California Public Utilities Commission on Jan 28 formally approved its earlier proposal for a “net metering 2.0 program” to take effect when the current program expires in 2017. The decision preserves net metering payments made to solar households at retail rates, rather than at a lower rate such as a wholesale rate. However, there were some negatives in the decision such as an initial interconnection fee of $75-100 for new solar customers, a 2-3 cent per kWh fee on net metering customers that is paid by other utility customers, and a move to make net metering tariff payments in the future tied to the variable “time-of-use” cost of electricity at various times during the day. On the whole, the solar industry was pleased with the proposal since the California PUC preserved net metering at retail rates. The industry hopes that the California proposal will provide a regulatory model for other states.

Oregon phases out coal and adopts a 50% renewable energy target by 2040

Oregon’s governor on March 11 signed into law a measure that requires the state’s utilities to stop purchasing coal power by 2035. Oregon thereby became the first state to begin to phase out coal power by legislative action. The bill also requires Oregon’s utilities to get at least 50% of their electricity generation from clean sources by 2040. Other states with aggressive renewable energy targets include a 50% target by 2030 for California and New York, a 75% target by 2032 for Vermont, and a 100% target by 2045 for Hawaii.

Exxon gets hits by both climate change resolution and Rockefeller Foundation divestment

The SEC in March ruled that Exxon Mobil Corp (XOM) will have to include a climate change resolution in its annual shareholder proxy ballot. The proposal was submitted by New York state’s comptroller. If approved by shareholders, the climate change resolution would require Exxon to detail the impact that climate change, or legislation on climate change, could have on the company’s profitability. Exxon shareholders typically have not approved climate change resolutions, but the resolution nevertheless spotlights the profitability risks for fossil fuel companies from climate change and the shift to a lower carbon future. Chevron (CVS) was also required to put a climate change resolution on its annual proxy ballot.

Meanwhile, the Rockefeller Family Fund said in March that it will divest from fossil fuels. The Rockefeller Fund also said that it will eliminate its holdings of Exxon Mobil because it believes the company has misled the public about climate change risks. The fact that the Rockefeller Family Fund is divesting from Exxon Mobil is particularly notable since Exxon Mobil is the descendent of Standard Oil, the company that made John D. Rockefeller the richest man in the world at the time. It is a sign of the times when some hundred years later, Mr. Rockefeller’s descendants have rejected their fossil fuel heritage due to the deleterious impact of fossil fuels on the environment.

SunEdison may be close to bankruptcy filing due to liquidity crunch

SunEdison (SUNE) is reportedly planning a bankruptcy filing according to reports by Debtwire and the Wall Street Journal. SunEdison was dropped from the MAC Solar Index on March 22 due to the bankruptcy planning reports.

If SunEdison does in fact file a bankruptcy petition, it will not be because of conditions in the solar industry but rather because the company got caught in a liquidity crunch after trying to grow too fast and taking on too much debt with a highly complex financing structure. The company also ran into internal financial control problems that resulted in a delay in filing its annual report, which resulted in a breach of some loan covenants.

Solar sector receives strong boost from Paris COP21 climate agreement, 5-year U.S. ITC extension, and California net metering decision; American solar jobs now exceed oil/gas jobs – Jan 2016
 

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

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), rallied in mid-December but then showed a sharp decline in early January and is currently down -22% year-to-date in 2016. The MAC index in 2015 closed -15% lower after the -2% decline seen in 2014 and the +127% gain seen in 2013.

Solar stocks fell in early January due to (1) the renewed sell-off in the Chinese stock market and the downward correction in the U.S. stock market, which resulted in a “risk off” trading environment, (2) concern that slower economic growth in China may translate into reduced solar power growth in China, (3) weakness in crude oil and natural gas prices, and (4) continued solar trade disputes.

January’s sell-off in solar stocks was mainly due to factors external to the solar sector since the solar industry itself is performing very well with strong demand and improving margins. Global solar demand continues to be very strong with both increasing unit sales and decreasing costs due to technology advances and economies of scale. Global solar growth in 2015 is estimated at +36% y/y by GTM Research, with about 37% growth in China and 29% growth in the U.S. Meanwhile the long-term demand outlook for solar remains very strong since solar will account for 35% (3.439 GW) of all electricity capacity additions and a massive $3.7 trillion of solar spending through 2040, according to Bloomberg New Energy Finance (BNEF). BNEF also expects all-in project costs for solar to plunge by another 48% by 2040, thus making solar a cheap electricity capacity source and beating most other sources of electricity generation.

The solar sector received very positive news in December that included (1) the surprise 5-year extension of the U.S. investment tax credit (ITC) and the elimination of the so-called “ITC cliff” at the end of 2016, (2) the Paris COP21 global climate agreement, which provides a long-term framework for the world to reduce carbon emissions, and (3) a favorable new net metering program in California.

Solar stocks are currently trading at bargain-basement prices compared with the broad market. The median trailing P/E of companies in the MAC Solar Index is currently 8.5, which is far below the P/E of 16.8 for the S&P 500 index. The median price-to-book ratio of 1.03 for the MAC Solar Index is well below the 2.53 ratio for the S&P 500. The median price-to-sales ratio of 0.77 for the MAC Solar Index is well below the 1.66 ratio for the S&P 500.

December’s Paris climate agreement provides a long-term framework for carbon reduction with the need for $13.5 trillion of investment

An historic global climate agreement to reduce carbon emissions was reached in December among 195 countries at the UN COP21 conference in Paris. The agreement will require massive spending of $13.5 trillion through 2030 to meet the carbon reduction targets, according to the International Energy Agency. This will involve the annual expenditure of $840 billion on various low-carbon solutions such as solar, wind, nuclear, carbon capture/storage, and energy efficiency.

The Paris climate agreement was criticized by some because the carbon reduction targets were not binding. The targets had to be voluntary because binding targets would not get through the U.S. Congress and would pose ratification problems in other countries as well.

Nevertheless, the agreement provides a permanent framework by which the world can now measure its intended progress towards reducing carbon emissions. The agreement also puts strong peer pressure on all nations to meet their stated goals. Moreover, the monitoring and reporting requirements in the agreement are actually binding, which means the world will at least be able to agree on which countries are, or are not, reducing carbon emissions in line with their stated targets. The agreement in short provides a critical monitoring and transparency framework for reducing carbon emissions.

Prior to December’s Paris agreement, there effectively was no global climate agreement in place. The old 1997 Kyoto Protocol agreement was limited mainly to Europe, was never ratified by the U.S. Congress, and didn’t apply to developing nations. The last major climate conference in Copenhagen in 2009 failed to produce a global climate agreement due in part to foot-dragging by the developing world.

The Paris climate agreement will come into force after it is ratified by at least 55 countries representing at least 55% of global emissions. The Obama administration can sign off on the agreement without the approval of Congress because the climate agreement is specifically structured so that it is not a treaty under U.S. law, meaning there is no way that the U.S. Congress at this point can block U.S. participation in the agreement. President Obama plans to meet the U.S. targets for carbon reduction by promoting renewable energy, boosting vehicle efficiency, and implementing the Clean Power Plan to reduce emissions from the all-important utility industry.

Under the Paris climate agreement, there will be a review every five years starting in 2018 to determine whether the pledges are strong enough to meet the climate change goals. Moreover, countries will be required every five years starting in 2020 to update their pledges and prepare tougher pledges if necessary. The targets of the Paris climate agreement do not take effect until 2020. In the meantime, countries will complete any required national ratification processes and will discuss a variety of implementation rules.

As part of the Paris agreement, the U.S. pledged to reduce emissions by 26-28% by 2025 from 2005 levels, The European Union pledged a 40% cut in greenhouse gases by 2030 from 1990. China pledged to cut carbon emissions per unit of economic output by 60-65% by 2030 from 2005 and increase the share of energy from renewables and nuclear to 20% by 2030. India set a goal of cutting carbon emissions per unit of economic output by 33-35% by 2030 from 2005 and to get 40% of its electricity capacity from non-fossil fuels by 2030. Russia committed to a 25-30% reduction in greenhouse gas emissions by 2030 from 1990.

While some members of the U.S. Congress objected to U.S. participation in the Paris climate agreement, the fact remains that the U.S. public generally supports efforts to reduce carbon emissions. In fact, two-thirds of Americans support the idea of the U.S. joining a binding international agreement to curb the growth of carbon emissions, according to the latest NY Times/CBS News poll. Moreover, Republican voters are increasingly convinced that global warming is real, which means that climate change is gaining more grass-roots political support. A Yale poll found that 74% of self-identified Republicans now believe that climate change is real, up sharply from only 52% in 2013. Unfortunately, some representatives in Congress continue to lag behind the public on climate change issues.

Paris climate agreement will not meet its goal of capping global warming and will likely require sharper carbon cuts down the road

While the Paris agreement was certainly a step in the right direction, researchers generally believe that the targets in the agreement will not be enough to stop global warming.

The Paris agreement seeks to cap global warming at 2 degrees Celsius (3.6 degrees Fahrenheit) from pre-industrial levels and calls on the parties to implement further carbon cuts to limit warming to 1.5 degrees Celsius. However, Climate Action Tracker is forecasting a 2.7 degree (Celsius) increase in global warning even if the pledges are met. Another group, Climate Interaction, is forecasting an even larger 3.5 degree (Celsius) increase in global temperatures.

As an indication of the scale of the global warming problem, NASA and the National Oceanic and Atmospheric Administration in January announced that 2015 was the earth’s hottest year since record-keeping began in 1880. NASA said that 2015 was 1.8 degrees Fahrenheit warmer than the late 19th century. In a separate analysis, NOAA said that 2015 was 1.62 degrees Fahrenheit warmer than the 20th century average.

The Paris climate agreement allows for carbon reduction targets to be “ratcheted up” in the future if global warming is not halted. However, the longer the world waits to cut carbon emissions, the sharper the cuts will need to be down the road. Moreover, there is the issue of whether it may soon become too late to stop global warming due to feedback loops such as increased methane emissions from thawing Arctic permafrost, the release of methane-trapped-ice, reduced sunlight reflection as polar and glacial ice melts, and the reduced ability of the oceans to absorb carbon dioxide as they become more acidified by CO2 absorption.

Paris climate agreement means $100 trillion of stranded fossil fuel reserves

The fossil fuel industry was clearly the big loser in the Paris climate agreement since the world committed itself to curb the use of fossil fuels and move towards low-carbon energy solutions. In order to meet the Paris climate targets, Citigroup analysts estimate that the world has to stick to a “carbon budget” and must leave in the ground one-third of the world’s oil reserves, one-half of global natural gas reserves, and 80% of global coal reserves. This amounts to a massive $100 trillion of stranded fossil fuel reserves that cannot be exploited, according to Citigroup analysts.

In addition to reserves left in the ground, the fossil fuel industry is expected to be forced to mothball a large number of extraction facilities as demand for fossil fuel ebbs. Carbon Tracker Initiative says that oil, natural gas, and coal producers are risking $2.2 trillion on projects for which there will be no demand as countries move towards meeting the Paris COP21 climate targets.

Investors are clearly getting the message about the risks of the fossil fuel industry. A recent survey of 200 global institutional investors by Ernst & Young found that 62% of respondents expressed concern about stranded-fossil-fuel asset risk and 36% said that their funds had already divested some stock investments because of concern about stranded assets. The risks in the fossil fuel industry are clearly rising as the world shifts toward renewables and are making the renewable energy industry look less risky by comparison.

Gates, Zuckerberg and others found the “Breakthrough Energy Coalition” with a $2 billion commitment for climate investment

To kick off December’s UN COP21 conference, a group of tech leaders and philanthropists announced their commitment to a new $2 billion fund to promote research for climate solutions. Bill Gates himself committed up to $1 billion to the effort. There are 26 members of the group that included Microsoft Founder Bill Gates, Facebook founder Mark Zuckerberg, Amazon founder Jeff Bezos, Alibaba founder Jack Ma, Khosla Ventures founder Vinod Khosla, fund manager George Soros, HP CEO Meg Whitman, billionaire entrepreneur Richard Branson, Ratan Tata of India’s Tata heavy industry group, and Saudi Prince Alwaleed bin Talal.

Bill Gates said in a July blog post, “If we create the right environment for innovation, we can accelerate the pace of progress, develop and deploy new solutions, and eventually provide everyone with reliable, affordable energy that is carbon free. We can avoid the worst climate-change scenarios while also lifting people out of poverty, growing food more efficiently and saving lives by reducing pollution.”

Also at the beginning of the COP21 conference, 20 major countries announced their participation in a new program called “Mission Innovation” in which they agreed to double their respective clean energy R&D over five years. These investments amount to $10 billion annually, with $5 billion coming from the U.S., according the New York Times. The public “Mission Innovation” and the private “Breakthrough Energy Coalition” agreed to work together in a public-private partnership to help solve energy problems.

5-year U.S. solar ITC extension provides huge boost for U.S. solar industry

Congress in mid-December approved a surprise 5-year extension of the solar investment tax credit (ITC) as part of an “energy grand bargain” in which the renewable tax credit extensions were traded for dropping the 40-year ban on exporting U.S. crude oil. In reality, the extension of the solar ITC was more bipartisan than it might appear since there were undoubtedly many Republicans in Congress who favored the extension of the solar ITC extension, even if they were not forced to say so, due to the importance of solar jobs in many states and due to the increasing acceptance among Republican voters that global warming is real.

Specifically, Congress extended the solar 30% ITC until 2019 when it will be phased down to 26% in 2020 and 22% in 2021, thereafter remaining permanently at 10%. If it were not for the extension, the solar ITC would have dropped to 10% at the end of 2016. In another big win for the solar industry, solar projects now only need to commence construction by the year-end ITC deadlines, rather than the previous rule of being completed and connected to the grid by the year-end ITC deadlines, which gives solar companies more time and certainty about using the ITC credit.

The extension of the solar ITC will keep solar electricity costs low and will help solar to better compete against other sources of new electricity generation over the next five years. In addition, the increased level of unit sales from the ITC extension should help the solar industry reduce solar costs more quickly by taking advantage of larger economies of scale and a steeper experience curve.

The 5-year solar ITC extension will attract $40 billion in new solar investment over the next four years and will double the number of jobs in the U.S. solar industry to 420,000, according to the Solar Energy Industries Association. The SEIA also said that the ITC extension will boost total U.S. solar electricity capacity to 100 GW by 2020, which would nearly match U.S. nuclear capacity and would be 25 GW higher than if the ITC had not been extended.

The ITC extension also means that power purchase agreements (PPAs) for utility-scale solar will now be regularly signed for 4 cents/kWh and below, according to GTM’s vice president of research Shayle Kann.

The 5-year ITC extension to 2021 also provides a favorable runway for the solar industry leading up to the EPA’s Clean Power Plan (CPP), which does not come into full effect until 2022. The Clean Power Plan will push utilities to get more of their electricity generation capacity from clean technologies such as solar and wind. The EPA’s CPP targets a 32% reduction in national greenhouse gas emissions from 2005 through 2030 and a goal for the U.S. to get 28% of its power from renewable energy sources by 2030, more than double the 2014 level of 13%. As a side note, the CPP received a big boost in January when a U.S. federal court said that the requirements of the Clean Power Plan can move ahead while a suit against the plan by 27 states is being considered in the courts. Opponents to the CPP have therefore failed thus far to block the CPP.

The so-called “ITC cliff,” which would have occurred if the ITC had expired at the end of 2016, had previously given investors a reason to be cautious about the solar sector as they waited to see how much new solar installations in the U.S. would dip without the ITC. However, the 5-year ITC extension now gives the U.S. solar industry better visibility and a much stronger longer-term demand picture. Cowen and Company in an ITC research note written in December noted that their solar research analysts were receiving calls from a much broader range of investors after the ITC was extended since the U.S. solar industry is now on much more certain ground.

Solar industry gets big win on net metering in California but sees setbacks in Nevada and Hawaii

The U.S. solar industry received a big win when the California Public Utilities Commission in December issued a proposal for a “net metering 2.0 program” to take effect when the current program expires in 2017. The proposal preserves net metering payments made to solar households at retail rates, rather than at something below retail rates such as wholesale rates. However, there were some negatives in the proposal such as an initial interconnection fee of $75-100 for new solar customers, imposing a 2-3 cent per kWh fee on net metering customers that is paid by other utility customers, and a move to make net metering tariff payments in the future tied to the variable “time-of-use” cost of electricity at various times during the day. A final decision is scheduled to be issued on January 28.

On the whole, the solar industry was pleased with the proposal since the California PUC preserved net metering at retail rates. The industry hopes that the California proposal will provide a regulatory model for other states. The California decision is also very important because roughly half of the residential solar installed in the U.S. is in California.

The solar industry also had a win in Wisconsin where a circuit court threw out a decision by the Wisconsin Public Service Commission to allow the “We Energies” utility to charge a monthly “grid fee” to its customers that have solar. The judge ruled that the utility was not able to show sufficient proof that the extra fee was justified.

However, the solar industry faced set-backs in Nevada and Hawaii. In Nevada, the state’s Public Utility Commission not only cut net metering payments from retail to wholesale electricity rates, but applied the new rules retroactively to existing customers, which will have a significant negative impact on the economics of existing solar systems. The ruling does not require solar customers to give back higher net metering fees that they received in the past, but the ruling is “retroactive” in the sense that existing solar customers were not grandfathered into the payments that were previously promised by the state and upon which solar customers relied when they bought their solar system. Solar customers argue that they should receive the full retail price of electricity for feeding their excess electricity into the grid because otherwise the utility is capturing a profit on that electricity that solar customers generate with their own equipment.

The PUC also allowed Nevada utilities to boost a fixed charge to all customers and reduce the per-kWh rate, meaning solar users will now have to pay a 40% higher minimum fixed charge.

There were vociferous protests against the Nevada PUC decision, particularly because it retroactively cut net metering payments. SolarCity responded by announcing that it was pulling out of Nevada and would relocate 550 jobs out of the state. SunRun, another major residential installer, announced that it was pulling out of Nevada as well. Sunrun also sued Nevada’s governor in attempt to get the governor to comply with a previous public records request that called for the release of all communications between the governor’s staff and employees and lobbyists for Nevada monopoly utility NV Energy. SunRun is looking for evidence about whether the governor and his advisors coordinated net metering policy with NV Energy in order to slow down solar adoption and protect the utility’s profits. A class action lawsuit by existing solar customers was also filed against NV Energy over the PUC decision. In response to the backlash, the Nevada PUC said it will reconsider its decision not to grandfather existing customers.

Meanwhile, Hawaii cut net metering rates from retail electricity prices to fixed prices of 15-28 cents/kWh depending on which island the customer is on. If a solar customer is not providing electricity to the grid and is not in a net metering program, then the solar customer will have a minimum monthly bill from the utility of $25 for residential customers and $50 for small business customers. The Hawaii decision avoided significant backlash from the solar industry since the decision did not apply retroactively to existing customers and since the net metering rates remained high. Regardless of the revision of its net metering program, Hawaii is still heavily promoting solar as a solution to meeting its goal of going 100% renewable by 2045. Hawaii already has the highest solar adoption rate in the country with about 12% of all homes having solar.

The bottom line in the net metering battle is that solar is economical regardless of lower net metering rates, just with longer payback periods. There will be a long battle between the solar industry and the utility industry as the utility industry tries to slow solar adoption and preserve its profit models by eliminating net metering and imposing fixed charges on solar. But the reality is that the utility industry is fighting a losing battle over the long run as electricity customers gain the power to generate their own electricity at progressively lower costs and thus sidestep the monopoly utility industry.

American solar jobs now exceed oil/gas jobs

There are now 209,000 people who work in the U.S. solar industry, according to the non-profit Solar Foundation, with 20% growth in solar jobs in the year through Nov 2015. The number of solar jobs is now more than the 185,000 people working in the U.S. oil and gas industry, representing a dramatic shift in energy technology jobs and potentially political clout. Moreover, the U.S. solar industry is just getting started and could add more than 1 million jobs by 2030 and nearly 2 million jobs by 2050, according to a report by NextGen Climate America.

COP21 Paris meeting approaches; White House announces more support for solar; California boosts RPS to 50%; North Carolina becomes fourth state to reach 1 GW of solar — Oct 2015
 

Read report in PDF with graphs: MAC-Solar-Sector-Update-Oct-2015

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), posted a 1-1/3 year high in April but then fell sharply through late-September, showing some recovery in early October. The index is currently down -14.0% year-to-date. The MAC solar index in 2014 fell by -2% after soaring by +127% in 2013.

Solar stocks fell sharply in the May-September period due to (1) the sharp downward correction in the Chinese stock market, which caused some carry-over weakness in Chinese-headquartered solar stocks, (2) concern that slower economic growth in China may translate into reduced solar power growth in China, (3) the downward correction in the U.S. stock market which featured particular weakness in tech stocks and high-beta stocks, (4) continued weakness in crude oil prices, (5) a downward correction in the stock prices of solar yieldcos in order to produce more attractive dividend yields, and (6) continued solar trade disputes.

Solar stocks have seen a recovery rally so far in October on (1) ideas that the sector was severely undervalued at recent levels, (2) an upward rebound in SunEdison (SUNE), a solar bellwether, after the company announced cost-cutting, streamlined operations, and more financial details about its margins and projects, and (3) the overall strength of the solar sector with strong revenue growth and improving margins.

Global solar demand continues to be very strong with both increasing unit sales and decreasing costs due to technology advances and economies of scale. Global solar installations in 2015 will grow by +36% y/y, the strongest growth rate in three years, according to GTM Research. At a country level, China this year should be able to easily hit its 2015 annual target of 17.8 GW, representing +37% y/y growth from 2014’s install amount of 13.0 GW. U.S. solar in 2015 will grow by +29% y/y, according to GTM Research.

Meanwhile, the medium to long term outlook for solar remains very strong. Solar will boom over the next 25 years and will account for 35% (3.429 GW) of all electricity capacity additions through 2040, according to Bloomberg New Energy Finance’s “New Energy Outlook 2015.” Spending on new solar installs will be a massive $3.7 trillion through 2040, according to the BNEF report. Moreover, BNEF says that all-in project costs for solar will plunge by another 48% by 2040 due to steep experience curves and improved financing.

Even after the October recovery, the solar sector remains undervalued compared with the broad market. The median trailing P/E of companies in the MAC Solar Index is currently 9.2, which is well below the P/E of 17.8 for the S&P 500 index. The median price-to-book ratio of 1.85 for the MAC Solar Index is well below the 2.72 ratio for the S&P 500. The median price-to-sales ratio of 1.12 for the MAC Solar Index is well below the 1.77 ratio for the S&P 500.

December’s COP21 climate talks approach and more corporations commit to renewable energy

The Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) meeting in Paris in early December is quickly approaching. There are hopes that the meeting will result in a new international climate change agreement aimed at capping global warming at a 2 degree (Celsius) increase from pre-industrial levels.

So far, 147 countries, accounting for 85% of world carbon emissions, have submitted pledges on reducing fossil-fuel emissions. However, even these pledges will probably not be enough to meet the 2-degree goal. The Climate Action Tracker group forecasts a 2.7 degree (Celsius) increase in global warning even if the pledges are met and Climate Interaction is forecasting a 3.5 degree (Celsius) increase.

As part of the COP21 agreement, the U.S. has pledged to reduce emissions by 26-28% by 2025 from 2005 levels, The European Union has pledged a 40% cut in greenhouse gases by 2030 from 1990. China has pledged to cut carbon emissions per unit of economic output by 60-65% by 2030 from 2005 and increase the share of energy from renewables and nuclear to 20% by 2030. India has set a goal of cutting carbon emissions per unit of economic output by 33-35% by 2030 from 2005 and to get 40% of its electricity capacity from non-fossil fuels by 2030. Russia has committed to a 25-30% reduction in greenhouse gas emissions by 2030 from 1990.

Ahead of the COP21 conference, the U.S. government is encouraging large U.S. corporations to demonstrate to world climate negotiators that there is broad-based business support in the U.S. for reducing carbon emissions and going off fossil fuels. As part of a White House initiative for sustainability investment announced in July, 13 major U.S. corporations including Apple, Berkshire Hathaway and Goldman Sachs, agreed to provide at least $140 billion in new investment to reduce their carbon footprints.

In addition, nine more major U.S. companies in September took the pledge to go 100% renewable as part of the RE100 Initiative (www.there100.org). There are now nearly 40 major global corporations that have committed to going 100% renewable including IKEA, Swiss Re, Goldman Sachs, Johnson & Johnson, Nestle, Nike, Phillips, Procter & Gamble, Salesforce, SAP, Starbucks, Steelcase, UBS, Unilever, Walmart, and others.

VP Biden highlights how “special interests” are standing in the way of solar

Vice President Joe Biden, speaking at the Solar Power International conference on Sep 17, said that more Americans need to “understand the possibilities of solar… just imagine what we can do. Folks, we are on the cusp for something huge here but a lot of folks don’t realize it.”

Mr. Biden lamented about how the U.S. has provided more than $5 billion of annual tax credits for the oil industry for many years and yet there is difficulty in extending smaller alternative energy credits. Mr. Biden said, “Deep-pocketed special interests that have lobbied for fossil fuels for years are now saying ‘Let’s take away consumer choice. Let’s stifle the market. Isn’t it amazing?” He added, “The Koch brothers–fine guys as I understand it–and groups like ALEC, have successfully argued for limits on the amount of net metered systems, like in Wisconsin. They are pushing back against change at every level, trying to alter how the market functions.”

Mr. Biden noted that solar has provided 40% of all new U.S. electricity generation capacity so far in 2015 and the solar industry now employs more people than Google, Apple, Twitter and Facebook combined. Mr. Biden noted that solar deployment in the U.S. has grown by 20-fold since the Obama administration took office in 2008. Mr. Biden also confirmed a White House announcement earlier in the day of another $120 million in solar funding for making PV cheaper through advanced solar technology research.

Meanwhile, President Obama in August sounded similar themes when he spoke at a clean energy summit in Nevada. Mr. Obama said that there are “massive lobbying efforts backed by fossil fuel interests or conservative think tanks” that are opposing renewables and that are trying to protect an “outdated status quo.” He said that “pushing for new laws to roll back renewable energy standards or prevent new clean energy businesses from succeeding” was “not the American way.” But on a more optimistic note, Mr. Obama noted how some Tea Party groups are coming together with green and pro-solar groups to support solar so that consumers can exercise their freedom of choice to select “cleaner, cheaper, and more efficient energy.” Mr. Obama spoke shortly after the White House announced a $1 billion increase in loan guarantees for renewable energy projects and a batch of other alternative energy support measures.

Pope Francis pleads for support in addressing climate change

Pope Francis on his visit to the U.S. in September raised public awareness of climate change issues and perhaps even modestly changed the terms of the climate change debate. The Pope said that citizens need to recognize that they have a responsibility to be stewards of the earth, saying “Humanity has the ability to work together in building our common home.” In remarks to Congress, the Pope called on the U.S. government to take “courageous actions” to address climate change and “avert the most serious effects of the environmental deterioration caused by human activity.”

“We’ve reached the limit of what’s possible with diesel and gasoline”

Elon Musk, CEO of Tesla (TSLA) and Chairman of Solar City (SCTY), recently said in response to a question about Dieselgate, “What the Volkswagen [scandal] is really showing is that we’ve reached the limit of what is possible with diesel and gasoline.” Mr. Musk said Volkswagen’s need to cheat on its emission testing shows that diesel cars simply cannot meet both government emissions tests and consumers’ performance standards. Mr. Musk said the scandal should lead automakers and consumers to the faster adoption of clean and high-performing electric vehicles. The Volkswagen scandal should make clear to consumers that there is no such thing as Volkswagen’s highly-touted claim of “clean diesel,” just as there is no such thing as “clean coal.”

California boosts renewable energy mandate to 50% with at least $8 billion in solar sales potential

California’s legislature and governor approved an increase in the state’s Renewable Portfolio Standard (RPS) to require that at least 50% of California’s utility electricity is produced by renewable sources by 2030, up from California’s previous RPS of 33% by 2020. California’s higher RPS means that there will be an extra $8.6 billion of potential revenue for building new utility-scale solar projects, according to GTM Research. The California Solar Energy Industries Association estimates that the solar sales potential will be even higher at $10 billion.

North Carolina becomes the fourth state to reach the 1 GW solar mark

North Carolina as of September had 1.04 GW of installed solar capacity, according to the NC Sustainable Energy Association (NCSEA) (link). North Carolina became the fourth state to reach that mark behind California, Arizona and New Jersey. The solar industry in North Carolina accounts for $1.8 billion in revenue and over 4,000 full-time equivalent jobs, according to the NCSEA’s 2014 Clean Energy Industry Census.

Solar ITC extension has a chance of becoming part of grand energy bargain

Congressional committees have so far failed to approve an extension of the solar Investment tax credit (ITC). The solar ITC under current law will drop to 10% from 30% for commercial projects installed after Jan 1, 2017, and the ITC will be eliminated for residential solar on that same date. Based on the Congressional track record, Congress is not likely to even consider a solar ITC extension until late 2016, just before the ITC step-down is set to occur. However, there is some hope for an earlier consideration of the solar ITC extension since some Democrats are talking about a grand energy bargain involving dropping the U.S. crude oil export ban in return for an extension of alternative energy support measures such as the solar ITC extension.

There is no doubt that solar growth in the U.S. will see a sharp drop in 2017 if the 30% ITC isn’t extended. Solar developers are racing to get solar projects installed before the Jan 1, 2017 ITC step-down, which means there is sure to be a hang-over in 2017 after the 2015-16 front-loading. However, that would only be a bump in the road for the global solar industry since the U.S. accounted for only 14% of world solar installs in 2014. Even if the U.S. solar industry temporarily stumbles in 2017-18, the rest of the world will still be going full speed ahead with solar and U.S. solar will then recover at a slower non-ITC growth rate.

In addition, even if there is a 2017 ITC step-down, U.S. solar will still have significant government support from various state support measures such as state tax credits, net metering, and Renewal Portfolio Standards (RPS). Solar will still see continued support at the federal level from (1) the Property Assessed Clean Energy (PACE) financing program, (2) the Department of Energy’s SunShot initiative along with technical and policy support from national laboratories, and (3) the EPA’s Clean Power Plan (CPP), which involves a 32% reduction in national greenhouse gas emissions from 2005 through 2030 and a goal for the U.S. to get 28% of its power from renewable energy sources by 2030, more than double last year’s 13% level.