Author Archives: Richard Asplund

MAC Solar Index Sep 2015 Quarterly Review Changes
 

As of the close of business on Sep 18, 2015, three stocks were added to the index: 8point3 Energy Partners (CAFD US) with an Exposure Factor of 1.0, Terraform Global (GLBL US) with an Exposure Factor of 0.5, and Sunrun (RUN US) with an Exposure Factor of 1.0. In addition, four stocks were deleted from the index: Advanced Energy Industries (AEIS US), Yingli (YGE US), ReneSola (SOL US), and Comtec (712 HK).

$3.7 trillion in solar investment through 2040; Clean Power Plan sets stage for long-term U.S. solar growth; Two yieldcos launch IPOs; Community solar is breaking out – Aug 2015
 

Read report in PDF with graphs: MAC-Solar-Sector-Update-Aug-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 in the last three months and is currently down -7.1% year-to-date. The MAC solar index in 2014 fell by -2% after soaring by +127% in 2013.

Solar stocks fell in the past three months 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) increased talk about a Fed rate hike in 2015 as higher interest rates could cause some downward pressure on yieldcos, (4) renewed weakness in crude oil prices after world powers reached a nuclear agreement with Iran that could pave the way for a sharp increase in Iranian oil exports late this year when sanctions are due to be dropped, and (5) continued solar trade disputes.

Despite these negative factors, the global solar industry as a whole remains healthy with strong demand and improving margins. GTM Research is forecasting that annual solar installations in 2015 will grow by +36% y/y, the strongest growth rate in three years. Meanwhile, solar installs in China in Q1-2015 were very strong at 5 GW, double the previous year and higher than expectations of 2-3 GW. China should be able to easily hit its 2015 annual target of 17.8 GW, which would be up by 37% from 2014’s install amount of 13.0 GW. U.S. solar in 2015 will grow by +29%, according to GTM Research.

Solar will see a massive $3.7 trillion of investment through 2040

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.

Meanwhile, all-in project costs for solar will plunge by 48% by 2040 due to steep experience curves and improving financing, according to the report. BNEF believes that solar will reach retail-price parity in all major economies by 2040 and that utility-scale PV will be the least-cost power generation option for utilities without subsidies by 2030.

BNEF sees a renewable revolution over the next several decades with zero-emission energy sources accounting for 56% of the world’s power-generating capacity mix by 2040, causing fossil fuels to drop to 40% from the current two-thirds. BNEF says the developing world will account for the largest proportion of solar installs since the developing world will build three times as much new electricity generation capacity as the developed world. That highlights the fact that the bulk of new solar installs will move to the developing world in coming years from the current concentration in the developed world.

U.S. Clean Power Plan (CPP) sets stage for long-term solar growth

The Obama administration on August 3 announced finalized rules for the EPA’s Clean Power Plan (CPP), which envisions a 32% reduction in national greenhouse gas emissions from 2005 through 2030. The plan is part of the Obama administration’s goal for the U.S. to get 28% of its power from renewable energy sources by 2030, more than double last year’s 13%. In announcing the plan, President Obama said “We only get one home. We only get one planet. There is no Plan B.”

The CPP plan targets carbon reductions in the electricity-generation sector, which accounts for about one-third of all U.S. carbon emissions. The plan expresses explicit support for renewables and nuclear but comes down hard on coal in particular and has less reliance on natural gas than the preliminary plan. Coal produces about 80% of the U.S. power sector’s carbon emissions, making it a prime target as a means to reduce emissions. The U.S. Energy Information Administration says that nearly 400 GW of renewable energy will be possible by 2040 under CPP, giving the solar and wind industries a big opportunity.

Despite the long-term opportunity, the plan will take time to have an impact since (1) there will be legal challenges to the plan as well as compliance resistance by some states, (2) states under the CPP plan do not need to have their carbon-reduction plans in place until 2018 and have until 2022 to meet their first carbon reduction targets, and (3) a future president and/or veto-proof Congress could halt the plan altogether. Hillary Clinton expressed support for CPP but all the Republican presidential candidates have said they oppose the plan.

The EPA has launched the CPP plan under the regulatory authority that the U.S. Supreme Court approved for the EPA to regulate carbon emissions under the Clean Air Act in the case of Massachusetts vs. EPA in 2007. The fact that the Supreme Court has already approved the EPA’s authority to regulate carbon emissions means that legal challenges to CPP may have an uphill battle.

The Obama administration is relying heavily on the CPP plan to demonstrate its world leadership on climate issues. President Obama in September will meet with Pope Francis on his trip to the U.S. The Pope has already boldly called for government action to address the problem of climate change. The U.S. also wants to show leadership ahead of this December’s climate talks in Paris, where a new global climate agreement could be reached.

Two yieldcos launch IPOs

First Solar (FSLR) and SunPower (SPWR) in June launched a $420 million IPO for their joint yieldco named “8point3 Energy Partners” (CAFD). The company is named for the number of minutes it takes for light to reach earth from the sun. 8Point3’s current market cap is about $1.0 billion. Separately, TerraForm Global (GLBL) in late-July raised $675 million in its IPO and currently carries a market cap of $4.1 billion. TerraForm Global is the yieldco that will have first rights on SunEdison’s global renewable energy projects. Several other large solar companies intend to launch yieldcos over the next year.

MAC Solar Index already has two yieldcos as index constituents: TerraForm Power (TERP) with a market cap of $3.7 billion and Abengoa Yield (ABY) with a market cap of $2.3 billion. Both of those stocks trade on the Nasdaq Exchange. These yieldcos provide an attractive dividend component to the MAC Solar Index.

In a “yieldco,” a solar company spins off a independent company that owns and operates large-scale solar plants under long-term power purchase agreements, usually with investment-grade utilities or corporations. Yieldcos pay an attractive and predictable dividend flow to investors. A yieldco typically has a low cost of capital to finance solar projects and pays little or no taxes due to large project depreciation costs. Meanwhile, the yieldco model allows the parent company to free up its balance sheet to focus on manufacturing, services, installation, and project development, but the parent still receives long-term cash flow from the solar projects through its partial ownership of the publicly-traded yieldco.

Renewable energy MLP bill re-introduced in Congress

A bill that would allow for renewable energy companies to utilize the Master LImited Partnership (MLP) structure was re-introduced in Congress in June. MLPs have traditionally been used in the gas and oil industry for infrastructure assets such as pipelines. The renewable energy MLP bill was introduced in last year’s Congress but there was no progress last year towards approval by the full Congress. Bloomberg estimates that extending MLPs to renewables would cost taxpayers about $1.3 billion in tax breaks over 10 years. The problem in Congress is to decide how to “pay for” that cost. Still, there is a chance that the renewable energy MLP cost could be wrapped up in larger energy or infrastructure legislation.

Having access to MLP and REIT structures would provide another project financing avenue for the solar industry. However, the solar industry has already made the MLP avenue moot to some extent by using the yieldco structure, which has been referred to as a synthetic MLP since it has many of the same benefits as a MLP. Bloomberg estimates that $16 billion has been raised by oil and gas companies in MLP public offerings since 2010, while about $3 billion has been raised by North American yieldco offerings over the same period.

Solar ITC extension doesn’t make it into Senate Finance Committee’s tax extenders bill

The Senate Finance Committee on July 21 approved a tax extenders bill that included a number of extensions of renewable energy production tax credits through the end of 2016. However, the bill did not include any extension of the solar Investment tax credit (ITC) or a proposed amendment that would have the current ITC apply to projects that start before the end of 2016 versus the current situation of projects that are completed before the end of 2016. The fact that the solar ITC did not make it into the tax extenders bill was not surprising considering that the bill dealt mainly with tax credits that already expired or that expire in 2015. Congress has not yet turned its attention to tax credits that expire in 2016.

The good news is that there was fairly strong Republican support in the extenders bill for extending renewable energy credits for wind, geothermal, biomass, landfill gas, incremental hydroelectric, and ocean energy, suggesting that the Republican Congress next year may yet be convinced to extend the solar ITC. The Senate Finance Committee, which is run by the Republicans, approved the tax extenders bill by the wide margin of 23 to 3.

Moreover, the American public continues to express strong support for renewable energy. In fact, 75% of Americans favor extending federal tax incentives that promote renewable energy, according to a poll by Zogby Analytics released in April. The breakdown in that poll showed that renewable energy tax incentives are supported by 82% of Democrats, 67% of Republicans, and 72% of independents.

The solar 30% ITC expires for residential and utility projects and falls to 10% from 30% for commercial projects at the end of 2016. There is no doubt that solar growth in the U.S. will see a serious dent starting in 2017 if the 30% ITC isn’t extended. However, that would only be a bump in the road for the global solar industry as a whole 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 recover to a slower non-ITC growth rate.

Community solar is expected to be high-growth segment in coming years

The U.S. rooftop solar segment has been growing very quickly over the past few years, but 49% of U.S. households and 48% of businesses are unable to host solar PV panels, according to the National Renewable Energy Laboratory (NREL). One of the solutions to that problem is “community solar” or “shared renewables” in which customers share the electricity produced by a large solar PV array. There are a variety of possible ownership structures, but the most popular community solar projects currently involve utilities and third-party solar companies as owners and developers.

The U.S. community solar segment is still in its infancy but there are already 50 community solar programs that are planned or operating, according to the Solar Electric Power Association. The U.S. community solar market will show a compound annual growth rate of 59% from 2014 through 2020, topping 500 MW by 2020, according to a new report by GTM Research entitled “U.S. Community Solar Outlook 2015-2020.” The report says that community solar over the next five years will add 1.8 GW of solar, meaning it will become a key segment of the U.S. solar market. The report identifies four states that will account for the majority of the community solar market over the next two years because of their supportive regulatory structures: California, Colorado, Massachusetts, and Minnesota.

Meanwhile, the U.S. National Renewable Energy Laboratory (NREL) recently released a major report on community solar, laying out forecasts, policy prescriptions, and analysis of ownership structures. The report is entitled, “Shared Solar: Current Landscape, Market Potential, and the Impact of Federal Securities Regulation.”

NREL is highly bullish on community solar, saying that “shared solar” could add 5.5-11 GW to the U.S. rooftop market by 2020, representing $8.2-$16.3 billion of solar sales. NREL says that community solar could account for 32-49% of the U.S. distributed solar PV market by 2020.

There are already some 29 developers in the U.S. that are working on community solar projects. In one example, SolarCity recently announced a program in which customers of Minnesota-based Excel Energy will be able to save about 11.5% on their electricity bill by participating in “community solar gardens.” Participants can include home owners, apartment dwellers, businesses, schools, and municipal facilities. SolarCity plans to invest some $200 million in up to 100 solar power plants, each with up to 1 MW of generation capacity.

Shared solar is a way for established utilities to break into distributed solar and compete with third-party solar developers such as SolarCity. For example, Tuscon Electric Power has a project in progress where it will build and own a 3.5 MW solar plant and provide the electricity to 600 customers. The list of interested customers is heavily oversubscribed. The future looks very bright for utility-owned community solar projects as state regulatory structures become more supportive.

U.S soars 30% in 2014; FSLR-SPWR yieldco surprises the markets; solar gains popularity among institutional investors; solar jobs now exceed coal jobs; China raises solar target to 17.8 GW; Middle East is shocked at low 5.85 cent solar project cost – Apr 2015
 

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

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has rallied sharply by +32% so far this year, regaining strength after falling by -2% in 2014. The MAC solar index in 2013 soared by 127%.

Solar stocks surged during the first quarter of 2015 on bullish factors including (1) broadly positive Q4 earnings news across the solar sector and positive guidance for 2015, (2) announcements by more solar companies that plan to form yieldcos, (3) indications of strong world solar demand that has solar companies running at high utilization rates and planning more capacity, (4) news that China boosted its 2015 PV installation target by 19% to 17.8 GW from the preliminary figure of 15 GW, (5) the stabilization of crude oil prices and the broader realization that crude oil prices and solar stocks have little connection, and (6) heavy short-covering.

Negative factors for solar stocks included (1) continued solar trade disputes, (2) the need for solar profit margins to improve further, and (3) a shaky overall U.S. stock market picture due to high valuations and weaker earnings tied to the strong dollar.

The fundamentals of the solar industry remain favorable with strong end-user demand, stable polysilicon and solar panel pricing (see charts on p. 3), right-sized industry capacity, and improving profitability among solar manufacturers.

U.S. solar grew 30% in 2014 and more than 500 MW of residential solar was without state support

The U.S. installed 6.2 GW of solar PV in 2014, up 30% yr/yr, according to a report by GTM Research and SEIA (link). Notably, residential solar reached a record annual install level of 1.2 GW in 2014 and more than 500 MW of that was installed without any state-level support. That indicates how U.S. residential solar is spreading beyond states that provide strong solar support such as California due to falling solar costs. Solar accounted for 32% of new U.S. electricity generation capacity in 2014, coming in second behind natural gas but ahead of coal and wind. For 2015, GTM Research is forecasting a further 31% increase in solar installs to 8.1 GW.

Meanwhile, California became the first state to obtain more than 5% of its utility-scale electricity from solar. The total solar-generation figure is even higher after taking into account California’s 2.3 GW of roof-top solar. California has aggressively promoted solar with its 33% renewable portfolio standard and other rebate incentives and net-metering policies to support smaller-scale solar.

First Solar and SunPower surprise the markets with a joint yieldco

First Solar (FSLR) and SunPower (SPWR) surprised the markets in February by announcing a joint yieldco named “8point3 Energy Partners” for the number of minutes it takes for light to reach earth from the sun. The firms filed an IPO prospectus for the yieldco. The stock prices of both First Solar and SunPower rallied on the news. The two companies apparently went into a joint-venture yieldco in order to boost the number of the projects available for the yieldco and create some economies of scale.

In a yieldco model, a solar company spins off a self-contained development subsidiary that owns and operates large-scale solar farms under long-term power purchase agreements with investment-grade utilities or corporations. Yieldcos pay an attractive and predictable dividend flow to investors. The low-risk yieldco typically has a low cost of capital to finance the project purchases. The yieldco model allows the parent company to free up its balance sheet to focus on manufacturing, services, installation, and project development, but the solar parent still receives long-term cash flow from those projects via its partial ownership of the publicly-traded yieldco.

The yieldco model has quickly proven itself in the solar energy industry. SunEdison in July 2014 launched its TerraForm Power (TERP) yieldco and has filed a prospectus for a second yieldco for overseas projects. Abengoa in June 2014 spun off its yieldco Abengoa Yield (ABY). Many of the other major solar companies have indicated an interest in spinning off their own yieldcos.

Apple’s $848 million solar purchase is largest ever for U.S. corporation

Apple in early February announced a deal to purchase $848 million worth of electricity from a First Solar solar plant in Monterey County, California on a 25-year power purchase agreement (PPA). Apple’s purchase of 130 MW of electricity is enough to power its headquarter offices, its California retail stores, and one of its data centers. This is the largest solar power purchase yet by any U.S. corporation, other than utilities. Apple CEO Tim Cook said, “We’re doing this because it’s the right thing to do, but you may also be interested to know that it’s good financially to do it. We expect to have a very significant savings because we have a fixed price for the renewable energy.”

Solar gains popularity among institutional investors

Google announced a $300 million investment in a $750 million SolarCity (SCTY) fund that will finance roof-top solar projects. Google expects to earn a return as high as 8% on its investment. SolarCity is currently the only sponsor for solar asset-backed securities (ABS) based on roof-top solar, but Moody’s in January released a report saying that “Solar ABS” is emerging as a distinct asset class. Meanwhile, some institutional investors are investing in solar by owning the actual solar farms. For example, two Canadian pension funds, the Ontario Teachers’ Pension Plan and the Public Sector Pension Investment Board, are teaming up with Santander in a joint venture to own $2 billion worth of solar, wind and water infrastructure assets. The renewable infrastructure assets are attractive to institutional investors due to low risk, attractive long-term cash flows, and portfolio diversification.

Solar homes fetch $15,000 premium

U.S. homes outfitted with rooftop solar PV fetched an average premium of $15,000 upon the home’s resale, according to an in-depth study by the U.S. Department of Energy’s Berkeley Lab in partnership with Sandia National Labs (link). The study bolstered the case for homeowners to install solar since the solar system boosts the value of their home as well as reduces their electricity costs and insulates them from rising utility electricity prices.

Residential solar is going mass market

SolarCity (SCTY) in March announced a partnership deal with DirecTV that allows DirecTV service reps to sell SolarCity solar power systems. This gives SolarCity access to DirecTV’s 37 million customers in the U.S. and Latin America. SolarCity already has sales partnership deals with Home Depot and Honda. The DirecTV deal is another example of how residential solar is going mass market.

U.S. solar jobs grow at 20 times the national average and now outstrip coal industry

U.S. solar jobs in 2014 grew at nearly 20 times the national average rate and accounted for 1.3% of all new jobs in the U.S., according to the Solar Foundation’s National Solar Jobs Census 2014 (link). U.S. solar jobs have grown by roughly 20% in each of the last two years and the forecast is for further 21% job growth in 2015. The solar sector now employs 173,807 workers, which is nearly double the 93,185 jobs in the coal mining industry and not far behind 215,700 jobs in the oil & gas extraction industry.

Americans support solar more than any other energy source

Americans support solar development more than any other energy source, according to a Gallup poll released in March (Gallup link) (SEIA article). The poll found that 91% of Americans favor the same or more emphasis on solar, higher than 87% for natural gas, 84% for wind, 68% for oil, 63% for nuclear, and 55% for coal. The poll suggests strong grass-roots political support for solar among American voters even if some Congressional representatives aren’t reflecting that grass-roots support.

China raises its 2015 solar target to 17.8 GW to achieve world’s largest installed solar base

China’s energy regulator, the National Energy Administration, in mid-March raised its national 2015 solar installation target to 17.8 GW, which was 19% higher than its preliminary target of 15 GW announced in January. The announcement gave a boost to Chinese solar stocks in March. The 2015 target of 17.8 GW represents 27% growth from the 2014 target of 14 GW. If the target is reached, China by the end of 2014 will have about 45 GW of installed solar capacity, leapfrogging Germany as the world’s largest installed-solar country. Germany had about 38 GW of solar capacity at the end of 2014.

China’s “Under the Dome” film goes viral and increases pressure on Chinese government to address pollution

The online documentary film “Under the Dome,” made by well-known China Central Television newscaster Chai Jing, was seen online by more than 150 million people in just its first days, which certainly qualifies as “going viral” (link). The impact of the film in China has been likened to America’s “Inconvenient Truth” film and the 1962 book on pesticides named “Silent Spring” by Rachel Carson that led to the ban on DDT and was instrumental in the creation of the U.S. Environmental Protection Agency.

The film highlights Chai Jing’s investigation into China’s major pollution problems as a means of understanding the risks from pollution to her young child, whom had a benign tumor at birth and whom she had to keep inside “like a prisoner” on extremely bad air days that amounted to nearly half of the days in 2014.

“Under the Dome” provided some support for Chinese solar stocks in March with the theme that China’s horrendous air pollution means the Chinese government has no choice but to reduce the country’s dependence on coal and increase its reliance on clean sources of electricity such as solar. Some Wall Street analysts went so far as to say that the film represents a watershed moment for China’s environmental policy and the awakening of the Chinese public to the need for solutions to China’s pollution problems.

Middle East is shocked at solar potential after 5.85 cent/kWh Dubai project

The Middle East was shocked to learn that the Dubai Electricity & Water Authority in Nov 2014 accepted a bid for a 200 MW solar power plant with a price of 5.85 U.S. cents/kWh (without subsidies) under a 25-year power purchase agreement. Various Middle East countries are in the midst of a big push to install solar to meet the strong growth in electricity demand. Middle East and North African countries will announce $2.7 billion worth of solar projects this year, according to the Middle East Solar Industry Association. Saudi Arabia has pushed back its solar plans due to reduced government revenue after the plunge in oil prices, but Saudi Arabia still plans to install 41 GW of solar capacity by 2040.

Middle East countries can now install large-scale solar power for the equivalent of only $25-30 per barrel of oil in a new oil-burning electricity plant, according to a report for the National Bank of Abu Dhabi written by the University of Cambridge and PwC (link). That means that it makes much more economic sense for oil producers to install solar and then sell their oil on the world markets at current prices near $56/bbl, or retain oil reserves in the ground for future sale, rather than burn that oil to generate electricity. Saudi Arabia currently obtains about 65% of its electricity from burning oil.

U.S.-Chinese solar duties are finalized while EU enforces previous trade agreement

The U.S. International Trade Commission (ITC) on Jan 21 finalized the duties levied by the U.S. Commerce Commission against Chinese solar companies that evaded the previous ruling by sourcing solar cells from Taiwanese suppliers. The ITC ruling finalized the latest round of the long-running U.S.-Chinese solar trade spat. Meanwhile, the EU announced that it planned to apply tariffs to three Chinese PV firms (Canadian Solar, ReneSolar, and ET Solar) that the EU says violated the 2013 EU-China trade agreement. ReneSolar responded by saying it will withdraw from the agreement while Canadian Solar and ET Solar pleaded innocent and said they plan to fight the proposed order. Canadian Solar said it does not see the EU order having a “significant impact” in its 2015 guidance.

SolarCity sues Arizona utility that is trying to slow solar by imposing surcharges

Many utilities have grown comfortable with their monopoly power and co-opted regulatory commissions. However, utilities are now becoming very concerned about the inroads that solar is making into their customer base and reducing demand for their product.

One utility in Arizona, Salt River Project (SRP), thinks it found a solution for battling solar by imposing surcharges on customers who install solar, thus replacing their lost revenue and making solar less economically attractive. The regulatory commission in SRP’s service area approved the utility’s surcharge plan despite the fact that about 500 solar users showed up at a commission hearing to protest the plan. However, SolarCity then sued the utility, charging that the surcharges are discriminatory and anti-competitive.

This is only the beginning of what will be a long war as the utility industry tries to fend off the disruptive technology offered by solar. As seen with other disruptive technologies, legacy companies can sometimes use their money and political clout to slow the new technology, but better customer solutions nearly always win in the end.

Meanwhile, the residential solar industry had a big win in red-state Georgia where the Georgia Senate passed a bill allowing third-party solar leasing for homes and businesses. Georgia’s governor is expected to sign the legislation. House Bill 57, “Solar Power Free-Market Financing Act of 2015,” allows third-party lessors to sell electricity to homeowners and businesses which was previously the privilege of only monopoly electric utilities. Florida is one of the few other states that does not allow third-party leasing, which is a key reason why Florida has been a laggard in installing solar.
Solar plane is nearly half-way through its around-the-world flight

Solar Impulse 2 has successfully completed 5 of the 12 legs on its around-the-world trip (see www.solarimpulse.com). The plane is flying solely on power generated by solar panels on its wings and fuselage. The plane is not using any fuel or emitting any pollution. The founders of the project do not expect commercial airliners to convert to solar panels, but they are seeking to “demonstrate that the actual alternative energy sources and new technologies can achieve what some consider impossible.” The project illustrates how solar power can be suitable for even a mission-critical operation such as plane flight.

Solar stocks hurt by oil and natural gas price weakness and Republican Senate victory but solar industry fundamentals remain strong; final US-China trade ruling approaches; India’s PM Modi launches solar boom – Jan 2015
 

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

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), fell -2% in 2014, giving back a small part of the +127% surge seen in 2013. So far in 2015, the Index is down -2%. Solar stocks have showed weakness since September due to falling oil and natural gas prices, the Republican victory in the Senate, solar bottlenecks and reduced subsidy support in Japan, and concern about slower economic growth in China. Nevertheless, the fundamentals of the solar industry remain favorable with strong end-user demand, stable polysilicon and solar panel pricing (see charts on p. 3), right-sized industry capacity, and improving profitability among solar manufacturers.

Plunge in oil prices hurts solar stocks even though there is little direct connection

The recent plunge in Brent crude oil prices to $46/barrel has had a negative impact on solar stocks since some market participants worry that the plunge in oil prices will reduce government policy pressure to support alternative energy. However, there is little direct connection between solar and crude oil prices. Petroleum is mostly used as fuel for the transportation sector and has little to do with solar power’s role in generating electricity. Petroleum accounts for less than 1% of U.S. electricity generation and less than 5% of worldwide electricity generation. Solar City’s CEO recently noted that oil prices could go to $50 or $150 per barrel and it would have almost zero effect on electricity prices.

Natural gas prices fall in December but New York bans fracking due to public health concerns

Solar stocks were also hurt by the drop in natural gas prices in December to the $3 area from the average of about $3.80 seen during summer and autumn. Lower natural gas prices reduce variable costs for some electric utilities and natural gas presents more direct competition with solar power than oil. However, lower natural gas prices seldom actually reduce utility electricity prices for customers since utilities still have much larger costs for transmission, distribution, grid infrastructure, and operations. In fact, America’s greater reliance on natural gas has failed to reduce electricity prices thus far considering that the average price of residential electricity in the U.S. rose to a record seasonal high of 12.9 cents/kWh in the latest reporting month of Sep 2014. While natural gas can be used by utilities to produce base-load electricity, natural gas cannot compete with solar when it comes to the environment or allowing customers to generate electricity on-site. Moreover, the drop in natural gas prices in December was attributed in part to mild early-winter weather across the U.S. and the weather has since turned much colder.

Natural gas is also running into stiffer regulatory headwinds as public awareness grows about the negative environmental effects from fracking involving water usage and pollution, and even earthquakes in some areas, as detailed, for example, in the Oscar®-nominated film “Gasland.” In fact, the state of New York in December joined Vermont in banning oil and gas fracking in the state due to public health and environmental concerns. The public is learning that natural gas is not the panacea that some industry boosters have claimed.

Republican control of Congress causes concern about alternative energy support

Solar stocks have also recently been hurt by concern that the Republican’s takeover of Congress in the November election will hurt the solar industry, even though the solar industry is a global industry that is only partially dependent on solar’s success in America. The U.S. solar industry in any case does not currently need any help from Congress since the 30% solar investment tax credit is already in place until the end of 2016, then dropping to 10%. President Obama would undoubtedly veto any attempt by Congress to repeal the current solar ITC, which in any case hasn’t even been suggested by Republicans. The Solar Energy Industries Association (SEIA) has already launched a campaign to get the 30% ITC extended after 2016 involving educating members of Congress about the benefits of solar. An SEIA official noted that solar fits with key parts of Republican doctrine in that both political parties want to create jobs, stimulate economic development, improve America’s energy security, and reduce pollution.

Solar power, in short, is not a Republican-Democrat issue. There are many Republicans who already have solar panels on the roofs of their homes. The benefits of solar energy are recognized across most of the political spectrum and the only real disagreement is about whether the government should provide any subsidy support. Subsidy support in any case is becoming less of an issue every day as solar costs fall and solar becomes more broadly competitive with the grid even without subsidies.

U.S. solar pricing fell by 3-12% in 2014

U.S. solar pricing dropped by 12-19% in 2013, according to a recently-released report entitled “PV Pricing Trends: Historical, Recent and Near-term Projections from the U.S. Department of Energy. The report projected a further drop of 3-12% in 2014. The report said that solar pricing is expected to continue to decline in coming years and reach widespread grid parity in the U.S. without federal or state subsidies within 5 years.

Final U.S.-Chinese solar trade ruling is expected within the next few weeks

The U.S. Department of Commerce on Dec 16 announced anti-dumping tariffs and countervailing duties on Chinese solar companies when components are sourced from Taiwanese and other non-Chinese companies. The decision came in response to charges that Chinese solar module producers were using Taiwanese solar cells to evade the previous U.S. tariff determinations. The next step will come later in January when the U.S. International Trade Commission will determine whether the U.S. solar manufacturing industry suffered any injury from Chinese solar companies. If so, then a final order is expected by early February.

In the big picture, the U.S. tariffs on Chinese solar companies have boosted the competitiveness of non-Chinese solar producers, impeded the sales and profits of Chinese solar companies, and raised the price of solar for U.S. customers. However, Chinese companies are taking aggressive action to open factories in the U.S. and elsewhere, and enter joint ventures with other companies, in order to avoid the tariffs. In the long-run, the trade spat will have little net effect. In the meantime, U.S. solar installations have soared despite the trade spat and were up +41% y/y in Q3-2014 at 1.354 GW, according to the SEIA and GTM Research, supporting the group’s estimate for total U.S. PV installs of 6.5 GW in 2014 (+37% y/y).

India’s PM Modi launches solar boom

Indian Prime Minister Modi recently announced plans to boost India’s installed solar capacity by 33 times to 100 GW by 2022, quintupling the government’s previous target of 20 GW. The government also wants global private companies to build large solar factories in India that are capable of churning out solar panels to meet the government’s ambitious goals. India in 2013 was the sixth largest country for solar PV installs at 1.2 GW, according to Bloomberg New Energy Finance. India, as of the end of 2013, had only 2.7 GW of installed solar generating capacity, meaning the country has a long way to go to install another 97 GW of solar in just 8 years. The Indian government aims to boost solar’s share of India’s electricity generation capacity to 10% from the current level of less than 1% as part of its electric modernization program.

Global solar companies are quickly jumping on the new solar opportunities in India. SunEdison (SUNE) on Jan 12, for example, announced an agreement to partner with Indian port owner/electricity provider Adani Enterprises to spend up to $4 billion to build a massive, fully-integrated solar manufacturing plant in India. SunEdison also announced agreements with two different Indian states to install 5 GW of utility-scale solar farms. First Solar already has a substantial footprint in India and other solar companies such as Canadian Solar, JA Solar, and JinkoSolar have expressed interest in producing and/or selling solar panels in India.

Germany’s largest utility goes after renewables with an entirely new business model

Germany’s largest utility E.ON in December announced plans to split into two, spinning off its conventional electricity generation activities into a new entity and switching the focus of the existing company to a dedicated renewable energy business including solar and wind, as well as distribution networks and customer businesses. E.ON’s CEO said that the move was being made to “tap the growth potential created by the transformation of the energy world.” Meawhile in the U.S., NextEra Energy acquired Hawaii’s main utility company and intends to use Hawaii as a test bed for a transition to a heavy reliance on renewables. Accenture in December published a report saying that U.S. and European utilities could take a $130 billion hit from disruptive technologies within 10 years.

PV+Storage, the holy grail, is set to surge

U.S. sales of combined solar rooftop and battery storage systems will reach $1 billion within four years (318 MW of capacity), according to a recent report by GTM Research. Meanwhile, PV+Storage worldwide will grow tenfold by 2018, according to IHS. PV+Storage can provide 24-hour electricity, which compensates for solar’s inability to produce electricity at night.

Strong solar demand is creating a module shortage; Successful Yieldco IPOs pave the way for more; Solar should see minimal impact from plunge in crude oil prices – Oct 2014
 

Read report in PDF with graphs: MAC-Solar-Sector-Update-Oct-2014

Solar Index Performance

The MAC Solar Index, which is the tracking index for the Guggenheim Solar Energy ETF (NYSE ARCA: TAN), is down -5% year-to-date (through Oct 14) giving back a little of the +127% rally seen in 2013. The MAC Solar Index posted a new 7-month high in early September but has since fallen sharply. The fundamentals of the solar industry remain strong but solar stocks have been caught by the downside correction in the overall U.S. stock market that has hit smaller-cap and higher-beta stocks particularly hard.

Nevertheless, solar stocks are still up sharply from the lows posted in late 2012 due to the surge in end-market demand, the stabilization of polysilicon and solar panel pricing (see charts on p. 3), reduced capacity via the exit of weaker solar players, and the improved profitability of solar manufacturers. The surge in demand has been driven by the sharply lower cost for solar and by the spread of solar growth across the world rather than just the initial concentration in Europe.

Strong solar demand is creating a module shortage

Global demand for solar panels has strengthened substantially in the past year and demand has now caught up with capacity, thus leading to some solar panel shortages. SunPower CEO Tom Werner recently said, “It would be fair to say that our panels are in short supply.” SunPower in July announced plans for a new 700 MW plant that will come on line in 2017. Meanwhile, Trina’s CEO Jifan Gao said in September that, “Right now Trina is producing at 100% of capacity and selling at all rates, and we still can’t meet all customer demand.”

The increase in demand is coming from a variety of geographical sectors and is being driven by the drop in solar pricing that has made many more solar projects economical. China, by far the world’s number one country for new solar installs, had a very weak first half with installations of only 3.3 GW. However, some market observers now believe that a breakneck pace of China installs in the second half may allow China to still reach its 2014 goal of 13 GW. The Chinese government is particularly trying to boost the installation of distributed solar at government, commercial and residential locations.

Meanwhile, solar demand in Japan remains strong as the government continues its efforts to promote solar as a means to reduce the country’s dependence on nuclear energy. Japan will install 10-12 GW of solar in 2014, easily making Japan the second largest solar market behind China, according to Bloomberg New Energy Finance. However, solar growth in Japan is currently seeing some bottlenecks as five of the nation’s utilities temporarily halted grid connection approval for solar farms to provide some time to study the capacity of their grids to integrate solar.

Successful Yieldco IPOs pave the way for more

Clean-energy YieldCos have quickly found acceptance among investors, thus providing solar companies with a valuable way to reduce capital costs and unlock shareholder value by spinning off their project subsidiaries.

In the solar industry, a “YieldCo” is a company that owns solar electricity generation facilities and collects stable electricity revenue from investment-grade utilities or companies through long-term power-purchase agreements. A YieldCo typically has low operating costs and distributes its excess cash to shareholders through relatively high dividends. A YieldCo can minimize or even eliminate its corporate tax liability by taking advantage of clean energy tax credits and accelerated depreciation. A YieldCo can be attractive to an investor who is looking for low risk and strong dividend yield.

The MAC Solar Index in September added two YieldCos as constituents: TerraForm Power (TERP), a spin-off from SunEdison (SUNE), and Abengoa Yield (ABY). YieldCos add a lower beta yield component to a stock index, thus damping the volatility of the index while boosting its overall dividend yield.

There are sure to be more solar YieldCos down the road. SunEdison (SUNE) has already filed an IPO prospectus for a second YieldCo that would own solar projects in Asia and Africa. Companies such as Trina (TSL), Jinko Solar (JKS), SunPower (SPWR), and others are also reportedly considering spinning off YieldCo subsidiaries.

IEA offers roadmap for solar to become the world’s largest power source by 2050

The International Energy Agency in September released a roadmap for solar to become the world’s largest power source by 2050. The IEA report (link) anticipates that solar PV could account for 16%, and concentrated solar power plants could account for 11%, of the world’s energy by 2050. The report anticipates that the levelized cost of solar electricity could drop to 5.4 cents per kWh by 2050 and that rooftop PV could drop to 7.8 cents/kWh.

Chinese and U.S. officials may be working to settle solar trade disputes

The U.S. Department of Commerce on July 25 issued a preliminary ruling for anti-dumping duties on Chinese solar companies, adding to the anti-subsidy duties that the DOC imposed earlier in the year. China then retaliated by clamping down on loopholes to its previous duties on polysilicon imports from the U.S. and Korea. On a brighter note, China’s Ministry of Commerce on Aug 8 sent a letter to the U.S. Commerce Secretary suggesting that China may be open to a possible settlement that would eliminate the tit-for-tat duties. Meanwhile, there was good solar trade news from India as India’s Ministry of Commerce & Industry in early September announced that the government dropped its May proposal to impose anti-dumping duties on solar imports.

Massachusetts posts third year of double-digit clean energy job growth

Clean energy jobs in Massachusetts have grown by nearly 50% since 2010. The clean energy sector in Massachusetts now includes 88,273 employees and 5,985 businesses, according to the 2014 Massachusetts Clean Energy Industry Report. The report said that the Massachusetts clean energy industry has grown to $10 billion, accounting for 2.5% of the state’s GDP. The report highlights the important contributions that clean energy is making to job creation and GDP growth in the United States as a whole, in addition to the benefits of reducing consumer electricity costs and reducing pollution and carbon emissions.

GT Technology’s bankruptcy not caused by solar

GT Technology (GTAT) on Oct 6 surprised the markets by announcing a Chapter 11 bankruptcy filing. GTAT was originally focused only on solar production equipment but then aggressively branched out into sapphire crystal technology. GTAT’s bankruptcy was caused by a cash crunch tied in part to Apple’s decision not to use GTAT’s sapphire glass for its new iPhone 6. GTAT’s bankruptcy was not related to its solar business. Indeed, the solar industry has begun to add new capacity, which is supportive for solar production equipment manufacturers.

Solar industry should see minimal impact from plunge in crude oil prices

The recent plunge in Brent crude oil prices to $85/barrel has had some negative impact on solar stock prices, but only because of a misperception among some investors that solar and crude oil are closely connected. The plunge in crude oil prices could possibly reduce political pressure for alternative energy policy support, but otherwise there is no direct connection between crude oil prices and solar. Solar power is part of the electricity-generation sector of the U.S. economy, whereas crude oil fuel products are mainly used to drive engines in the transportation sector. A sharp drop in oil prices has no significant impact on electricity prices because U.S. utilities derive only about 1% of their electricity from burning petroleum fuel. Lower crude oil prices therefore do not present a competitive threat to solar.

MAC Solar Index Sep 2014 Quarterly Review Changes
 

As of the close of business on Sep 19, 2014, TerraForm Power Inc (TERP US) was added to the Index with an Exposure Factor of 1.0; Abengoa Yield Plc (ABY US) was added to the Index with an Exposure Factor of 0.5; and the Exposure Factor was reduced to 0.5 from 1.0 for existing-constituent GT Advanced Technologies Inc (GTAT US).