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Solar stocks settle back but longer-term industry trends remain bullish
 

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MAC-Solar-Sector-Update-May-2022

Solar Index Performance

The MAC Global Solar Energy Stock Index, the tracking index for the U.S.-based Invesco Solar ETF (NYSE ARCA: TAN) and the European-based Invesco Solar Energy UCITS ETF (ISUN LN, RAYS LN, SOLR GY, SOLR IM, SOLR SW), has fallen back in the past year since posting a 13-year high in January 2021. The Index is currently down by -21% on a year-to-date basis. That adds to the -26% decline in 2021 but doesn’t come close to reversing the extraordinary gains of 67% seen in 2019 and +245% seen in 2020.

The MAC Solar Index has fallen back this year as part of the downward correction seen in the overall stock market, caused by concern about high inflation, weaker global economic growth, and rising interest rates. Solar stocks are also seeing weakness due to the U.S. Department of Commerce’s tariff investigation, some minor disruptions to U.S. panel imports due to the new Xinjiang law, and the inability of Congress as yet to pass at least the renewable energy provisions in President Biden’s Build Back Better bill.

Despite the recent obstacles, bullish longer-term factors for solar stocks continue to include (1) the global dash to reduce carbon emissions as many countries are now adopting net zero emissions goals to add to their Paris climate agreement goals, (2) strong demand for solar by many global corporations that have recently adopted net zero emissions goals, (3) strong economic demand for solar now that solar is cheaper to build than fossil fuel or nuclear power in most of the world, (4) the pairing of solar with ever-cheaper battery systems to provide a 24/7 electricity solution, and (5) the increased focus by many nations to improve their energy security by building domestic electricity infrastructure such as solar, thus freeing themselves from the energy risk of importing fossil fuels from potentially hostile nations.

Solar stocks settle back but long-term industry trends remain bullish

Solar stocks have fallen in 2022 along with the rest of the stock market, which is seeing a post-pandemic correction caused by concern about high inflation, weaker global economic growth, and rising interest rates. The MAC Solar Index is currently down -21% year-to-date, which is less than the -24% year-to-date decline in the Nasdaq 100 index.

Yet solar stocks are still up by about 90% from their pre-pandemic level and the long-term prospects for the solar industry look very strong. Demand for solar is soaring across the world due to solar’s cost-competitiveness and the dash for net-zero emissions by many nations and global corporations. In fact, solar demand is so strong that it has far outstripped the supply of available panels, which means the solar growth rate would be much higher if enough panels were available. This demand will be met before long since many solar companies in recent months have announced massive manufacturing capacity additions.

The global solar industry in recent years has proven its resilience by adapting to rising demand and quickly shifting government policies. The solar industry was able to easily shake off the pandemic and showed very strong growth rates of +23% in 2020 and +27% in 2021, according to data from Bloomberg New Energy Finance. The long-term growth theme for the solar industry remains intact, with BNEF forecasting +33% yr/yr solar growth in 2022 and more than $4 trillion of solar spending through 2050.

Global solar growth is expected to show another strong year in 2022 as demand surges across the globe. Bloomberg New Energy Finance (BNEF) is forecasting that solar installs in 2022 will surge by another 33% to 246 GW, which would be the fourth consecutive year of double-digit growth.

In 2021, global solar growth soared by +27% to 184 GW, adding to the growth rates of +11% seen in 2019 and +23% seen in 2020, according to BNEF. New global solar installs grew by a compounded annual growth rate of +20% over the 5-year period through 2021.

Demand for solar has soared in the past several years as solar becomes cheaper than competitors and as nations and corporations are racing to meet net zero emissions targets. Many countries, especially in Europe, are also taking energy security more seriously and are focused on building domestic infrastructure such as solar to produce their electricity rather than relying on unreliable fossil fuels from foreign sources.

The solar industry over the past two years has shown very strong growth and has been able to shake off obstacles such as pandemic shutdowns, higher commodity prices, supply chain constraints, higher shipping costs, and trade/geopolitical barriers.

The long-term outlook for solar looks very bright. There will be a massive $4.2 trillion of spending on solar through 2050, according to BNEF’s 2020 New Energy Outlook.

BNEF forecasts that solar PV will account for 38% of world electricity capacity by 2050, up sharply from the 2019 world level of 11% and easily the largest source of electricity generation.

“I see solar becoming the king of the world’s electricity markets, Fatih Birol, executive director of the International Energy Agency (IEA), said in 2021 with the release of the IEA’s flagship World Energy Outlook report. In that report, the IEA forecasts that solar will easily become the largest source of electricity generation by 2040. The report goes on to say:

“Solar PV becomes the new king of electricity supply and looks set for massive expansion. From 2020 to 2030, solar PV grows by an average of 13% per year, meeting almost one-third of electricity demand growth over that period. Global solar PV deployment exceeds pre-crisis levels by 2021 and sets new records each year after 2022 thanks to widely available resources, declining costs and policy support in over 130 countries.”

Demand for solar should surge in the coming years as solar costs continue to decline and solar becomes even more competitive against fossil fuels and nuclear. Solar’s levelized cost has already plunged by an overall -85% since 2010 and by an average -8% per year over the last five years, according to Lazard (see p. 11).

China’s transition to subsidy-free solar is progressing well

The Chinese solar market remains strong as the country shifts toward a subsidy-free solar market and relies on solar to provide the power it needs to fuel rapid economic development, phase out coal, improve its air quality, and meet its emissions goals.

The Chinese government is relying heavily on solar to meet increasingly aggressive climate targets. In October 2021, the Chinese government adopted the goal for carbon emissions to peak before 2030 and for carbon-neutrality by 2060 as part of its National Determination Contribution (NDC) under the Paris Climate Agreement.

To meet its NDC goals, China has adopted a target of generating 25% of its electricity from non-fossil fuel sources by 2030. China also reiterated its target of achieving 1,200 GW of renewable energy capacity by 2030, with 619 GW of solar by 2030.

In order to help meet that dramatic renewables goal, China has begun work on a massive set of solar and wind projects in its desert regions. The first phase of 97 GW of solar and wind began in 2021 and has been running smoothly, leading the government to expand the project. The Chinese government has now announced another 455 GW of desert solar and wind projects, with 200 GW of that slated to be built by 2025 and another 255 GW to be built by 2030. The bulk of the generated electricity will be delivered to the populated eastern regions of the nation.

Turning to solar growth rates, Chinese solar installs in 2021 soared by +32% to a new record high of 68.6 GW, adding to the very strong growth rate of +57% seen in 2020 to 52.1 GW, according to BNEF. China’s solar surge is expected to continue in 2022 with BNEF forecasting growth of +48% to 101.4 GW.

Chinese solar growth was strong in 2020-21 despite the disruptions caused by the Covid pandemic and the transition in China to a solar market without national subsidies. Developers are showing strong interest in subsidy-free solar projects since they can still earn attractive internal rates of return. The Chinese government has also added benefits to subsidy-free projects, such as a guaranteed price for solar electricity output and priority on the grid. Solar projects can still qualify for subsidies at the local level.

The move away from national subsidies should be a long-term positive factor for the Chinese solar industry since the industry should be able to grow in a more predictable manner with more stable profit margins, as opposed to the boom-bust days of the past that were caused by erratic government subsidy policies.

Without subsidy distortions, the solar industry should be able to more closely match end-user demand, thus eliminating the small and less competitive players that can only compete when there are generous subsidies. The current trend should accelerate whereby the solar industry is dominated by large players with the best technology and the lowest production costs.

By contrast, the Chinese solar market in recent years has been buffeted by erratic subsidy policies that caused upheaval in the industry. For example, Chinese solar installs in 2017 soared by 76% to a record high of 53.0 GW as developers took advantage of very generous government subsidies.

However, in response to that 2017 install surge, the Chinese government, on May 31, 2018, announced a sharp cut in most of its solar subsidies, with utility-scale solar capped at 40 GW and roof-top distributed generation (DG) capped at 10 GW in 2018. China’s subsidy phase-out plan was referred to in the industry as the “China-531” order after the date of the announcement.

The government was forced into its China-531 action partly by the big backlog of unpaid subsidies that reached $23 billion by the end of 2018. The China-531 curtailment of subsidies caused a sharp drop in Chinese solar installs by -17% to 44.3 GW in 2018 and -25% to 33.1 GW in 2019.

Regarding Chinese labor issues, the U.S. government in June 2021 imposed a “withhold release order” that blocked the import of polysilicon products produced by five companies based in China’s Xinjiang province due to allegations the companies were involved with forced labor programs of the Uyghur Muslim minority. The Biden administration also placed those companies on the Treasury’s Entity List, which blocks U.S. exports to those companies.

At least one of the targeted companies strenuously denied the use of forced labor. In order to rebut the claims, the company hired a global auditor to study its workforce practices and opened its Xinjiang factory to tours by global equity analysts and investors.

The U.S. Congress in December then passed the Uyghur Forced Labor Prevention Act, which was signed into law by President Biden. The law bans the import into the U.S. of products made in Xinjiang unless the importer can prove that the products were not made with forced labor.

The global solar industry is adjusting to the Xinjiang labor issues by building new polysilicon plants outside Xinjiang and creating supply chain documentation. Factories in the Xinjiang region produced about 45% of the world’s solar-grade polysilicon in 2020, according to Bernreuter Research. Many companies have announced plans to build new polysilicon plants outside Xinjiang to make it easier to comply with the new U.S. rules.

The U.S. ban on importing non-documented solar products from Xinjiang has caused some supply-chain disruptions for U.S. solar developers, who have had shipments temporarily detained by U.S. Customs until they provided the necessary documentation.

However, the overall impact of the ban has been reduced by the fact that the U.S. only buys a small portion of China’s solar module output in the first place due to U.S. tariffs on Chinese solar products.

Also, the U.S. accounted for only 13% of global solar installs in 2021, which means that the impact of the U.S. ban on forced-labor products from Xinjiang has had only a minor impact on the overall global solar growth rate.

U.S. and global solar companies have been aware of the Xinjiang risk for the last two years and have already been taking steps to divert supplies away from Xinjiang and do a better job of ensuring transparency and documenting their supply chains.

The global solar industry, as a whole, is taking specific steps to address allegations of forced labor. About 175 solar companies from around the world signed a pledge sponsored by the Solar Energy Industries Association (SEIA) to ensure that their supply chains are free of any forced-labor products (see “Solar Companies Unite to Prevent Forced Labor in the Solar Supply Chain”). The SEIA also released a Supply Chain Traceability Protocol that helps companies prove that their supply chain is free of any products that are potentially connected with forced labor (see “New Traceability Protocol Allows Solar Companies to Ensure Ethical Supply Chain”).

U.S. solar demand remains very strong but panel supply is an issue

U.S. solar growth in 2021 saw continued strength with +28% yr/yr growth to a new record 23.9 GW, adding to the +62% yr/yr surge seen in 2020, according to BNEF.

Utility-scale solar accounted for 73% of the U.S. solar installs in 2021, followed by 17% for residential solar, and 10% for commercial and community solar, according to Wood Mackenzie’s “U.S Solar Insight – 2021 Year in Review.”

Solar accounted for an impressive 46% of new U.S. electricity installs in 2021, which was a record high and up from 43% in 2020 and 40% in 2019, according to Wood Mackenzie. Solar accounted for only 3.9% of U.S. electricity generation in 2021, showing that there is plenty of headroom for massive solar growth in the coming decades.

Solar remained first among all the electricity generation technologies for the third straight year, beating the 44% share for wind and 10% share for natural gas. The share of new natural gas U.S. electricity additions fell further to 10% in 2021 from 18% in 2020 and from 57% as recently as 2018. Solar and wind together accounted for a combined 90% of new electricity capacity installs and shoved aside natural gas. Neither coal or nuclear registered any significant new installs in 2021, according to Wood Mackenzie.

U.S. solar growth in 2021 was driven by strong demand and overcame various obstacles such as the pandemic, supply chain disruptions, high commodity input prices, and U.S. trade and geopolitical barriers.

Solar installs in 2020 and 2021 saw support as developers sought to take advantage of the investment tax credit (ITC), which allows developers to receive a partial tax credit for solar installations.

The solar ITC of 26% in 2020 was due to step down to 22% in 2021 and 10% in 2022 for utility PV projects, non-residential, and third-party-owned residential solar projects (and to zero for direct-owned residential projects).

However, Congress in December 2020 extended the solar ITC as part of the combined passage of the $900 billion pandemic aid bill and the $1.4 trillion omnibus spending bill. The new legislation set the ITC at 26% for 2021 and 2022, with a step-down to 22% in 2023. In 2024, the ITC will be set at 10% indefinitely for large-scale solar projects and at zero for small-scale solar projects.

There is no doubt that there is very strong demand for solar in the U.S. from all sectors, including residential, distributed solar at commercial and community locations, corporate demand for solar power purchase agreements (PPAs) to meet net-zero emissions targets, and utility-scale solar.

However, there are questions about whether this demand can be met because of various actions by the U.S. government that have restricted the supply of solar panels available to U.S. developers. These restrictions include the new U.S. law on Xinjiang and a new tariff investigation by the U.S. Department of Commerce.

Specifically, the Department of Commerce in March 2022 opened an investigation into whether Chinese companies are circumventing the decade-old antidumping and countervailing (AD/CVD) tariffs with their factories in Malaysia, Thailand, Vietnam, and Cambodia. Those countries currently account for about 80% of the almost $7 billion of solar products that the U.S. imports annually, according to Bloomberg.

The probe was started due to a petition filed by a small U.S. solar company, Auxin Solar, which would benefit from extended tariffs by seeing less competition from Asian solar suppliers.

The DOC investigation has already sparked a flurry of order cancellations and project delays by U.S. developers, who are not willing to risk that large tariffs could be imposed retroactively by the DOC, thus dramatically increasing the costs of their projects.

The deadline for the DOC to make a preliminary determination on the investigation is August 2022, and final determination might not come until between January and April 2023. In the meantime, the Commerce Department has thrown the U.S. solar industry into turmoil with its antiquated investigation procedures that are based on a 92-year-old trade law.

In any case, there is a great deal of pressure on the Department of Commerce to get its investigation over with quickly. A group of 22 U.S. Senators sent a letter to President Biden pleading for a quick conclusion to the solar probe. Various clean energy organizations and companies are also applying pressure to get the investigation resolved as soon as possible.

U.S. Commerce Secretary Gina Raimondo, in early May 2022, indicated that her department would move as quickly as possible on the investigation by saying, “This case has my attention, we are focused on it, and we’re doing everything we can to move it as swiftly as we can in the confines of the law. Any place that we can accelerate within the bounds of the law, we are doing that.”

The good news for the global solar industry as a whole is that the U.S. investigation affects only U.S. solar installs, which represented only 13% of global solar installs in 2021. If the U.S. government wants to block certain panels from being imported into the U.S., those panels will quickly be snapped up by buyers in many other countries where demand is booming and the overall global solar install rate will remain strong. Moreover, the U.S. investigation will only have a temporary effect on U.S. installs, which can return to strong levels in line with demand once the uncertainty from the investigation passes.

Separately on the tariff front, the Biden administration in February 2022 extended former-President Trump’s Section 201 tariffs on imported solar panels at 14-15% for another four years. However, the administration allowed a continued exemption for bifacial panels and also doubled the import quota for duty-free solar cells to 5 GW.

The exemption for bifacial panels was considered a big win for solar developers and buyers since those panels are widely used by large utility-scale projects. The U.S. solar industry has already migrated to bifacial panels because they use-effective technology and have been exempted from tariffs the last two years because of a mistake made by the former Trump administration that it couldn’t correct before leaving office. Bifacial panels allow light to be absorbed by both the front of the panel and back of the panel as light bounces off the ground.

Regarding the history of the U.S. 201 tariffs, former-President Trump in January 2018 imposed a Section 201 tariff of 30% on imported solar cells and modules in an attempt to protect the few existing U.S. solar manufacturers. The initial Section 201 import tariff of 30% for 2018 stepped down to 25% in February 2019, 20% in February 2020, and 15% in February 2021. The tariff was set to expire in February 2022, but as mentioned earlier, President Biden then extended the tariff for another four years.

Elsewhere on the policy front, the solar industry continues to wait to see whether Congress, before the November 2022 mid-term elections, will pass any part of President Biden’s $1.7 trillion Build Back Better bill, such as the $550 billion of energy and climate spending.

The energy provisions of the Build Back Better bill contain an extension of the solar investment tax credit (ITC), and also a hike in the ITC rate to 30% from the current 26%. Also, the ITC proposal would have a “direct pay” provision, which would allow tax credits to be converted into direct payments from the federal government, rather than as an offset by investors against tax liabilities, which a shortage of tax equity can hinder. The Build Back Better proposal also has a production tax credit for U.S. solar manufacturers. The bill also has a new ITC for battery storage, which would give solar-plus-storage a big boost.

Those energy measures could be passed by Congress as separate legislation or as add-ons to must-pass legislation such as an omnibus spending bill to fund the U.S. government.

Since taking office in January 2021, the Biden administration has taken a number of executive actions on the climate front. President Biden, on his first day in office, announced that the U.S. would rejoin the international Paris Climate Accord. That confirmed that the U.S. would resume its global leadership position in trying to meet the Paris Climate Accord’s goal of keeping global warming to less than 2 degrees Celsius above the pre-industrial level, and preferably below 1.5 degrees Celsius. President Biden also pledged to reach a 100% carbon-free electricity sector by 2035 and to reach net-zero greenhouse gas emissions by 2050.

The Biden administration, in April 2021, announced a new “Nationally Determined Contribution” under the Paris Climate Agreement of a reduction in U.S. greenhouse gas emissions by 50-52% by 2030 from 2005 levels. That was nearly double the previous commitment made by President Obama of a 26-28% cut in greenhouse gas emissions by 2025 from 2005 levels. The NDC also included the target of the U.S. economy having net-zero carbon emissions by 2050.

In December 2021, President Biden signed an executive order to cut the federal government’s emissions by 65% by 2035 and make the government carbon neutral by 2050, the same year that carbon neutrality is targeted for the U.S. economy as a whole. As part of that order, the U.S. government is instructed to have 100% carbon pollution-free electricity by 2030, which is only eight years away.

Explaining the order, the White House said, “The federal government will work with utilities, developers, technology firms, financiers, and others to purchase electricity produced from resources that generate no carbon emissions, including solar and wind, for all its operations by 2030.”

European solar expected to show continued strong growth

European solar growth in 2021 grew sharply by +34% yr/yr to a new record high of 25.9 GW, according to the “EU Market Outlook for Solar Power” reported published by SolarPower Europe. That was the fourth consecutive year of very strong solar growth for Europe. Solar now produces 6% of Europe’s electricity, according to thinktank Amber.

In 2021, the largest European national solar install amounts were in Germany with 5.3 GW (+8% yr/yr), Spain with 4.6 GW (+50% yr/yr), Netherlands with 3.6 GW (+4% yr/yr), Poland with 3.2 GW (+21%), and France with 2.5 GW (+154%), according to BNEF.

European solar growth in 2020 and 2021 continued to see strong support from the spread of subsidy-free solar throughout Europe after the EU’s elimination in late 2018 of solar tariffs and the minimum-price scheme. Also, Europe is mandating increasing amounts of solar power to meet its aggressive targets for cutting emissions.

European solar growth improved significantly after the EU in September 2018 ended its anti-dumping duties against solar modules imported from China and ended the associated minimum import price (MIP) scheme. The EU’s MIP scheme had been in place since 2013 when the EU tried unsuccessfully to protect local European solar manufacturers from Chinese competition. The MIP scheme succeeded only in raising the cost of solar modules for European solar installers and causing many years of very slow solar growth in Europe.

The end of the MIP scheme, combined with the sharp drop in solar module prices seen in recent years, allowed solar to reach grid-parity in a growing portion of Europe. Many solar projects in Europe are now being installed on an unsubsidized basis.

European solar growth is also receiving a boost from the EU’s pandemic stimulus plan, approved in July 2020, which totaled 750 billion euros, since almost one-third of those funds were targeted for fighting climate change. That added to the EU’s 7-year budget that has 1 trillion euros of funding to help EU countries meet their EU’s Paris Agreement goals for reducing carbon emissions.

European solar growth is expected to show solid growth in the coming years due to the need to meet renewable energy targets. The European Parliament in 2018 raised the EU renewable energy target for 2030 to 32% from 27% and also made the target binding on EU members. The European Commission in July 2021, as part of its “Fit for 55” package, proposed raising that renewable energy target to 40%, with that proposal going to the European Parliament and its members for approval.

The EU is relying on its renewables target to meet its pledge under the UN Paris climate agreement to cut its greenhouse gas emissions by at least 55% by 2030 from 1990 levels, and for net zero emissions by 2050.

Europe was thrown into an energy emergency after Russia invaded Ukraine in February 2022 and Europe came under pressure to quickly slash its dependence on Russian oil and gas. The EU imports 90% of its natural gas consumption, and Russia provides about 45% of those gas imports, according to data from the European Commission. The Commission also notes that Europe depends on Russia for about 25% of its oil imports and 45% of its coal imports. Europe currently derives about 20% of its electricity from natural gas, according to PV Tech.

Sanctions on Russia’s oil and gas industries have driven natural gas prices sharply higher, which makes solar even more price-competitive against gas. That provides another reminder that solar is not only a good environmental solution, it is also a good economic solution as well. The UK’s secretary of state for Business, Energy and Industrial Strategy (BEIS), Kwasi Kwarteng, said, “Renewables are cheaper than gas. The more cheap, clean power we generate at home, the less exposed we’ll be to global gas markets.”

Russia’s invasion of Ukraine brought the importance of domestic energy security to the forefront once again, much as it was in the 1970’s when OPEC’s oil embargo caused long gasoline lines and a global recession. Fossil fuels tend to come from hostile and inhospitable places, making them an unreliable and risky source of energy for importers.

As a result of Russia’s attack on Ukraine, the EU is formulating a new plan called REPowerEU to reduce its dependence on Russian fossil fuels. The EU is planning to end most of its crude oil imports from Russia by the end of 2022 and reduce its natural gas imports from Russia by two-thirds by the end of 2022. In response to Russia’s invasion of Ukraine, Germany in February already scrapped the whole approval process for the Nord Stream 2 gas pipeline from Russia to the EU, putting the project into an indefinite freeze and forced the Gazprom-backed Nord Stream company towards insolvency.

A key strategy of REPower EU is to rapidly build new alternative energy capacity to replace the need for natural gas and coal to generate electricity. The RePowerEU proposal seeks to ensure that 420 GW of new solar is installed in the EU by 2030, which would bring installed capacity to 565 GW. That would require the average annual solar installation of 47 GW of solar over the next nine years, which is about 80% higher than the 2021 install level of 26 GW.

The EU’s climate policy chief, Frans Timmermans, said, “Let’s dash into renewable energy at lightning speed. Renewables are a cheap, clean and potentially endless source of energy, and instead of funding the fossil fuel industry elsewhere, they create jobs here.”

The REPower EU strategy includes several key measures for speeding the installation of solar, including larger government solar auctions, government help in identifying land sites, streamlining permitting, and streamlining solar Power Purchase Agreements (PPAs) to make them more attractive for small and medium-sized companies.

India’s solar demand expected to remain very strong

India’s government is pushing solar very hard as a means to modernize India’s infrastructure, boost its global business competitiveness, expand electricity access in rural areas, and meet its climate goals. India, at the COP26 conference in late 2021, announced national goals of 500 GW of renewable capacity by 2030 and net zero emissions by 2070.

India’s government has set an aggressive goal for installing 280 GW of cumulative solar capacity by 2030, which is more than four times the current installed level of 60 GW seen at the end of 2021. In order to reach that target, India would need to install an average of about 31 GW per year from 2022 through 2030, which would be more than double India’s 2021 annual install rate of 12 GW.

In 2021, India installed the third most solar of any country in the world behind China and the U.S. In 2021, India installed a record 12.4 GW of solar, recovering by +192% from 2020’s dismal install level of 4.2 GW that was caused in part by the pandemic, according to BNEF data. BNEF is forecasting that India’s solar growth rate will remain strong at a compounded annual rate of +14% over the next five years and more than triple to an annual install rate of 47 GW by 2030.

Solar is already big business in India, accounting for 62% of new power capacity additions and accounting for about 12.4% of India’s installed power capacity at the end of 2021, according to PV Tech. Solar also provides India’s largest source of alternative power, with solar representing 47% of total renewable power generation, ahead of 48% for wind, 10% for biopower, and 5% for small hydro, according to PV Tech.

Over the near-term, however, India has been running into obstacles as it tries to reduce its reliance on Chinese solar panels and encourage the construction of solar manufacturing plants located inside India. In 2020, India imported about 80% of its solar panels from China.

India is currently using a combination of steep tariffs on Chinese solar panels and domestic manufacturing subsidies to try to promote a homegrown solar industry. So far, India’s domestic manufacturing capacity of 8.8 GW for solar modules and 2.5 GW for solar cells is far below India’s 2021 annual solar install level of 12.4 GW, according to PV Tech. India’s solar manufacturers, therefore, remain woefully short of meeting India’s outsized demand. There are the additional problems that India-made solar panels tend to be expensive and do not utilize the latest solar technologies.

India’s government, in recent years, has made some progress on the domestic production front by using a variety of tariffs and incentives. However, demand for solar panels in India still far outstrips supply. In fact, some solar developers are currently curbing their solar building plans in India because of the shortage and the high price of the limited number of panels that are currently available domestically in India.

The Indian government’s new and more aggressive industrial policy plan, although it will take time, may have some success in weaning the country off Chinese modules. In the meantime, however, the Indian government’s policies are restricting the supply of reasonably-priced panels that are available to solar developers in India.

On the tariff side, India’s government, as of April 1, 2022, imposed a new basic customs duty of 40% on the import of solar modules and a 25% duty on cells. India also maintains an “Approved List of Models and Manufacturers” (ALMN) of solar panels that are approved for installation in India. That list that was originally designed as a minimum quality requirement, but there is now speculation that the list is being used as a non-tariff barrier against foreign panels because there are no non-India solar manufacturers on the list.

On the production side, India’s government in early 2022 announced a hefty $2.6 billion of funding for its solar PV manufacturing “Production Linked Incentive” (PLI) scheme. That added to the $617 million of funding already directed to the program. The program provides subsidies to companies that build large PV manufacturing plants in India.

The combined tariff and production incentive program will produce an additional 40 GW of cell and module production capacity, according to Indian rating company ICRA, a Moody’s Investors Services company. That would go a long way towards making India self-sufficient in solar production and allow the country to meet the massive domestic demand for solar products.

Japan’s solar slows but much of the rest of Asia/Pacific is soaring

Solar installs in Japan in 2021 fell by -25% to 6.5 GW, reversing most of the +28% surge seen in 2020 to a 5-year high of 8.7 GW, according to BNEF. Japan’s solar installs in 2022 will fall by another -24% to 5.0 GW in 2022, stabilize in the 4-5 GW area during 2023-25, and then resume solid growth during 2026-2030, according to forecasts by BNEF.

Japan’s solar growth is currently slowing due to the phase-out of some subsidies. Yet, the Japanese government’s subsidy support for solar will continue in the coming years. The government’s FIT (feed-in tariff) program will continue to support smaller-scale solar projects and the government in April 2022 launched a new feed-in-premium (FIP) support program for large-scale projects.

The new FIP program will provide solar electricity producers a premium over wholesale electricity prices as an incentive, as opposed to the old FIT system that specified a fixed electricity price. The goal of the new system is to transition the Japanese solar market to unsubsidized parity.

Aside from subsidies, the Japanese government is pursuing aggressive solar targets and is relying on solar to meet its emissions goals. In July 2021, the Japanese government almost doubled its solar target to a cumulative capacity of 108 GW by 2030. In order to meet that target, Japan would need to install 37 GW of solar by 2030, or roughly 4 GW per year. The government raised its solar target to help meet Japan’s carbon target of cutting greenhouse gas emissions by 46% by 2030 from 2013 levels.

Solar in Japan should also see support in coming years from Japanese corporations looking to sign solar power purchase agreements to meet their corporate renewable energy goals. Corporate demand is expected to drive the development of subsidy-free solar in Japan in the coming years.

Elsewhere in Asia/Pacific, Taiwan is expected to see strong solar installs in the coming years as the government promotes solar to meet its climate goals. Solar installs in Taiwan in 2021 fell by -4% to 1.6 GW, pausing after extraordinary growth rates of +109% in 2018, +91% in 2018, +41% in 2019, and +18% in 2020, according to BNEF. Taiwan’s solar installs will show strong growth in 2022 of +28% to 2.1 GW, according to BNEF.

Solar is seeing strong demand in Taiwan from corporations looking to meet their renewable energy goals. Also, there is rising demand for solar power in Taiwan to replace the coming closure of coal plants in order to meet its goal of net zero emissions by 2050.

Taiwan’s government is targeting a 25% renewable energy supply by 2025 and has announced an aggressive solar cumulative-capacity target of 20 GW by 2025, which would be four times the current cumulative capacity of about 5 GW.

South Korea is another bright spot for solar in Asia. Solar installs in South Korea grew sharply by a compounded annual growth rate of 35% in the 5-year period through 2021. In 2020, South Korea’s solar installs surged by +51% to a record 5.6 GW, although installs in 2021 then fell by -26% to 4.1 GW, according to BNEF.

Corporate demand for solar power is expected to grow sharply after South Korea’s government in January 2021 revised its electricity laws to allow clean energy developers to sell electricity directly to corporations with power purchase agreements. The South Korean government in February also raised its mandate to 25% from 10% for the amount of annual renewable energy that electric utilities must source by 2030.

In Australia, solar installs in 2021 grew sharply by +25% to 4.7 GW, capping a 5-year compounded annual growth rate of 39% seen during 2016-21, according to BNEF. Australia’s solar installs in 2022 will grow by +5% to 4.9 GW, according to BNEF.

Solar industry hits some temporary obstacles but longer-term industry trends remain bullish
 

Solar Index Performance

The MAC Global Solar Energy Stock Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN) and the Invesco Solar Energy UCITS ETF (London: ISUN LN), has settled back in recent months after posting a 13-year high in January 2021. The Index is currently down by -25% on a year-to-date basis, giving back some of the extraordinary +235% annual gain seen in 2020.

The MAC Solar Index in 2020 rallied sharply as the industry shook off the impact of the pandemic and looked ahead to more favorable solar policy support as Joe Biden won the November 2020 U.S. presidential election and Democrats took control of both the House and Senate.

The Index has since fallen back in 2021 as the solar industry hit some temporary obstacles caused by the pandemic, a polysilicon shortage, various supply chain disruptions and costs, and concern about the Biden administration’s ban on some solar products from China’s Xinjiang province. There has also been a slowdown in project planning due to higher solar costs. The markets are also getting impatient for Democrats to pass solar policy-support legislation contained in the Build Back Better bill, or pass those solar-support measures through other bills.

Despite the recent obstacles, bullish longer-term factors for solar stocks continue to include (1) expectations for a global dash to reduce carbon emissions now that the U.S. has reclaimed its leadership role in the global Paris climate effort, (2) the strong global solar demand picture that has resulted from the fact that solar has now reached unsubsidized grid parity in more than two-thirds of the world, (3) the pairing of solar with large-scale battery systems to provide a 24/7 electricity solution, (4) broadening solar growth in India, Turkey, Latin America, Middle East, and Southeast Asia, and (5) strong demand for renewable energy as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement.

Solar stocks settle back on temporary obstacles but long-term industry trends remain bullish

Solar stocks are sharply higher from their pandemic lows seen in spring-2020 due to (1) the overall recovery in global stocks seen since the pandemic-induced dip in spring 2020, (2) the realization that solar is emerging as a key solution to climate change as it becomes the cheapest source of new electricity generation and is paired with battery storage for 24/7 electricity, (3) the Biden administration’s clean energy push through executive actions and proposed legislation, (4) a big European renewable energy push to stimulate the pandemic-ravaged economy and meet its Paris climate goals, and (5) the recent announcement by China of massive solar and wind projects in its desert areas.

The recent obstacles for the solar industry are likely to prove temporary, allowing the bullish long-term secular trend for solar to continue. BNEF is forecasting that global solar installs in 2021 will be very strong at +28% despite this year’s problems. Moreover, BNEF is forecasting that 2022 will be another very strong year, with +25% solar growth. The solar industry already shook off the pandemic shutdowns in 2020 with very strong growth of 21%.

The long-term growth story for the solar industry remains intact, with BNEF forecasting more than $4 trillion of solar spending through 2050.

Solar PV Growth Outlook

Global solar growth is expected to show another strong year in 2021 despite temporary disruptions from the Covid pandemic and higher solar costs. Bloomberg New Energy Finance (BNEF) is forecasting that solar installs in 2021 will grow by +28% to 183 GW from 143 GW in 2020.

In 2020, world solar growth soared by +21% to 143 GW, accelerating from the +9% growth rates seen in both 2018 and 2019, according to BNEF. Solar growth in 2018 and 2019 was hindered by a temporary pull-back in Chinese solar installs and two years of global retrenchment after two very strong global solar growth years in 2016 (+34%) and 2017 (+32%). Over the past five years (2015-20), global solar has grown by a very strong compounded annual growth rate of +21%.

Solar growth soared in 2020 despite the pandemic, which slowed planning, construction, and supply-chain deliveries. Solar is being installed at a torrid clip across the globe due to its low cost and attractiveness as a long-term solution for a sustainable energy future. Solar’s low cost means that it is now on a strong long-term growth path without the need for government subsidies.

Solar will account for 28% of all electricity capacity additions, and there will be a massive $4.2 trillion of spending on solar through 2050, according to BNEF’s 2020 New Energy Outlook. BNEF forecasts that solar PV will account for 38% of world electricity capacity by 2050, up sharply from the 2019 level of 11%.

Solar will easily be the largest source of electricity generation in 2050 at 38%, far outpacing wind at 20% and gas at 15%, according to BNEF. BNEF expects coal to fall to 7% of electricity generation by 2050 from 28% in 2019, and for nuclear to drop to 2% in 2050 from 5% in 2019.

“I see solar becoming the king of the world’s electricity markets, Fatih Birol, executive director of the International Energy Agency (IEA), said upon the release of the IEA’s flagship World Energy Outlook report. In that report, the IEA forecasts that solar will easily become the largest source of electricity generation by 2040. The report goes on to say:

“Solar PV becomes the new king of electricity supply and looks set for massive expansion. From 2020 to 2030, solar PV grows by an average of 13% per year, meeting almost one-third of electricity demand growth over that period. Global solar PV deployment exceeds pre-crisis levels by 2021 and sets new records each year after 2022 thanks to widely available resources, declining costs and policy support in over 130 countries.”

Demand for solar should surge in the coming years as solar costs fall and as solar becomes even more competitive against fossil fuels and nuclear. Solar’s levelized cost has already plunged by an overall -85% since 2010 and by an average -8% per year over the last five years, according to Lazard (see p. 10).

China’s transition to subsidy-free solar is progressing well

There is strong optimism about the Chinese solar market as it shakes off the Covid pandemic and shifts toward a subsidy-free market in the coming years.

The markets are also optimistic about the Chinese government’s intent to rely heavily on solar to meet increasingly aggressive climate targets. In September 2020, China’s President Xi surprised the world by announcing at the UN General Assembly that China intends to be carbon-neutral by 2060, which was the first time China had set such a target.

In December 2020, President Xi then announced a more specific target of 1,200 GW of solar, wind, and biomass capacity by 2030, which is nearly triple the current capacity of 450 GW. The Chinese government also proposed a new clean power mandate that would require grid operators, power retailers, and large consumers to source 25.9% of their output from solar, wind, or biomass by 2030. BNEF estimates that meeting that mandate would require 1,580 GW of cumulative capacity by 2030, or a third higher than President Xi’s earlier goal of 1,200 GW.

The Chinese government in March 2021 then announced a draft of the 14th Five-year Plan for 2021-2025. That plan reiterated the targets for carbon emissions to peak before 2030 and achieve carbon-neutrality by 2060. In October 2021, China adopted those goals in its National Determination Contribution (NDC) under the Paris Climate Agreement.

To meet its NDC goals, China has adopted a target of generating 25% of its electricity from non-fossil fuel sources by 2030. China also reiterated its target of achieving 1,200 GW of renewable energy capacity by 2030 and 619 GW of solar by 2030.

In order to meet that dramatic renewables goal, China has begun work on a massive solar and wind project in its desert regions. The first phase of 100 GW of wind and solar began earlier this year and has been running smoothly, leading to the government to plan a second phase. There are reports that the project total will be a massive 400 GW, with a target of being half-completed by 2025.

Turning to solar growth rates, Chinese solar installs in 2020 soared by +57% to 52.1 GW from 33.1 GW in 2019. The 2020 install level of 52 GW was just slightly below the record high of 53.0 GW posted in 2017.

Solar installs were undercut in early 2020 by the Covid pandemic but finished the year on a very strong note as developers sought to beat the expiration of some subsidies at the end of 2020.

BNEF is forecasting that Chinese solar installs in 2021 will have another strong year with growth of +19% to 61.8 GW. Strength in 2021 is expected to be driven in part by the completion of projects that were started in 2020 to qualify for subsidies.

Chinese solar installs are expected to remain strong even though the Chinese government is transitioning to a solar market without national subsidies. Developers are showing strong interest in subsidy-free solar projects since they can still earn attractive internal rates of return. The Chinese government has also added benefits to subsidy-free projects, such as a guaranteed price for solar electricity output and priority on the grid. Solar projects can still qualify for subsidies at the local level.

The move away from national subsidies should be a long-term positive factor for the Chinese solar industry since the industry should be able to grow in a more predictable manner with more stable profit margins, as opposed to the boom-bust days of the past that were caused by erratic government subsidy policies.

Without subsidy distortions, the solar industry should be able to more closely match end-user demand, thus eliminating the small and less competitive players that can only compete when there are generous subsidies. The current trend should accelerate whereby the solar industry is dominated by large players with the best technology and the lowest production costs.

In recent years, the Chinese solar market has been buffeted by erratic subsidy policies that previously caused upheaval in the industry. For example, Chinese solar installs in 2017 soared by 76% to a record high of 53.0 GW as developers took advantage of very generous government subsidies.

However, in response to that 2017 install surge, the Chinese government, on May 31, 2018, announced a sharp cut in most of its solar subsidies, with utility-scale solar capped at 40 GW and roof-top distributed generation (DG) capped at 10 GW in 2018. China’s subsidy phase-out plan was referred to in the industry as the “China-531” order after the date of the announcement.

The government was forced into its China-531 action partly by the big backlog of unpaid subsidies that reached $23 billion by the end of 2018. The China-531 curtailment of subsidies caused a sharp drop in Chinese solar installs by -17% to 44.3 GW in 2018 and -25% to 33.1 GW in 2019.

Regarding Chinese labor issues, the U.S. government in June 2021 imposed a “withhold release order” that blocked the import of polysilicon products produced by five companies based in China’s Xinjiang province due to allegations the companies were involved with forced labor programs of the Uyghur Muslim minority. The Biden administration also placed those companies on the Treasury’s Entity List, which blocks U.S. exports to those companies.

One of the targeted companies denied the use of forced labor. In order to rebut the claims, the company hired a global auditor to study its workforce practices and opened its Xinjiang factory to tours by global equity analysts and investors.

The markets were relieved that the U.S. order was narrowly focused and did not involve a blanket prohibition on the import of polysilicon from the Xinjiang region. Factories in the Xinjiang region produced about 45% of the world’s solar-grade polysilicon in 2020, according to Bernreuter Research. Polysilicon plants consume a large amount of electricity, which makes Xinjiang an attractive location for those plants due to the region’s cheap electricity prices.

There is concern that the ban could hamper the ability of U.S. developers to import solar products and raise the price of imported solar panels, thus curbing the U.S. solar growth rate. However, a Citigroup analyst quoted by Bloomberg said he expects the impact from the ban will be “mild” since the U.S. only buys a small portion of China’s solar module output. The U.S. in recent years has had tariffs on Chinese solar products, which means that U.S. imports of Chinese solar products are relatively small.

Also, the U.S. accounted for only 14% of global solar installs in 2020, which means that the impact of the U.S. ban is likely to have only a minor impact on the overall global solar growth rate even if it impedes the U.S. solar install rate.

Global solar companies have been aware of the Xinjiang risk for months and have already been taking steps to divert supplies away from Xinjiang and do a better job of ensuring transparency and documenting their supply chains.

The global solar industry as a whole is also taking steps to address allegations of forced labor. About 175 solar companies from around the world signed a pledge sponsored by the Solar Energy Industries Association (SEIA) to ensure that their supply chains are free of any forced-labor products (see “Solar Companies Unite to Prevent Forced Labor in the Solar Supply Chain”). The SEIA also released a Supply Chain Traceability Protocol that helps companies prove that their supply chain is free of any products that are potentially connected with forced labor (see “New Traceability Protocol Allows Solar Companies to Ensure Ethical Supply Chain”).

U.S. solar is seeing strong growth despite obstacles

U.S. solar growth is seeing strong growth despite recent obstacles. U.S. solar installs in 2020 soared by +64% to 18.9 GW, adding to 2019’s strong +15% growth rate. BNEF is forecasting another strong year for U.S. solar in 2021 despite recent obstacles with growth of +56% to 29.5 GW.

Solar accounted for an impressive 43% of U.S. electricity installs in 2020, which was a record high and up from 40% in 2019, according to Wood Mackenzie. Solar remained first among all the electricity generation technologies for the second straight year, beating the 38% share for wind and 18% share for natural gas. The share of natural gas electricity additions fell sharply to 18% in 2020 from 32% in 2019 and 57% in 2018 as solar and wind took the lion’s share of new installs and shoved aside natural gas.

Solar showed very strong growth in 2020 despite the pandemic, which turned out to have a minor impact on the overall install rates. The residential sector was negatively impacted by the pandemic in Q2-2020 but then came roaring back in the second half of the year and still showed strong yearly growth of +11% to 3.1 GW.

Solar installs in the non-residential sector (commercial, government, nonprofit, and community solar) showed a -4% decline in 2020 to 2 GW, according to Wood Mackenzie. Non-residential installs were undercut by the pandemic, which slowed development timelines and delayed project interconnections.

By contrast, U.S. utility solar installs in 2020 soared by +60% to a new record of just under 14 GW, according to Wood Mackenzie. Moreover, Wood Mackenzie expects strong growth to continue into 2021 due to a massive utility-solar pipeline of 69 GW. The firm expects utility solar to show continued strong growth due to “the expansion of state-level renewable energy targets, utilities’ self-enforced carbon reduction plans, a renewed focus on clean energy deployment at the federal level, and large corporate off-takers looking to meet net-zero carbon emissions goals.”

Solar installs in 2020 also showed strength as developers sought to take advantage of the previously-set 26% solar investment tax credit (ITC) in 2020 before it was to step down to 22% in 2021 and 10% in 2022 for utility PV projects, non-residential, and third-party-owned residential solar projects (but to zero for direct-owned residential projects).

However, the solar industry received a pleasant surprise in December 2020 when Congress extended the solar ITC for another two years as part of the combined passage of the $900 billion pandemic aid bill and the $1.4 trillion omnibus spending bill. The 2-year extension of the ITC caused Wood Mackenzie to increase its U.S. solar install figure by a total of +17% for its 2021-25 forecast.

The ITC is currently set at 26% for 2021 and 2022. The ITC will then fall to 22% in 2023, and then in 2024 to 10% indefinitely for large-scale solar projects and to zero for small-scale solar projects.

Regarding the ITC, the markets are mainly waiting to see if Democrats can pass the $1.75 trillion Build Back Better bill, which contains a long-term extension of the ITC. Alternatively, Democrats could pass an ITC extension by appending it to other legislation.

The Build Back Better bill, currently under consideration in the Senate, contains an extension of the ITC and a hike in the ITC rate to 30% from the current 26%. Also, the ITC proposal would have a “direct pay” provision, which would allow tax credits to be converted into direct payments from the federal government, rather than as an offset by investors against tax liabilities, which a shortage of tax equity can hinder. The Build Back Better proposal also has a production tax credit for U.S. solar manufacturers.

Congress in November 2021 completed passage of the $550 billion bipartisan infrastructure bill that contained funds for clean energy research, power grid upgrades, and support for building a nationwide network of power charging stations for electric vehicles, some of which may be solar-powered. The bill included about $80 billion of funding for the energy transition, with $28 billion of that earmarked for grid enhancement.

Since taking office in January 2021, the Biden administration has taken a number of executive actions on the climate front. President Biden, on his first day in office, announced that the U.S. would rejoin the international Paris Climate Accord. That confirmed that the U.S. would resume its global leadership position in trying to meet the Paris Climate Accord’s goal of keeping global warming to less than 2 degrees Celsius above the pre-industrial level, and preferably below 1.5 degrees Celsius. President Biden also pledged to reach a 100% carbon-free electricity sector by 2035 and to reach net-zero greenhouse gas emissions by 2050.

The Biden administration in April 2021 announced a new “Nationally Determined Contribution” under the Paris Climate Agreement of a reduction in U.S. greenhouse gas emissions by 50-52% by 2030 from 2005 levels. That was nearly double the previous commitment made by President Obama of a 26-28% cut in greenhouse gas emissions by 2025 from 2005 levels. The NDC also adopts the target of the U.S. economy having net-zero carbon emissions by 2050.

In December 2021, President Biden signed an executive order to cut the federal government’s emissions by 65% by 2035 and make the government carbon neutral by 2050, the same year that carbon neutrality is targeted for the U.S. economy as a whole. As part of that order, the U.S. government is instructed to have 100% carbon pollution-free electricity by 2030, which is only eight years away.

Explaining the order, the White House said, “The federal government will work with utilities, developers, technology firms, financiers, and others to purchase electricity produced from resources that generate no carbon emissions, including solar and wind, for all its operations by 2030.”

The markets are waiting to see how the Biden administration handles the tariffs on the solar industry that were previously imposed by the Trump administration. There is concern that Mr. Biden will take a continued aggressive approach to China on solar tariffs. Indeed, the Biden administration in March argued in court that the Trump Administration’s reimposition of tariffs on bifacial solar panels was legal and should remain in effect.

The U.S. solar market in recent years has been negatively impacted by solar tariffs imposed by the former Trump administration. Mr. Trump, in January 2018, announced a Section 201 tariff of 30% on imported solar cells and modules, which hurt solar install growth because of the higher price of solar panels for U.S. solar projects. The markets are waiting to see if the Biden administration might raise or extend that tariff.

The initial Section 201 import tariff of 30% for 2018 already stepped down to 25% as of February 2019, 20% as of February 2020, and 15% as of February 2021. The tariff is set to drop to zero in February 2022, when it expires. The first 2.5 GW of solar imports are exempt from the tariff. Thin-film solar modules, such as those produced by First Solar, are exempt from the tariff even if those modules are imported from overseas factories. The only significant solar-producing countries that are exempt from the tariff are Turkey, Brazil, and South Africa. However, imports from those exempted nations are capped each year at 300 MW each and at 900 MW as a group.

The former Trump administration in June 2019 surprised the solar industry by exempting bifacial (two-sided) solar panels from the Section 201 tariff, which resulted in a surge in imports of those panels during summer 2019. The Trump administration then reversed its decision, but it took time to reimpose the tariff because of procedural requirements. More recently, a U.S. trade court in November 2021 reinstated that tariff exemption and ordered a return of tariffs paid by companies for bifacial panels.

On the tariff front, the U.S. solar sector is also dealing with some disruptions in the solar inverter market. Solar inverters are electrical devices that convert the direct current (DC) from solar panels into the alternating current (AC) used on the grid.

The Trump administration in May 2019 raised the tariff on inverters imported from China to 25% from the 10% level that was first imposed in September 2018 as part of the U.S. move to impose tariffs on $200 billion of Chinese products.

However, the inverter tariff is not having much direct impact on the U.S. solar sector because inverters can easily be sourced outside of China. Yet, the inverter tariff makes it difficult for the big Chinese inverter companies such as Huawei Technologies and Sungrow Power Supply to build their market share in the U.S.

On another tariff issue, the former Trump administration, on September 1, 2019, imposed a 15% tariff on about $110 billion of Chinese goods that included Chinese lithium-ion batteries. Before the tariff, the U.S. imported about 40% of its lithium-ion batteries from China, although most of those batteries were for end-markets other than grid storage.

China supplies less than 5% of the batteries used in large-scale U.S. energy storage products, according to BNEF, which means that the U.S. tariff on Chinese batteries did not have much impact on the U.S. solar-plus-storage market.

U.S. solar growth has been very volatile in recent years, mainly because of changes by the U.S. government in tax credits and tariffs. For example, solar growth in 2016 spiked higher by +92% to beat the scheduled expiration of the investment tax credit (ITC) at the end of 2016, although Congress in December 2015 then extended the ITC by 5 years. U.S. solar installs fell by -23% in 2017 and by -2% in 2018 on a let-down after the 2016 spike and on the solar tariffs imposed by the Trump Administration in January 2018.

In another episode, solar growth in 2020 soared by +64% on strong demand and the desire to beat the scheduled step-down of the ITC at the end of 2020. However, Congress in December 2020, extended the ITC for another two years.

European solar expected to show strong growth in 2021

European solar growth remained relatively strong in 2020 despite the pandemic. European solar installs in 2020 rose by +8.0% to about 16.6 GW from 15.3 GW in 2019, according to BNEF. That added to the extremely strong growth years of +48% in 2018 and +98% in 2019.

In 2020, the largest PV install amounts were in Germany with 4.9 GW (+22% yr/yr), Netherlands 3.0 GW (+19% yr/yr), Spain 2.8 GW (-45% yr/yr), France 875 MW (-9% yr/yr), and Italy 645 GW (-13% yr/yr), according to BNEF.

European solar growth in 2020 continued to see support from the spread of subsidy-free solar throughout Europe and the EU’s elimination in late 2018 of the minimum-price scheme. Also, Europe is mandating increasing amounts of solar power to meet its aggressive targets for cutting emissions.

Much of Europe’s solar install growth in 2020 was driven by auctions for utility-scale solar in Germany, France, and Poland. Solar growth in Spain is being driven by subsidy-free power purchase agreements with both utilities and corporations.

European solar installs are expected to show strong growth in the coming years, with BNEF forecasting a +25% rise to 20.8 GW in 2021 and a +9% rise to 22.5 GW in 2022.

A very large pipeline of subsidy-free solar projects in Europe will contribute to installs in 2021 and 2022. BNEF reports that there is a huge 37.2 GW pipeline of unsubsidized solar projects in Europe that are scheduled to be built, with 6.6 GW of that due in 2021. BNEF reports that there are particularly large pipelines in Spain and Portugal.

European solar growth should receive a solid boost in coming years after the EU in July 2020 approved a big pandemic stimulus plan of 750 billion euros since almost one-third of those funds are targeted for fighting climate change. That added to the EU’s 7-year budget that has 1 trillion euros of funding to help EU countries meet their EU’s Paris Agreement goals for reducing carbon emissions.

European solar growth improved significantly after the EU in September 2018 ended its anti-dumping duties against solar modules imported from China and ended the associated minimum import price (MIP) scheme. The EU’s MIP scheme had been in place since 2013 when the EU tried unsuccessfully to protect local European solar manufacturers from Chinese competition. The MIP scheme succeeded only in raising the cost of solar modules for European solar installers and caused several years of very slow solar growth in Europe.

The end of the MIP scheme, combined with the sharp drop in solar module prices that resulted from the China-531 order in 2018, allowed solar to reach grid-parity in a growing portion of Europe. Many solar projects in Europe are now being installed on an unsubsidized basis.

European solar growth is expected to show solid growth in the coming years due to the need to meet renewable energy targets. The European Parliament in 2018 raised the EU renewable energy target for 2030 to 32% from 27% and also made the target binding on EU members. The European Commission in July 2021 proposed raising that renewable energy target to 40%, with that proposal going to the European Parliament and its members for approval. The EU is relying on its renewables target to meet its pledge under the UN Paris climate agreement to cut its greenhouse gas emissions by at least 55% by 2030 from 1990 levels, and to become carbon neutral by 2050.

India’s solar expected to recover after weak 2020

India’s government is pushing solar very hard as a means to modernize India’s infrastructure, boost its global business competitiveness, expand electricity access in rural areas, and meet its climate goals.

The Indian government has set a goal of installing a cumulative 100 GW of solar by 2022, consisting of 60 GW of large-scale solar and 40 GW of rooftop solar. However, India is unlikely to meet that goal due in part to the pandemic disruptions in 2020 and 2021. The 100 GW target is more than twice India’s cumulative installed solar capacity of 48 GW as of the end of 2020. India has set a climate target of achieving zero carbon emissions by 2070.

India’s solar installs in 2020 slowed sharply by -63% to 4.2 GW from 11.6 GW in 2019, according to BNEF. India’s solar installs in 2020 were hurt mainly by the Covid pandemic, which caused planning and construction delays and supply-chain disruptions. Also, solar developers pulled back due to the poor financial condition of electric utilities and their delayed payments to developers.

However, India’s solar installs are expected to show a major recovery in 2021 and 2022 as delayed projects come on line and as the government continues to push hard for more solar. India’s solar installs in 2021 will grow by +186% to 12.1 GW, and will then grow by another 7% in 2022 to 13.0 GW, according to forecasts by BNEF.

India’s solar sector has seen serious disruptions over the past several years from the government’s use of tariffs to encourage the development of domestic solar panel manufacturing capacity. The government tariff has made it difficult for solar installers to obtain reasonably-priced solar panels to meet their installation plans. However, the tariff has been sidestepped to some extent by sourcing panels from non-tariffed countries and by having solar plant owners pay the tariff for imported panels to get their plants finished on schedule.

The Indian government first implemented the 25% safeguard tariff on July 30, 2018, covering modules imported from developed countries, China, or Malaysia. The 2-year tariff started at 25% for the first year (30-Jul-2018 to 29-Jul-2019) but then stepped down to 20% for the next 6-month period (30-Jul-2019 to 29-Jan-2020) and to 15% for the next 6-month period (30-Jan-2020 to 29-Jul-2020).

The safeguard tariff was imposed to prevent the “threat of serious injury” to domestic solar module producers from import competition. Prior to the tariff, India imported 90% of its modules from China and Malaysia.

The government then extended the tariff for another year at 14.9% for the 6-month period of July 30, 2020 to January 29, 2021, stepping down slightly to 14.5% for the next 6-month period of January 30, 2021 to July 29, 2021. In addition to developed countries and China, the 2020-21 tariff also applied to Thailand and Vietnam. India dropped Malaysia as a country covered by the tariff.

The government’s current plan is to have no import tariffs from July 2021 through March 2022. However, the government then plans to impose a large 40% basic customs duty on solar modules, and a 25% duty on solar cells, starting in April 2022. That duty will be a further attempt to promote the development of solar panel and cell manufacturing capacity within India. However, India’s solar manufacturing base remains far smaller than solar demand, meaning the duty is likely to hurt solar installers’ ability to find enough reasonably-priced solar panels to meet the strong demand.

Japan’s solar sees strong growth in 2020

Solar installs in Japan in 2020 rose sharply by +20% to 8.1 GW from 6.7 GW in 2019, according to BNEF. Solar growth was strong as developers sought to meet project completion deadlines in 2020 and 2021 to qualify for the solar feed-in-tariff (FIT), which is progressively stepping down.

Solar installs in Japan are expected to be negatively impacted by the phase-out of the government’s generous FIT program for large-scale solar projects in 2022. BNEF is forecasting that Japan’s solar installs will fall by -13% to 7.1 GW in 2021 and by -35% to 4.6 GW in 2022.

However, the Japanese government’s support for solar will continue in the coming years. The government’s FIT program will continue to support smaller-scale solar projects while the government is developing a new feed-in-premium (FIP) support program for large-scale projects starting in 2022.

The Japanese government in July 2021 almost doubled its solar target to a cumulative capacity of 108 GW by 2030. In order to meet that target, Japan would need to install 37 GW of solar by 2030, or an average of 3.7 GW per year. The government raised its solar target to help meet Japan’s carbon target of cutting greenhouse gas emissions by 46% by 2030 from 2013 levels.

Solar in Japan should also see support in coming years from Japanese corporations looking to acquire solar power purchase agreements to meet their corporate renewable energy goals. Corporate demand is expected to drive the development of subsidy-free solar in Japan in the coming years.

Elsewhere in Asia, Taiwan is expected to see strong solar installs in the coming years as the government promotes solar to meet its climate goals. Solar installs in Taiwan grew sharply by +41% to 1.4 GW in 2019 but then fell by -22% to 1.1 GW in 2020, according to BNEF.

Solar is seeing strong demand in Taiwan from corporations looking to meet their renewable energy goals. Also, there is rising demand for solar power in Taiwan to replace the coming closure of coal and nuclear plants. Taiwan’s government is targeting a 25% renewable energy supply by 2025 and has announced an aggressive solar cumulative-capacity target of 20 GW by 2025, which would be four times the current cumulative capacity of about 5 GW.

South Korea is another bright spot for solar in Asia. Solar installs in South Korea grew sharply by +70% in 2018 and +62% in 2019, before tailing off to +5% growth in 2020 to 3.8 GW, according to BNEF.

Corporate demand for solar power is expected to grow sharply after South Korea’s government in January 2021 revised its electricity laws to allow clean energy developers to sell electricity directly to corporations with power purchase agreements. The South Korean government in February also raised its mandate to 25% from 10% for the amount of annual renewable energy that electric utilities must source by 2030.

Solar stocks settle back on industry bottlenecks but see support from strong growth and policy prospects; 2021 solar growth seen at over +20%
 

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Solar Index Performance

The MAC Global Solar Energy Stock Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN), has settled back in recent months after posting a 12-year high in January 2021. The Index is currently down by -14% on a year-to-date basis, giving back some of the extraordinary +235% annual gain seen in 2020.

The MAC Solar Index in 2020 rallied sharply as the industry shook off the impact of the pandemic and looked ahead to more favorable solar policy support as Joe Biden won the November 2020 U.S. presidential election and Democrats took control of both the House and Senate. The Index has since fallen back as solar stocks hit some short-term roadblocks caused by a temporary polysilicon shortage and various pandemic-related supply chain disruptions and costs.

Bullish longer-term factors for solar stocks include (1) expectations for a global dash to reduce carbon emissions now that the U.S. has reclaimed its leadership role in the global Paris climate effort, (2) the strong global solar demand picture that has resulted from the fact that solar has now reached unsubsidized grid parity in more than two-thirds of the world, (3) the pairing of solar with large-scale battery systems to provide a 24/7 electricity solution, (4) broadening solar growth in India, Turkey, Latin America, Middle East, and Southeast Asia, and (5) strong demand for renewable energy as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement.

Bearish factors for solar stocks include (1) the temporary increase in polysilicon and solar module costs being caused by polysilicon factory disruptions and pandemic-related supply chain shortages and costs, (2) the transition in China to unsubsidized solar, (3) the continued negative effect on U.S. solar from the Section 201 tariff on imported cells and modules that took effect in February 2018, and (4) temporary obstacles to India’s solar growth from the pandemic and the government’s solar tariffs.

Solar stocks settle back on industry bottlenecks but see support from strong growth and policy prospects

Solar stocks are sharply higher from their pandemic lows seen in spring-2020 due to (1) the overall recovery in global stocks seen since the pandemic-induced dip in spring 2020, (2) the realization that solar is emerging as a key solution to climate change as it becomes the cheapest source of new electricity generation and is paired with battery storage for 24/7 electricity, (3) the Democratic sweep of Washington in the November 2020 election and expectations for a strong solar push from Washington, (4) the extension of the solar ITC by two years in December 2020, and (5) a big European renewable energy push to stimulate the pandemic-ravaged economy and meet its Paris climate goals.

Global solar installs in 2020 grew at a very strong rate of +21% despite the pandemic, according to Bloomberg New Energy Finance (BNEF). Moreover, global solar growth is expected to have an even bigger year in 2021 with growth of +28%, according to forecasts by BNEF.

Solar growth is currently running strong in China, the U.S., Europe, and many other countries around the world. China’s solar installs in 2021 will grow by +32%, U.S. solar installs will grow by +39%, and EU installs will grow by +23%, according to BNEF forecasts. India’s solar installs in 2021 are expected to soar by +137% on a recovery from 2020’s slump of -63%.

Global solar growth is expected to show another very strong year in 2021 despite ongoing disruptions from the Covid pandemic. Bloomberg New Energy Finance (BNEF) is forecasting that solar installs in 2021 will grow by +28% to 182 GW from 143 GW in 2020.

In 2020, world solar growth soared by +21% to 143 GW, accelerating from the +9% growth rates seen in both 2018 and 2019, according to BNEF. Solar growth in 2018 and 2019 was hindered by a temporary pull-back in Chinese solar installs and two years of global retrenchment after two very strong global solar growth years in 2016 (+34%) and 2017 (+32%). Over the past five years (2015-20), global solar has grown by a very strong compounded annual growth rate of +21%.

Solar growth soared in 2020 despite the pandemic, which slowed planning, construction, and supply-chain deliveries. Solar is being installed at a torrid clip across the globe due to its low cost and attractiveness as a long-term solution for a sustainable energy future. Solar’s low cost means that it is now on a strong long-term growth path without the need for government subsidies.

Solar will account for 28% of all electricity capacity additions, and there will be a massive $4.2 trillion of spending on solar through 2050, according to BNEF’s 2020 New Energy Outlook. BNEF forecasts that solar PV will account for 38% of world electricity capacity by 2050, up sharply from the 2019 level of 11%.

Solar will easily be the largest source of electricity generation in 2050 at 38%, far outpacing wind at 20% and gas at 15%. BNEF expects coal to fall to 7% of electricity generation by 2050 from 28% in 2019, and for nuclear to drop to 2% in 2050 from 5% in 2019.

“I see solar becoming the king of the world’s electricity markets, Fatih Birol, executive director of the International Energy Agency (IEA), said upon the release of the IEA’s flagship World Energy Outlook report. In that report, the IEA forecasts that solar will easily become the largest source of electricity generation by 2040. The report goes on to say:

“Solar PV becomes the new king of electricity supply and looks set for massive expansion. From 2020 to 2030, solar PV grows by an average of 13% per year, meeting almost one-third of electricity demand growth over that period. Global solar PV deployment exceeds pre-crisis levels by 2021 and sets new records each year after 2022 thanks to widely available resources, declining costs and policy support in over 130 countries.”

Demand for solar should surge in the coming years as solar costs continue to fall and as solar becomes even more competitive against fossil fuels and nuclear. Solar’s levelized cost has already plunged by an overall -85% since 2010 and by an average -11% per year over the last five years, according to Lazard (see p. 9).

China’s transition to subsidy-free solar is progressing well

There is strong optimism about the Chinese solar market as it shakes off the Covid pandemic and shifts toward a subsidy-free market in the coming years.

The markets are also optimistic about the Chinese government’s intent to rely heavily on solar to meet increasingly aggressive climate targets. In September 2020, China’s President Xi surprised the world by announcing at the UN General Assembly that China intends to be carbon-neutral by 2060, which is the first time China has set such a target.

In December 2020, President Xi then announced a more specific target of 1,200 GW of solar, wind, and biomass capacity by 2030, which is nearly triple the current capacity of 450 GW. The Chinese government also proposed a new clean power mandate that would require grid operators, power retailers, and large consumers to source 25.9% of their output from solar, wind, or biomass by 2030. BNEF estimates that meeting that mandate would require 1,580 GW of cumulative capacity by 2030, or a third higher than President Xi’s earlier goal of 1,200 GW.

The Chinese government in March 2021 then announced a draft of the 14th Five-year Plan for 2021-2025. That plan reiterated the targets for carbon emissions to peak before 2030 and achieve carbon-neutrality by 2060. The plan also contained some details on how those targets will be met. One of the key targets in the plan was a goal of generating 20% of its electricity from non-fossil fuel sources by 2025, which is just a few years away. The 20% target was up from the previous target of 15.9%.

Turning to solar growth rates, Chinese solar installs in 2020 soared by +57% to 52.1 GW from 33.1 GW in 2019. The 2020 install level of 52 GW was just slightly below the record high of 53.0 GW posted in 2017.

Solar installs were undercut in early 2020 by the Covid pandemic but finished the year on a very strong note as developers sought to beat the expiration of some subsidies at the end of 2020.

BNEF is forecasting that Chinese solar installs in 2021 will have another big year with growth of +32% to 69.0 GW. Strength in 2021 is expected to be driven in part by the completion of projects that were started in 2020 to qualify for subsidies.

Chinese solar installs are expected to remain strong even though the Chinese government is transitioning to a solar market without national subsidies. Developers are showing strong interest in subsidy-free solar projects since they can still earn attractive internal rates of return. The Chinese government has also added benefits to subsidy-free projects, such as a guaranteed price for solar electricity output and priority on the grid. Solar projects can still qualify for subsidies at the local level.
The move away from national subsidies should be a long-term positive factor for the Chinese solar industry since the industry should be able to grow in a more predictable manner with more stable profit margins, as opposed to the boom-bust days of the past that were caused by erratic government subsidy policies.

Without subsidy distortions, the solar industry should be able to more closely match end-user demand, thus eliminating the small and less competitive players that can only compete when there are generous subsidies. The current trend should accelerate whereby the solar industry is dominated by large players with the best technology and the lowest production costs.

In recent years, the Chinese solar market has been buffeted by erratic subsidy policies that previously caused upheaval in the industry. For example, Chinese solar installs in 2017 soared by 76% to a record high of 53.0 GW as developers took advantage of very generous government subsidies.

However, in response to that 2017 install surge, the Chinese government, on May 31, 2018, announced a sharp cut in most of its solar subsidies, with utility-scale solar capped at 40 GW and roof-top distributed generation (DG) capped at 10 GW in 2018. China’s subsidy phase-out plan was referred to in the industry as the “China-531” order after the date of the announcement.

The government was forced into its China-531 action partly by the big backlog of unpaid subsidies that reached $23 billion by the end of 2018. The China-531 curtailment of subsidies caused a sharp drop in Chinese solar installs by -17% to 44.3 GW in 2018 and -25% to 33.1 GW in 2019.

Regarding Chinese labor issues, the U.S. government in June 2021 imposed a “withhold release order” that blocked the import of polysilicon products produced by five companies based in China’s Xinjiang province due to allegations the companies were involved with forced labor programs of the Uyghur Muslim minority. The Biden administration also placed those companies on the Treasury’s Entity List, which blocks U.S. exports to those companies.

One of the targeted companies denied the use of forced labor. In order to rebut the claims, the company hired a global auditor to study its workforce practices and opened its Xinjiang factory to tours by global equity analysts and investors.

The markets were relieved that the U.S. order was narrowly focused and did not involve a blanket prohibition on the import of polysilicon from the Xinjiang region. Factories in the Xinjiang region produced about 45% of the world’s solar-grade polysilicon in 2020, according to Bernreuter Research. Polysilicon plants consume a large amount of electricity, which makes Xinjiang an attractive location for those plants due to the region’s cheap electricity prices.

There is concern that the ban could hamper the ability of U.S. developers to import solar products or raise the price of imported solar panels, thus curbing the U.S. solar growth rate. However, a Citigroup analyst quoted by Bloomberg said he expects the impact from the ban will be “mild” since the U.S. only buys a small portion of China’s solar module output. The U.S. in recent years has had tariffs on Chinese solar products, which means that U.S. imports of Chinese solar products are relatively small.

Also, the U.S. accounted for only 14% of global solar installs in 2020, which means that the impact of the U.S. ban is likely to have only a minor impact on the overall global solar growth rate even if it impedes the U.S. solar install rate.

Global solar companies have been aware of the Xinjiang risk for months and have already been taking steps to divert supplies away from Xinjiang and do a better job of ensuring transparency in their supply chains.

The global solar industry as a whole is also taking steps to address allegations of forced labor. About 175 solar companies from around the world signed a pledge sponsored by the Solar Energy Industries Association (SEIA) to ensure that their supply chains are free of any forced-labor products (see “Solar Companies Unite to Prevent Forced Labor in the Solar Supply Chain”). The SEIA also released a Supply Chain Traceability Protocol that helps companies prove that their supply chain is free of any products that are potentially connected with forced labor (see “New Traceability Protocol Allows Solar Companies to Ensure Ethical Supply Chain”).

U.S. solar is seeing blockbuster growth

U.S. solar growth is seeing blockbuster growth due to its low cost and strong policy support. U.S. solar installs in 2020 soared by +64% to 18.9 GW, adding to 2019’s strong +15% growth rate to 11.5 GW. BNEF is forecasting another strong year for U.S. solar in 2021 with growth of +39% to 26.2 GW.

Solar accounted for a hefty 43% of U.S. electricity installs in 2020, which was a record high and up from 40% in 2019, according to Wood Mackenzie. Solar remained first among all the electricity generation technologies for the second straight year, beating the 38% share for wind and 18% share for natural gas. The share of natural gas electricity additions fell sharply to 18% in 2020 from 32% in 2019 and 57% in 2018 as solar and wind took the lion’s share of new installs and shoved aside natural gas.

Solar showed very strong growth in 2020 despite the pandemic, which turned out to have only a minor impact on the overall install rates. The residential sector was negatively impacted by the pandemic in Q2-2020 but then came roaring back in the second half of the year and still showed strong yearly growth of +11% to 3.1 GW.

Solar installs in the non-residential sector (commercial, government, nonprofit, and community solar) showed a -4% decline in 2020 to 2 GW, according to Wood Mackenzie. Non-residential installs were undercut by the pandemic, which slowed development timelines and delayed project interconnections.

By contrast, U.S. utility solar installs in 2020 soared by +60% to a new record of just under 14 GW, according to Wood Mackenzie. Moreover, Wood Mackenzie expects strong growth to continue into 2021 due to a massive utility-solar pipeline of 69 GW. The firm expects utility solar to show continued strong growth due to “the expansion of state-level renewable energy targets, utilities’ self-enforced carbon reduction plans, a renewed focus on clean energy deployment at the federal level, and large corporate off-takers looking to meet net-zero carbon emissions goals.”

Solar installs in 2020 also showed strength as developers sought to take advantage of the 26% solar investment tax credit (ITC) in 2020 before it was to step down to 22% in 2021 and 10% in 2022 for utility PV projects, non-residential, and third-party-owned residential solar projects (but to zero for direct-owned residential projects).

However, the solar industry received a pleasant surprise in December 2020 when Congress extended the solar ITC for another two years as part of the combined passage of the $900 billion pandemic aid bill and the $1.4 trillion omnibus spending bill. The 2-year extension of the ITC caused Wood Mackenzie to increase its U.S. solar install figure by a total of +17% for its 2021-25 forecast.

The ITC is currently set at 26% for 2021 and 2022. The ITC will then fall to 22% in 2023 and then in 2024 to 10% indefinitely for large-scale solar projects and to zero for small-scale solar projects.

The U.S. solar industry received even better news in March 2021 when the Biden administration announced that its $2.25 trillion infrastructure plan includes a proposal for a 10-year extension of the ITC and a hike in the ITC rate to 30% from the current 26%. Also, the ITC proposal would have a “direct pay” provision, which would allow tax credits to be converted into direct payments from the federal government, rather than as an offset by investors against tax liabilities, which a shortage of tax equity can hinder. The solar industry is waiting to see whether Congress will pass the 10-year solar ITC as proposed by the Biden administration.

The Biden infrastructure proposal also contains $100 billion for the electricity sector and energy programs over the next eight years. The program included tax credits for storage and for grid modernization that would benefit the solar industry. The program also designated $180 billion for climate-related research, pilot projects, and other R&D efforts in advanced technologies.

The Biden infrastructure plan also contains a Clean Energy Standard (CES) proposal that would require a 100% zero-carbon U.S. electricity sector by 2035. The federal Clean Energy Standard would be similar to the state-level CES standards that already exist in thirty states, which are used to pressure utilities to move towards clean electricity and reduce their emissions.

The markets are waiting until autumn 2021 to see exactly what clean energy legislation Congress will pass. The Senate in early August 2021 passed a $550 billion bipartisan infrastructure bill that contained funds for clean energy research, power grid upgrades and support for building a nationwide network of power charging stations for electric vehicles, some of which may be solar-powered. However, House Speaker Pelosi said that the Senate’s infrastructure bill will not receive a vote in the House until the Senate passes the $3.5 trillion reconciliation bill.

The bulk of the Democrats’ clean energy legislation is expected to be contained in the $3.5 trillion reconciliation bill, which Congress will consider this autumn. The Democrats do not need to gain any support from any Republican Senators for that bill because it is being considered under the special budget reconciliation rules that do not allow a filibuster by the minority party.

The Biden administration has already taken executive actions on the climate front. President Biden, on his first day in office, announced that the U.S. would rejoin the international Paris Climate Accord. That confirmed that the U.S. would resume its global leadership position in trying to meet the Paris Climate Accord’s goal of keeping global warming to less than 2 degrees Celsius above the pre-industrial level, and preferably below 1.5 degrees Celsius. President Biden also pledged to reach a 100% carbon-free electricity sector by 2035 and to reach net-zero greenhouse gas emissions by 2050.

Mr. Biden named former Senator John Kerry as his Presidential climate envoy. Mr. Kerry said that meeting the current Paris emissions goals is not enough and that tighter restrictions are needed. Mr. Kerry said that even if every country delivered on its current commitments, there would still be a warming of planet Earth of about 3.7 degrees Celsius, which he said would be “just catastrophic.”

The Biden administration in April 2021 announced a new target for the U.S. to reduced greenhouse gas emissions by 50-52% by 2030 from 2005 levels. That is nearly double the previous commitment made by President Obama of a 26-28% cut in greenhouse gas emissions by 2025 from 2005 levels.

The BIden administration made the announcement of the new U.S. “Nationally Determined Contribution” ahead of the highly-important United National Climate Change Conference (COP26), which will be held this November in Glasgow.

The markets are waiting to see how the Biden administration will handle the tariffs on the solar industry that were previously imposed by the Trump administration. There is concern that Mr. Biden will take a continued aggressive approach to China on solar tariffs. Indeed, the Biden administration in March argued in court that the Trump Administration’s reimposition of tariffs on bifacial solar panels was legal and should remain in effect.

The U.S. solar market in recent years has been negatively impacted by solar tariffs imposed by the Trump administration. Mr. Trump, in January 2018, announced a Section 201 tariff of 30% on imported solar cells and modules, which hurt solar install growth because of the higher price of solar panels for U.S. solar projects. The markets are waiting to see if the Biden administration might raise or extend that tariff.

The initial Section 201 import tariff of 30% for 2018 already stepped down to 25% as of February 2019, 20% as of February 2020, and 15% as of February 2021. The tariff is set to drop to zero in February 2022, when it expires. The first 2.5 GW of solar imports are exempt from the tariff. Thin-film solar modules, such as those produced by First Solar, are exempt from the tariff even if those modules are imported from overseas factories. The only significant solar-producing countries that are exempt from the tariff are Turkey, Brazil, and South Africa. However, imports from those exempted nations are capped each year at 300 MW each and at 900 MW as a group.

The former Trump administration in June 2019 surprised the solar industry by exempting bifacial (two-sided) solar panels from the Section 201 tariff, which resulted in a surge in imports of those panels during summer 2019. The Trump administration then reversed its decision, but it took time to reimpose the tariff because of procedural requirements.

On the tariff front, the U.S. solar sector is also dealing with some disruptions in the solar inverter market. Solar inverters are electrical devices that convert the direct current (DC) from solar panels into the alternating current (AC) used on the grid.

The Trump administration in May 2019 raised the tariff on inverters imported from China to 25% from the 10% level that was first imposed in September 2018 as part of the U.S. move to impose tariffs on $200 billion of Chinese products.

However, the inverter tariff is not having much direct impact on the U.S. solar sector because inverters can easily be sourced outside of China. Yet, the inverter tariff makes it difficult for the big Chinese inverter companies such as Huawei Technologies and Sungrow Power Supply to build their market share in the U.S.

On another tariff issue, the Trump administration, on September 1, 2019, imposed a 15% tariff on about $110 billion of Chinese goods that included Chinese lithium-ion batteries. Before the tariff, the U.S. imported about 40% of its lithium-ion batteries from China, although most of those batteries were for end-markets other than grid storage.

China supplies less than 5% of the batteries used in large-scale U.S. energy storage products, according to BNEF, which means that the U.S. tariff on Chinese batteries did not have much impact on the U.S. solar-plus-storage market.

U.S. solar growth has been very volatile in recent years, mainly because of changes by the U.S. government in tax credits and tariffs. In 2016, solar growth spiked higher by +92% to beat the scheduled expiration of the investment tax credit (ITC) at the end of 2016, although Congress in December 2015 then extended the ITC by 5 years.

However, U.S. solar installs then fell by -23% in 2017 and by -2% in 2018 on a let-down after the 2016 spike and on the solar tariffs imposed by the Trump Administration in January 2018.

In 2019, U.S. solar growth showed a more stable growth rate of +8.0% after the volatility seen in the previous several years. Solar growth in 2020 then soared by +64% on strong demand and the desire to beat the scheduled step-down of the ITC at the end of 2020.

European solar expected to show strong growth in 2021

European solar growth remained relatively strong in 2020 despite the pandemic. European solar installs in 2020 rose by +8.0% to about 16.6 GW from 15.3 GW in 2019, according to BNEF. That added to the extremely strong growth years of +48% in 2018 and +98% in 2019.

In 2020, the largest PV install amounts were in Germany with 4.9 GW (+22% yr/yr), Netherlands 3.0 GW (+19% yr/yr), Spain 2.8 GW (-45% yr/yr), France 875 MW (-9% yr/yr), and Italy 645 GW (-13% yr/yr), according to BNEF.

European solar growth in 2020 continued to see support from the spread of subsidy-free solar throughout Europe and the EU’s elimination in late 2018 of the minimum-price scheme. Also, Europe is mandating increasing amounts of solar power to meet its aggressive targets for cutting emissions.

Much of Europe’s solar install growth in 2020 was driven by auctions for utility-scale solar in Germany, France, and Poland. Solar growth in Spain is being driven by subsidy-free power purchase agreements with both utilities and corporations.

European solar installs are expected to show strong growth in the coming years, with BNEF forecasting a +23% rise to 20.4 GW in 2021 and +12% to 22.7 GW in 2022.

A very large pipeline of subsidy-free solar projects in Europe will contribute to installs in 2021 and 2022. BNEF reports that there is a huge 37.2 GW pipeline of unsubsidized solar projects in Europe that are scheduled to be built, with 6.6 GW of that due in 2021. BNEF reports that there are particularly large pipelines in Spain and Portugal.

European solar growth should receive a solid boost in coming years after the EU in July 2020 approved a big pandemic stimulus plan of 750 billion euros since almost one-third of those funds are targeted for fighting climate change. That added to the EU’s 7-year budget that has 1 trillion euros of funding to help EU countries meet their EU’s Paris Agreement goals for reducing carbon emissions.

European solar growth improved significantly after the EU in September 2018 ended its anti-dumping duties against solar modules imported from China and ended the associated minimum import price (MIP) scheme. The EU’s MIP scheme had been in place since 2013 when the EU tried unsuccessfully to protect local European solar manufacturers from Chinese competition. The MIP scheme succeeded only in raising the cost of solar modules for European solar installers and caused several years of very slow solar growth in Europe.

The end of the MIP scheme, combined with the sharp drop in solar module prices that resulted from the China-531 order in 2018, allowed solar to reach grid-parity in a growing portion of Europe. Many solar projects in Europe are now being installed on an unsubsidized basis.

European solar growth is expected to show solid growth in the coming years due to the need to meet renewable energy targets. The European Parliament in 2018 raised the EU renewable energy target for 2030 to 32% from 27% and also made the target binding on EU members. The European Commission in July 2021 proposed raising that renewable energy target to 40%, with that proposal going to the European Parliament and its members for approval. The EU is relying on its renewables target to meet its pledge under the UN Paris climate agreement to cut its greenhouse gas emissions by at least 55% by 2030 from 1990 levels, and to become carbon neutral by 2050.

India’s solar expected to recover after weak 2020

India’s government is pushing solar very hard as a means to modernize India’s infrastructure, boost its global business competitiveness, expand electricity access in rural areas, and meet its climate goals.

The Indian government has set a goal of installing a cumulative 100 GW of solar by 2022, consisting of 60 GW of large-scale solar and 40 GW of rooftop solar. However, India is unlikely to meet that goal due in part to the pandemic disruptions in 2020. The 100 GW target is more than twice India’s cumulative installed solar capacity of 48 GW as of the end of 2020.

India’s solar installs in 2020 slowed sharply by -64% to 4.2 GW from 11.6 GW in 2019, according to BNEF. India’s solar installs in 2020 were hurt mainly by the Covid pandemic, which caused planning and construction delays and supply-chain disruptions. Also, solar developers pulled back due to the poor financial condition of electric utilities and their delayed payments to developers.

However, India’s solar installs are expected to show a major recovery in 2021 and 2022 as delayed projects come online and as the government continues to push hard for more solar. India’s solar installs in 2021 will grow by +137% to 10.0 GW, and will then grow by another 27% in 2022 to 12.7 GW, according to forecasts by BNEF.

India’s solar sector has seen serious disruptions over the past several years from the government’s use of tariffs to encourage the development of domestic solar panel manufacturing capacity. The government tariff has made it difficult for solar installers to obtain reasonably-priced solar panels to meet their installation plans. However, the tariff has been sidestepped to some extent by sourcing panels from non-tariffed countries and by having solar plant owners pay the tariff for imported panels to get their plants finished on schedule.

The Indian government first implemented the 25% safeguard tariff on July 30, 2018, covering modules imported from developed countries, China, or Malaysia. The 2-year tariff started at 25% for the first year (30-Jul-2018 to 29-Jul-2019) but then stepped down to 20% for the next 6-month period (30-Jul-2019 to 29-Jan-2020) and to 15% for the next 6-month period (30-Jan-2020 to 29-Jul-2020).

The safeguard tariff was imposed to prevent the “threat of serious injury” to domestic solar module producers from import competition. Prior to the tariff, India imported 90% of its modules from China and Malaysia.

The government then extended the tariff for another year at 14.9% for the 6-month period of July 30, 2020 to January 29, 2021, stepping down slightly to 14.5% for the next 6-month period of January 30, 2021 to July 29, 2021. In addition to developed countries and China, the 2020-21 tariff also applied to Thailand and Vietnam. India dropped Malaysia as a country covered by the tariff.

The government’s current plan is to have no import tariffs from July 2021 through March 2022. However, the government then plans to impose a large 40% basic customs duty on solar modules, and a 25% duty on solar cells, starting in April 2022. That duty will be a further attempt to promote the development of solar panel and cell manufacturing capacity within India. However, India’s solar manufacturing base remains far smaller than solar demand, meaning the duty is likely to hurt solar installers’ ability to find enough reasonably-priced solar panels to meet the strong demand.

Japan’s solar sees strong growth in 2020

Solar installs in Japan in 2020 rose sharply by +20% to 8.1 GW from 6.7 GW in 2019, according to BNEF. Solar growth was strong as developers sought to meet project completion deadlines in 2020 and 2021 to qualify for the solar feed-in-tariff (FIT), which is progressively stepping down.

Solar installs in Japan are expected to be negatively impacted by the phase-out of the government’s generous FIT program for large-scale solar projects in 2022. BNEF is forecasting that Japan’s solar installs will fall by -31% to 5.6 GW in 2021 and by -34% to 3.7 GW in 2022.

However, the Japanese government’s support for solar will continue in the coming years. The government’s FIT program will continue to support smaller-scale solar projects while the government is developing a new feed-in-premium (FIP) support program for large-scale projects starting in 2022.

The Japanese government in July 2021 almost doubled its solar target to a cumulative capacity of 108 GW by 2030. In order to meet that target, Japan would need to install 37 GW of solar by 2030, or an average of 3.7 GW per year. The government raised its solar target to help meet Japan’s carbon target of cutting greenhouse gas emissions by 46% by 2030 from 2013 levels.

Solar in Japan should also see support in coming years from Japanese corporations looking to acquire solar power purchase agreements to meet their corporate renewable energy goals. Corporate demand is expected to drive the development of subsidy-free solar in Japan in the coming years.

Elsewhere in Asia, Taiwan is expected to see strong solar installs in the coming years as the government promotes solar to meet its climate goals. Solar installs in Taiwan grew sharply by +41% to 1.4 GW in 2019 but then fell by -22% to 1.1 GW in 2020, according to BNEF.

Solar is seeing strong demand in Taiwan from corporations looking to meet their renewable energy goals. Also, there is rising demand for solar power in Taiwan to replace the coming closure of coal and nuclear plants. Taiwan’s government is targeting a 25% renewable energy supply by 2025 and has announced an aggressive solar cumulative-capacity target of 20 GW by 2025, which would be four times the current cumulative capacity of about 5 GW.

South Korea is another bright spot for solar in Asia. Solar installs in South Korea grew sharply by +70% in 2018 and +62% in 2019, before tailing off to +5% growth in 2020 to 3.8 GW, according to BNEF.

Corporate demand for solar power is expected to grow sharply after South Korea’s government in January 2021 revised its electricity laws to allow clean energy developers to sell electricity directly to corporations with power purchase agreements. The South Korean government in February also raised its mandate to 25% from 10% for the amount of annual renewable energy that electric utilities must source by 2030.

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Solar stocks remain generally strong on long-term growth prospects and renewed policy support; U.S. solar is seeing blockbuster growth
 

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MAC-Solar-Sector-Update-Apr-2021

Solar Index Performance

The MAC Global Solar Energy Stock Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN), has rallied sharply in the past year and posted a new 12-year high in January 2021. The Index has since settled back and is down by -15.0% on a year-to-date basis, giving back some of the extraordinary +235% annual gain seen in 2020.

The MAC Solar Index earlier took a sharp hit, along with the rest of the stock market in early 2020, on the Covid pandemic’s emergence. However, the Index then staged a rally of more than 5-fold on strength in the overall stock market and on polls suggesting that Joe Biden would win the November 2020 presidential election. The MAC Index then reached its highs in January after Joe Biden became president and Democrats won control of both the House and Senate.

Bullish longer-term factors for solar stocks include (1) expectations for a global dash to reduce carbon emissions now that the U.S. has reclaimed its leadership role in the global Paris climate effort, (2) the strong global solar demand picture that has resulted from the fact that solar has now reached unsubsidized grid parity in more than two-thirds of the world, (3) the stabilization of solar cell and module prices in 2019-20 that helped the profitability of solar manufacturers, (4) the pairing of solar with large-scale battery systems to provide a 24/7 electricity solution, (5) broadening solar growth in India, Turkey, Latin America, Middle East, and Southeast Asia, and (6) strong demand for renewable energy as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement.

Bearish factors for solar stocks include (1) the Covid pandemic that continues to hamper solar planning and installations, (2) the transition in China to unsubsidized solar, (3) the continued negative effect on U.S. solar from the Section 201 tariff on imported cells and modules that took effect in February 2018, and (4) temporary obstacles to India’s solar growth from the pandemic and the government’s solar tariffs.

Solar stocks remain generally strong on long-term growth prospects and renewed policy support

Solar stocks since spring 2020 have rallied sharply due to (1) the overall recovery in global stocks seen since the pandemic-induced dip in spring 2020, (2) the realization that solar is emerging as a key solution to climate change as it becomes the cheapest source of new electricity generation and is paired with battery storage for 24/7 electricity, (3) the Democratic sweep of Washington in the November 2020 election and expectations for a strong solar push from Washington, (4) the extension of the solar ITC by two years in December 2020, and (5) a big European renewable energy push to stimulate the pandemic-ravaged economy and meet its Paris climate goals.

Global solar installs in 2020 grew at a very strong rate of +21% despite the pandemic, according to Bloomberg New Energy Finance (BNEF). Moreover, global solar growth is expected to have an even bigger year in 2021 with growth of +29%, according to forecasts by BNEF.

Solar growth is currently running strong in China, the U.S., Europe, and many other countries around the world. China’s solar installs in 2021 will grow by +34%, U.S. solar installs will grow by +12%, and EU installs will grow by +19%, according to BNEF forecasts. India’s solar installs in 2021 are expected to soar by +183% on a recovery from 2020’s slump of -63%.

Solar PV Growth Outlook

Global solar growth is expected to show another very strong year in 2021 despite ongoing disruptions from the Covid pandemic. Bloomberg New Energy Finance (BNEF) is forecasting that solar installs in 2021 will grow by +29% to 185 GW from 143 GW in 2020.

In 2020, world solar growth soared by +21% to 143 GW, accelerating from the +9% growth rates seen in both 2018 and 2019, according to BNEF. Solar growth in 2018 and 2019 was hindered by a temporary pull-back in Chinese solar installs and two years of global retrenchment after two very strong global solar growth years in 2016 (+34%) and 2017 (+32%). Over the past five years (2015-20), global solar has grown by a very strong compounded annual growth rate of +21%.

Solar growth soared in 2020 despite the pandemic, which slowed planning, construction, and supply-chain deliveries. Solar is being installed at a torrid clip across the globe due to its low cost and attractiveness as a long-term solution for a sustainable energy future. Solar’s low cost means that it is now on a strong long-term growth path without the need for government subsidies.

Solar will account for 28% of all electricity capacity additions, and there will be a massive $4.2 trillion of spending on solar through 2050, according to BNEF’s 2020 New Energy Outlook. BNEF forecasts that solar PV will account for 38% of world electricity capacity by 2050, up sharply from the 2019 level of 11%.

Solar will easily be the largest source of electricity generation in 2050 at 38%, far outpacing wind at 20% and gas at 15%. BNEF expects coal to fall to 7% of electricity generation by 2050 from 28% in 2019, and for nuclear to drop to 2% in 2050 from 5% in 2019.

“I see solar becoming the king of the world’s electricity markets, Fatih Birol, executive director of the International Energy Agency (IEA), said upon the release of the IEA’s flagship World Energy Outlook report. In that report, the IEA forecasts that solar will easily become the largest source of electricity generation by 2040. The report goes on to say:

“Solar PV becomes the new king of electricity supply and looks set for massive expansion. From 2020 to 2030, solar PV grows by an average of 13% per year, meeting almost one-third of electricity demand growth over that period. Global solar PV deployment exceeds pre-crisis levels by 2021 and sets new records each year after 2022 thanks to widely available resources, declining costs and policy support in over 130 countries.”

Demand for solar should surge in the coming years as solar costs continue to fall and as solar becomes even more competitive against fossil fuels and nuclear. Solar’s levelized cost has already plunged by an overall -85% since 2010 and by an average -11% per year over the last five years, according to Lazard (see p. 9).

China’s transition to subsidy-free solar is progressing well

There is strong optimism about the Chinese solar market as it shakes off the Covid pandemic and shifts toward a subsidy-free market in the coming years.

The markets are also optimistic about the Chinese government’s intent to rely heavily on solar to meet increasingly aggressive climate targets. In September 2020, China’s President Xi surprised the world by announcing at the UN General Assembly that China intends to be carbon-neutral by 2060, which is the first time China has set such a target.

In December 2020, President Xi then announced a more specific target of 1,200 GW of solar, wind, and biomass capacity by 2030, which is nearly triple the current capacity of 450 GW. The Chinese government also proposed a new clean power mandate that would require grid operators, power retailers, and large consumers to source 25.9% of their output from solar, wind, or biomass by 2030. BNEF estimates that meeting that mandate would require 1,580 GW of cumulative capacity by 2030, or a third higher than President Xi’s earlier goal of 1,200 GW.

The Chinese government in March 2021 then announced a draft of the 14th Five-year Plan for 2021-2025. That plan reiterated the targets for carbon emissions to peak before 2030 and achieving carbon-neutrality by 2060. The plan also contained some details on how those targets will be met. One of the key targets in the plan was a goal of generating 20% of its electricity from non-fossil fuel sources by 2025, which is just a few years away. The 20% target was up from the previous target of 15.9%.

Turning to solar growth rates, Chinese solar installs in 2020 soared by +57% to 52.1 GW from 33.1 GW in 2019. The 2020 install level of 52 GW was just slightly below the record high of 53.0 GW posted in 2017.

Solar installs were undercut in early 2020 by the Covid pandemic but finished the year on a very strong note as developers sought to beat the expiration of some subsidies at the end of 2020.

BNEF is forecasting that Chinese solar installs in 2021 will have another huge year with growth of +35% to 70.3 GW. Strength in 2021 is expected to be driven in part by the completion of projects that were started in 2020 to qualify for subsidies.

Chinese solar installs are expected to remain strong even though the Chinese government is transitioning to a solar market without national subsidies. Developers showed strong interest in subsidy-free solar projects in 2020 since they can still earn attractive internal rates of return. The Chinese government has also added benefits to subsidy-free projects, such as a guaranteed price for solar electricity output and priority on the grid. Solar projects can still qualify for subsidies at the local level.

The move away from national subsidies should be a long-term positive factor for the Chinese solar industry since the industry should be able to grow in a more predictable manner with more stable profit margins, as opposed to the boom-bust days of the past that were caused by erratic government subsidy policies. Without subsidy distortions, the solar industry should be able to more closely match end-user demand, thus eliminating the small and less competitive players that can only compete when there are generous subsidies. The current trend should accelerate whereby the solar industry is dominated by large players with the best technology and the lowest production costs.

In recent years, the Chinese solar market has been buffeted by erratic subsidy policies that previously caused upheaval in the industry. For example, Chinese solar installs in 2017 soared by 76% to a record high of 53.0 GW as developers took advantage of very generous government subsidies.

However, in response to that 2017 install surge, the Chinese government, on May 31, 2018, announced a sharp cut in most of its solar subsidies, with utility-scale solar capped at 40 GW and roof-top distributed generation (DG) capped at 10 GW in 2018. China’s subsidy phase-out plan was referred to in the industry as the “China-531” order after the date of the announcement.

The government was forced into its China-531 action partly by the big backlog of unpaid subsidies that reached $23 billion by the end of 2018. The China-531 curtailment of subsidies caused a sharp drop in Chinese solar installs by -17% to 44.3 GW in 2018 and -25% to 33.1 GW in 2019.

U.S. solar is seeing blockbuster growth

U.S. solar growth is seeing blockbuster growth due to its low cost and strong policy support. U.S. solar installs in 2020 soared by +64% to 18.9 GW, adding to 2019’s strong +15% growth rate to 11.5 GW. BNEF is forecasting another strong year for U.S. solar in 2021 with growth of +12% to 21.1 GW.

Solar accounted for a hefty 43% of U.S. electricity installs in 2020, which was a record high and up from 40% in 2019, according to Wood Mackenzie. Solar remained first among all the electricity generation technologies for the second straight year, beating the 38% share for wind and 18% share for natural gas. The share of natural gas electricity additions fell sharply to 18% in 2020 from 32% in 2019 and 57% in 2018 as solar and wind took the lion’s share of new installs and shoved aside natural gas.

Solar showed very strong growth in 2020 despite the pandemic, which turned out to have only a minor impact on the overall install rates. The residential sector was negatively impacted by the pandemic in Q2-2020 but then came roaring back in the second half of the year and still showed strong yearly growth of +11% to 3.1 GW.

Solar installs in the non-residential sector (commercial, government, nonprofit, and community solar) showed a -4% decline in 2020 to 2 GW, according to Wood Mackenzie. Non-residential installs were undercut by the pandemic, which slowed development timelines and delayed project interconnections.

By contrast, U.S. utility solar installs in 2020 soared by +60% to a new record of just under 14 GW, according to Wood Mackenzie. Moreover, Wood Mackenzie expects strong growth to continue into 2021 due to a massive utility-solar pipeline of 69 GW. The firm expects utility solar to show continued strong growth due to “the expansion of state-level renewable energy targets, utilities’ self-enforced carbon reduction plans, a renewed focus on clean energy deployment at the federal level, and large corporate off-takers looking to meet net-zero carbon emissions goals.”

Solar installs in 2020 also showed strength as developers sought to take advantage of the 26% solar investment tax credit (ITC) in 2020 before it was to step down to 22% in 2021 and 10% in 2022 for utility PV projects, non-residential, and third-party-owned residential solar projects (but to zero for direct-owned residential projects).

However, the solar industry received a pleasant surprise in December 2020 when Congress extended the solar ITC for another two years as part of the combined passage of the $900 billion pandemic aid bill and the $1.4 trillion omnibus spending bill. The 2-year extension of the ITC caused Wood Mackenzie to increase its U.S. solar install figure by a total of +17% for its 2021-25 forecast.

The ITC is now set at 26% for 2021 and 2022. The ITC will then fall to 22% in 2023 and then in 2024 to 10% indefinitely for large-scale solar projects and to zero for small-scale solar projects.

The U.S. solar industry received even better news in March 2021 when the Biden administration announced that its $2.25 trillion infrastructure plan includes a proposal for a 10-year extension of the ITC and a hike in the ITC rate to 30% from the current 26%. Also, the ITC proposal would have a “direct pay” provision, which would allow tax credits to be converted into direct payments from the federal government, rather than as an offset by investors against tax liabilities, which a shortage of tax equity can hinder. The solar industry is waiting to see whether Congress will pass the 10-year solar ITC as proposed by the Biden administration.

The Biden infrastructure proposal also contains $100 billion for the electricity sector and energy programs over the next eight years. The program included tax credits for storage and for grid modernization that would benefit the solar industry. The program also designated $180 billion for climate-related research, pilot projects, and other R&D efforts in advanced technologies.

The Biden infrastructure plan also contains a Clean Energy Standard (CES) proposal that would require a 100% zero-carbon U.S. electricity sector by 2035. The federal Clean Energy Standard would be similar to the state-level CES standards that already exist in thirty states, which are used to pressure utilities to move towards clean electricity and reduce their emissions.

However, the Biden CES proposal contained few details, and Congress will need to design the actual legislation. There is unlikely to be bipartisan support for the CES proposal, which means the CES will have to bypass a Senate Republican filibuster either by (1) Senate Democrats doing away with the filibuster altogether, or (2) designing the CES so that it qualifies for passage under the Senate’s budget reconciliation process, which requires only a majority vote in the Senate. There are questions about whether a federal CES can be designed to fit within the constraints of the budget reconciliation process, which requires measures to materially affect the budget or national debt.

In any case, the U.S. solar energy industry received a big boost of optimism when Joe Biden was elected President in the November 2020 election, and Democrats were able to take control of the Senate as well as the House. Democrats will now be able to pass any legislation they wish that fits under the budget reconciliation process, which would bypass a Senate Republican filibuster. However, bipartisan support would still be necessary for legislation that doesn’t affect the budget and doesn’t qualify for the budget reconciliation process.

President Biden, on his first day in office, announced that the U.S. would rejoin the international Paris Climate Accord. That confirmed that the U.S. would resume its global leadership position in trying to meet the Paris Climate Accord’s goal of keeping global warming to less than 2 degrees Celsius above the pre-industrial level, and preferably below 1.5 degrees Celsius. President Biden also pledged to reach a 100% carbon-free electricity sector by 2035 and to reach net-zero greenhouse gas emissions by 2050.

Mr. Biden named former Senator John Kerry as his Presidential climate envoy. Mr. Kerry said that meeting the current Paris emissions goals is not enough and that tighter restrictions are needed. Mr. Kerry said that even if every country delivered on its current commitments, there would still be a warming of planet Earth of about 3.7 degrees Celsius, which he said would be “Just catastrophic.”

The Biden administration is expected to announce soon a more stringent emissions target than the commitment made by President Obama of a 26-28% cut in greenhouse gas emissions below 2005 levels by 2025. That announcement of a new “Nationally Determined Contribution” is expected ahead of President Biden’s invitation to 40 world leaders for the “Leaders Summit on Climate” that he will host on April 22-23. The next United National Climate Change Conference (COP26) will be held this November in Glasgow.

The markets are waiting to see how the Biden administration will handle the tariffs on the solar industry that were previously imposed by the Trump administration. There is concern that Mr. Biden will take a continued aggressive approach to China on solar tariffs. Indeed, the Biden administration in March argued in court that the Trump Administration’s reimposition of tariffs on bifacial solar panels was legal and should remain in effect.

The U.S. solar market in recent years has been negatively impacted by solar tariffs imposed by the Trump administration. Mr. Trump, in January 2018, announced a Section 201 tariff of 30% on imported solar cells and modules, which hurt solar install growth because of the higher price of solar panels for U.S. solar projects. The markets are waiting to see if the Biden administration might raise or extend that tariff.

The initial Section 201 import tariff of 30% for 2018 already stepped down to 25% as of February 2019, 20% as of February 2020, and 15% as of February 2021. The tariff is set to drop to zero in February 2022, when it expires. The first 2.5 GW of solar imports are exempt from the tariff. Thin-film solar modules, such as those produced by First Solar, are exempt from the tariff even if those modules are imported from overseas factories. The only significant solar-producing countries that are exempt from the tariff are Turkey, Brazil, and South Africa. However, imports from those exempted nations are capped each year at 300 MW each and at 900 MW as a group.

The Trump administration in June 2019 surprised the solar industry by exempting bifacial (two-sided) solar panels from the Section 201 tariff, which resulted in a surge in imports of those panels during summer 2019. The Trump administration then reversed its decision but had difficulty reimposing the tariff due to procedural requirements.

On the tariff front, the U.S. solar sector is also dealing with some disruptions in the solar inverter market. Solar inverters are electrical devices that convert the direct current (DC) from solar panels into the alternating current (AC) used on the grid.

The Trump administration in May 2019 raised the tariff on inverters imported from China to 25% from the 10% level that was first imposed in September 2018 as part of the U.S. move to impose tariffs on $200 billion of Chinese products.

However, the inverter tariff is not having much direct impact on the U.S. solar sector because inverters can easily be sourced outside of China. Yet, the inverter tariff makes it difficult for the big Chinese inverter companies such as Huawei Technologies and Sungrow Power Supply to build their market share in the U.S.

On another tariff issue, the Trump administration, on September 1, 2019, imposed a 15% tariff on about $110 billion of Chinese goods that included Chinese lithium-ion batteries. Before the tariff, the U.S. imported about 40% of its lithium-ion batteries from China, although most of those batteries were for end-markets other than grid storage.

China supplies less than 5% of the batteries used in large-scale U.S. energy storage products, according to BNEF, which means that the U.S. tariff on Chinese batteries did not have much impact on the U.S. solar-plus-storage market.

U.S. solar growth has been very volatile in recent years, mainly because of changes by the U.S. government in tax credits and tariffs. In 2016, solar growth spiked higher by +92% to beat the scheduled expiration of the investment tax credit (ITC) at the end of 2016, although Congress in December 2015 then extended the ITC by 5 years.

However, U.S. solar installs then fell by -23% in 2017 and by -2% in 2018 on a let-down after the 2016 spike and on the solar tariffs imposed by the Trump Administration in January 2018.

In 2019, U.S. solar growth showed a more stable growth rate of +8.0% after the volatility seen in the previous several years. Solar growth in 2020 then soared by +64% on strong demand and the desire to beat the scheduled step-down of the ITC at the end of 2020.

European solar expected to show strong growth in 2021

European solar growth remained relatively strong in 2020 despite the pandemic. European solar installs in 2020 rose by +8.0% to about 16.6 GW from 15.3 GW in 2019, according to BNEF. That added to the extremely strong growth years of +48% in 2018 and +98% in 2019.

In 2020, the largest PV install amounts were in Germany with 4.9 GW (+22% yr/yr), Netherlands 3.0 GW (+19%), Spain 2.8 GW (-45%), France 875 MW (-9%), and Italy 645 GW (-13%), according to BNEF.

European solar growth in 2020 continued to see support from the spread of subsidy-free solar throughout Europe and the EU’s elimination in late 2018 of the minimum-price scheme. Also, Europe is mandating increasing amounts of solar power to meet its aggressive targets for cutting emissions.

Much of Europe’s solar install growth in 2020 was driven by auctions for utility-scale solar in Germany, France, and Poland. Solar growth in Spain is being driven by subsidy-free power purchase agreements with both utilities and corporations.

European solar installs will continue to show strong growth in the coming years, with BNEF forecasting a +19% rise to 19.7 GW in 2021 and +11% to 22.0 GW in 2022.

A very large pipeline of subsidy-free solar projects in Europe will contribute to installs in 2021 and 2022. BNEF reports that there is a huge 37.2 GW pipeline of unsubsidized solar projects in Europe that are scheduled to be built, with 6.6 GW of that due in 2021. BNEF reports that there are particularly large pipelines in Spain and Portugal.

European solar growth should receive a solid boost in coming years after the EU in July 2020 approved a big pandemic stimulus plan of 750 billion euros since almost one-third of those funds are targeted for fighting climate change. That added to the EU’s 7-year budget that has 1 trillion euros of funding to help EU countries meet their EU’s Paris Agreement goals for reducing carbon emissions.

European solar growth improved significantly after the EU in September 2018 ended its anti-dumping duties against solar modules imported from China and ended the associated minimum import price (MIP) scheme. The EU’s MIP scheme had been in place since 2013 when the EU tried unsuccessfully to protect local European solar manufacturers from Chinese competition. The MIP scheme succeeded only in raising the cost of solar modules for European solar installers and caused several years of very slow solar growth in Europe.

The end of the MIP scheme, combined with the sharp drop in solar module prices that resulted from the China-531 order in 2018, allowed solar to reach grid-parity in a growing portion of Europe. Many solar projects in Europe are now being installed on an unsubsidized basis.

European solar growth is expected to show solid growth in the coming years due to the need to meet renewable energy targets. The European Parliament in 2018 raised the EU renewable energy target for 2030 to 32% from 27% and also made the target binding on EU members. The EU is relying on its renewables target to meet its pledge under the UN Paris climate agreement to cut its greenhouse gas emissions by at least 40% by 2030 from 1990 levels.

India’s solar expected to recover after weak 2020

India’s government is pushing solar very hard to modernize India’s infrastructure, boost its global business competitiveness, expand electricity access in rural areas, and meet its climate goals.

The Indian government has set a goal of installing a cumulative 100 GW of solar by 2022, consisting of 60 GW of large-scale solar and 40 GW of rooftop solar. However, India is unlikely to meet that goal due in part to the pandemic disruptions in 2020. The 100 GW target is more than twice India’s cumulative installed solar capacity of 48 GW as of the end of 2020.

India’s solar installs in 2020 slowed sharply by -64% to 4.2 GW from 11.6 GW in 2019, according to BNEF. India’s solar installs in 2020 were hurt mainly by the Covid pandemic, which caused planning and construction delays and supply-chain disruptions. Also, solar developers pulled back due to the poor financial condition of electric utilities and their delayed payments to developers.

However, India’s solar installs are expected to show a major recovery in 2021 and 2022 as delayed projects come online and as the government continues to push hard for more solar. India’s solar installs in 2021 will grow by +183% to 11.97 GW, and will then show further growth of +2% in 2022 to 12.18 GW, according to forecasts by BNEF.

India’s solar sector has seen serious disruptions over the past several years from the government’s use of tariffs to encourage the development of domestic solar panel manufacturing capacity. The government tariff has made it difficult for solar installers to obtain reasonably-priced solar panels to meet their installation plans. However, the tariff has been sidestepped to some extent by sourcing panels from non-tariffed countries and by having solar plant owners pay the tariff for imported panels to get their plants finished on schedule.

The Indian government first implemented the 25% safeguard tariff on July 30, 2018, covering modules imported from developed countries, China, or Malaysia. The 2-year tariff started at 25% for the first year (30-Jul-2018 to 29-Jul-2019) but then stepped down to 20% for the next 6-month period (30-Jul-2019 to 29-Jan-2020) and to 15% for the next 6-month period (30-Jan-2020 to 29-Jul-2020).

The safeguard tariff was imposed to prevent the “threat of serious injury” to domestic solar module producers from import competition. Prior to the tariff, India imported 90% of its modules from China and Malaysia.

The government then extended the tariff for another year at 14.9% for the 6-month period of July 30, 2020 to January 29, 2021, stepping down slightly to 14.5% for the next 6-month period of January 30, 2021 to July 29, 2021. In addition to developed countries and China, the new 2020-21 tariff also applies to Thailand and Vietnam. India dropped Malaysia as a country covered by the tariff.

Apart from the safeguard tariff, the Indian government in March 2021 announced that a 40% basic customs duty on solar modules, and a 25% duty on solar cells, will be imposed beginning in April 2022. That duty will be a further attempt to promote the development of solar panel and cell manufacturing capacity within India. However, India’s solar manufacturing base remains far smaller than solar demand, meaning the duty is likely to hurt solar installers’ ability to find enough reasonably-priced solar panels to meet the strong demand.

Japan’s solar sees strong growth in 2020

Solar installs in Japan in 2020 rose sharply by +20% to 8.1 GW from 6.7 GW in 2019, according to BNEF. Solar growth was strong as developers sought to meet project completion deadlines in 2020 and 2021 to qualify for the solar feed-in-tariff (FIT), which is progressively stepping down.

Solar installs in Japan are expected to be negatively impacted by the phase-out of the government’s generous FIT program for large-scale solar projects in 2022. BNEF is forecasting that Japan’s solar installs will fall by -25% to 6.1 GW in 2021 and by -26% to 4.5 GW in 2022.

However, the Japanese government’s support for solar will continue in the coming years. The government’s FIT program will continue to support smaller-scale solar projects, while the government is developing a new feed-in-premium (FIP) support program for large-scale projects starting in 2022.

Solar in Japan should also see support in coming years from Japanese corporations looking to acquire solar power purchase agreements to meet their corporate renewable energy goals. Corporate demand is expected to drive the development of subsidy-free solar in Japan in the coming years.

Elsewhere in Asia, Taiwan is expected to see strong solar installs in coming years as the government promotes solar to meet its climate goals. Solar installs in Taiwan grew sharply by +41% to 1.4 GW in 2019 but then fell by -22% to 1.1 GW in 2020, according to BNEF.

Solar is seeing strong demand in Taiwan from corporations looking to meet their renewable energy goals. Also, there is rising demand for solar power in Taiwan to replace the coming closure of coal and nuclear plants. Taiwan’s government is targeting a 25% renewable energy supply by 2025 and has announced an aggressive solar cumulative-capacity target of 20 GW by 2025, which would be four times the current cumulative capacity of about 5 GW.

South Korea is another bright spot for solar in Asia. Solar installs in South Korea grew sharply by +70% in 2018 and +62% in 2019, before tailing off to +5% growth in 2020 to 3.8 GW, according to BNEF.

Corporate demand for solar power is expected to grow sharply after South Korea’s government in January 2021 revised its electricity laws to allow clean energy developers to sell electricity directly to corporations with power purchase agreements. The South Korean government in February also raised its mandate to 25% from 10% for the amount of annual renewable energy that electric utilities must source by 2030.

See PDF for continued report and graphs….

Solar stocks rally on long-term growth prospects; Solar largely shakes off pandemic; China’s transition to subsidy-free solar is progressing well
 

Solar stocks rally on long-term growth prospects; Solar largely shakes off pandemic; China’s transition to subsidy-free solar is progressing well

See full PDF report with graphs at:

MAC-Solar-Sector-Update-Sep-2020

Solar Index Performance

The MAC Global Solar Energy Stock Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN), has rallied sharply during 2020 and posted a new 9-year high in September. The Index is up 97% on a year-to-date basis, adding to the rise of +67% seen in 2019.

The MAC Solar Index earlier took a sharp hit, along with the rest of the stock market in early 2020, on the emergence of the Covid pandemic. However, the Index has more than regained the early-2020 pandemic losses to rally to a new 9-year high.

Bullish longer-term factors for solar stocks include (1) the strong global solar demand picture that has resulted from the fact that solar has now reached unsubsidized grid parity in more than two-thirds of the world, (2) the stabilization of solar cell and module prices in 2019-20 that helped the profitability of solar manufacturers, (3) the pairing of solar with large-scale battery systems to provide a 24/7 electricity solution, (4) broadening solar growth in India, Turkey, Latin America, Middle East, and Southeast Asia, and (5) strong demand for renewable energy as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement.

Bearish longer-term factors for solar stocks include (1) the Covid pandemic that has hampered solar planning and installations, (2) the transition in China to unsubsidized solar by next year, (3) the continued negative effect on U.S. solar from the Section 201 tariff on imported cells and modules that took effect in February 2018, and (4) the obstacle to India’s solar growth from the government’s safeguard tariff on solar modules.

Solar stocks rally on long-term growth prospects

Solar stocks since spring 2020 have rallied sharply due to (1) the overall recovery in global stocks seen since the pandemic-induced dip in spring 2020, (2) the realization that solar is emerging as a key solution to climate change as it progressively becomes the cheapest source of new electricity generation and is paired with battery storage for 24/7 electricity, (3) the polls showing that former Vice President Biden is ahead for the November 3 U.S. presidential election, who has an aggressive clean energy agenda, and (4) a huge European renewable energy push to stimulate the pandemic-ravaged economy and to meet the Paris climate goals.

The Covid pandemic caused a temporary pause in solar growth in spring 2020, but the global solar industry has already shaken off the weakness in most areas and is still expected to show growth for 2020 as a whole. Despite the pandemic, Bloomberg New Energy Finance (BNEF) is forecasting that global solar installs in 2020 will grow by +8% to 127 gigawatts (GW) from 118 GW in 2019.

Solar growth is currently running strong in China and the U.S., and in many other countries around the world. China’s solar installs in 2020 will grow by +21% to 44.1 GW, and U.S. solar installs will also grow by +21% to 13.4 GW, according to BNEF.

Meanwhile, European solar installs in 2020 are expected to be flat as pandemic restraints hold back what would otherwise be strong solar growth in Europe. India’s solar installs are expected to fall due to the pandemic and other issues such as India’s tariffs, delays in subsidy payments, and grid connection delays.

Solar’s cost falls by another 7% and beats fossil fuels and nuclear by even larger amounts; Corporations show strong demand for solar; UN calls climate outlook “bleak”
 

See full PDF report with graphs at:

MAC-Solar-Sector-Update-Dec-2019

Solar Index Performance

The MAC Solar Energy Stock Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN), has rallied sharply during 2019 and posted a new 4-year high in September. The index has since settled back but is still up 51% on the year.

Bullish factors for solar stocks include (1) the improved global solar demand picture that has resulted from the sharp drop in solar module prices in 2018-19 and the fact that solar has now reached grid parity for two-thirds of the world’s population, (2) the stabilization of solar cell and module prices in 2019 that helped the profitability of solar manufacturers, (3) expectations for strong solar growth in Europe in 2019 as unsubsidized solar grows due to lower solar pricing and the end of Europe’s minimum import price (MIP) scheme, (4) broadening solar growth in India, Turkey, Latin America, Middle East, and Southeast Asia (see page 4 for the world solar growth outlook), (5) strong demand for renewable energy in general as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (6) the reasonable valuation level of solar stocks.

Bearish factors for solar stocks include (1) low Chinese solar installs in the first nine months of 2019 as China shifts its solar policy to phase out subsidies, (2) the continued negative effect on U.S. solar from the Section 201 tariff on imported cells and modules that took effect in February 2018, and (3) the obstacle to India’s solar growth from the government’s safeguard tariff on solar modules.

Solar stocks are trading at reasonable valuation levels compared with the broad market. The estimated positive P/E of 16.68 for the companies in the MAC Solar Index is well below the comparable figure of 19.12 for the S&P 500 index, according to Bloomberg data. Also, the price-to-book ratio of 1.35 for the companies in the MAC Solar Index is far below the 3.52 ratio for the S&P 500. The price-to-sales ratio of 1.11 for the MAC Solar Index is far below the 2.29 ratio for the S&P 500.

Solar stocks rally on expanding solar growth

Solar stocks in 2019 have rallied sharply due to (1) underlying support from the sharp rally seen in the overall global stock markets during 2019, (2) the recovery of the global solar industry after the blow from China’s subsidy cut in May 2018, and (3) expectations for strong global solar growth outside China in 2019 and beyond.

Solar stocks were hit hard in mid-2018 after the Chinese government in May 2018 announced a sharp cut in its subsidy support, which caused a big drop in Chinese solar demand and a big drop in global solar pricing. However, the drop in Chinese demand was less severe than initially expected and solar pricing stabilized in late 2018, which helped to stabilize the profitability of solar manufacturers. Meanwhile, the sharp drop in solar pricing in 2018 was a windfall for solar developers, who could bring more projects to market since solar has become even more economical versus alternatives such as nuclear, coal, natural gas, and wind.

The sharp drop in solar pricing in 2018 made new large-scale solar projects cheaper than fossil-fuel and nuclear plants in many cases, leading to very strong new solar demand from utilities and corporations. There is now a big pipeline of global solar projects, supporting expectations for a strong year for solar installs in 2019 and 2020. Bloomberg New Energy Finance (BNEF) is forecasting that global solar installs in 2019 will grow by +12% to 121 GW from 108 GW in 2018.

In China, solar installs in the first nine months of 2019 were disappointing at only 16 GW because the government was slow to announce the details of its new policies for subsidized and unsubsidized solar. However, Chinese-based solar companies responded by exporting some 70% of their output to other areas of the world that are showing very strong solar growth.

In the U.S., solar growth is expected to be particularly strong over the next several years as developers take advantage of the investment tax credit (ITC) before it progressively steps down to 10% in 2022. In Europe, utility-scale project pipelines are filling up now that solar has become competitive on an unsubsidized basis.

Solar’s electricity cost falls 7% and beats fossil fuels and nuclear by even larger amounts

The levelized cost of electricity (LCOE) for newly-built U.S. utility-scale solar PV plants in late 2019 fell by -7% yr/yr to a midpoint of $40 per MWh ($36-44 range) for crystalline PV on an unsubsidized basis, adding to 2018’s -13% decline, according to Lazard in the latest annual edition of its comprehensive “Levelized Cost of Energy Analysis-Version 13.0” released in November 2019. The LCOE for thin-film utility-scale solar fell by a similar -7.5% yr/yr to an even lower mid-point price of $37 per MWh ($32-42 range).

The cost of residential and corporate solar PV systems also fell. The Lazard report found that the unsubsidized mid-point LCOEs fell by -3% yr/yr for Community Solar to $106/MWh ($64-148 range), -9% yr/yr for Roof-Top Commercial and Industrial to $114.5/MWh ($75-154), and -8% yr/yr for Rooftop Residential to $196.5/MWh ($151-242).

The Lazard report found that the mid-point cost for utility-scale crystalline solar PV of $40/MWh is now 63% cheaper than the $109/MWh mid-point cost for newly-built coal plants, 74% cheaper than the $155/MWh mid-point cost for nuclear plants, and 77% cheaper than the $174.5/MWh mid-point cost for gas-peaking plants.

The Lazard data shows that in most areas it is no longer economical for a utility to build any new coal or nuclear plants.

Regarding the natural gas comparison, the crystalline solar PV midpoint cost of $40/MWh (range $36-44/MWh) is now 29% cheaper than the mid-point cost of $56/MWh (range $44-68) for natural gas plants. That illustrates that the cost of utility-scale solar now beats the cost for building a natural gas plant in many cases.

While solar clearly wins against coal and nuclear for newly-built plants, the fact remains that existing coal and nuclear plants are still relatively cheap to operate. Lazard estimates the average marginal cost for running a nuclear plant is only $29/MWh and $33/MWh for coal, which is below the $40/MWh mid-point cost for building a brand-new utility-scale solar plant.

That shows that solar and wind are not yet cheap enough that utilities have an economic incentive to mothball all their existing nuclear and coal plants and build new solar and wind plants. However, as coal and nuclear plants reach the end of their useful lives, utilities will clearly decide to switch to building new gas, solar and wind plants based on economics, with gas being their preference for baseload until storage starts to play a bigger role in supporting solar as a 24/7 base-load electricity resource.

The average age of power plants in the U.S. is 39 years for coal plants and 37 years for nuclear plants, illustrating that utilities are facing pressure to build new electricity plants as old coal and nuclear plants reach the end of their useful lives and must be retired. In addition, increased pollution and carbon constraints mean that the marginal cost of operating coal plants will steadily rise in coming years, thus encouraging utilities to phase out their aging coal plants sooner rather than later.

It is also worth noting that the marginal cost of running an existing solar plant is negligible compared with the cost of running coal, gas, or nuclear plants since the sun is free. In addition, the operating costs of a solar plant are very predictable and present much less cost risk for a utility than a coal or natural gas plant where the future cost of the fuel is not known.

Solar has become cheaper than new fossil fuel plants, not just in the U.S., but also globally. BNEF reports that for two-thirds of the world’s population, it is already cheaper to get new power from solar or wind than from new fossil fuel plants.

Corporations show strong demand for solar

Corporations are becoming increasingly important buyers of solar power. Corporations can buy solar power by (1) buying solar panels and installing them onsite, or (2) buying solar power through Power Purchase Agreements (PPAs). With a PPA, a corporation enters into a contract with a solar facility owner to pay a certain price per megawatt-hour of electricity that the corporation uses over a long period of time such as 10 years or more.

Corporations have entered into 15.5 GW of clean energy PPAs so far in 2019 across the world, which is more than double the year-earlier figure of 6.2 GW, according to BNEF. Corporate PPAs are the most popular in the Americas, which account for 82% of this year’s corporate PPAs, according to BNEF. However, corporate PPAs are also starting to boom in Europe, reaching a record high of 200 MW so far this year.

There are now more than 200 global companies that have joined the RE100 initiative and have agreed to move towards getting 100% of their electricity from renewable sources. These RE100 corporations already effectively get 39% of their electricity from clean energy, mostly by buying renewable energy credits.

However, the RE100 companies need to buy 189 terawatt-hours of clean electricity through 2030 to meet their 100% renewable energy goals, according to BNEF. That represents a massive $97 billion worth of clean energy purchases through 2030.

Regarding the breakdown of corporate clean energy purchases, Wood Mackenzie reports that corporate solar purchases in 2019 of 1.3 GW are expected to lag wind purchases of 3.9 GW. However, Wood Mackenzie expects solar to quickly overtake wind in coming years with annual purchases of 6.6-12.5 GW of solar purchases by 2030, far more than wind purchases of less than 2 GW.

The Solar Energy Industry Association (SEIA) in July released a comprehensive report on corporate solar entitled “Solar Means Business.” The SEIA report found that there is currently 7 GW of corporate solar power installed in the U.S. across 35,000 installations, which is 23 times what it was a decade ago.

The report found that the biggest corporate users of solar power are Apple, Amazon, Target, Walmart, Switch (data centers), and Google. Other notable big corporate solar users include IKEA, Macys, Kohls, Costco, Starbucks, Paypal, Home Depot, and many others.

UN calls climate outlook “bleak” as global emission cuts fall far short

The UN Environmental Program (UNEP) in its annual Emissions Gap Report said that the world is falling far behind in the goals for limiting global warming.

The report said, “The summary findings are bleak. Countries collectively failed to stop the growth in global GHG emissions, meaning that deeper and faster cuts are now required.”

The world has already warmed by 1 degree Celsius (1.8 degrees Fahrenheit) from pre-industrial levels. The goal is to limit the warming to well below 2.0 degrees Celsius (3.6 degrees Fahrenheit) and preferably below 1.5 degrees Celsius. However, the world is currently on track for warming of 3.9 degrees Celsius (7 degrees Fahrenheit) by the end of this century, which would result in catastrophic damage, according to UNEP.

The current pledges in the Paris agreement for emission cuts are not enough to keep warming below 2 degrees Celsius. To make matters worse, most countries aren’t even meeting their current Paris pledges. The Trump administration is in the process of withdrawing the U.S. altogether from the Paris climate agreement and reneging on America’s previous emission-cut pledge. The UNEP report says that the Paris pledges need to be tripled and then met in order to prevent global warming from causing catastrophic damage.

The report said that “Incremental changes will not be enough and there is a need for rapid and transformational action.” The report says those changes will require the investment of at least $1.6 trillion annually in energy-sector investment through 2050, for a total of $48 trillion. That illustrates the massive opportunity for solar power to provide one of the most economical solutions for global warming.

Solar stocks rally on expectations for solid 2019 solar growth; Solar-plus-storage goes big; Chinese inverters see tariff hike
 

See full PDF report with graphs at:

MAC-Solar-Sector-Update-May-2019

Solar Index Performance

The MAC Solar Energy Stock Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN), rebounded sharply higher to a 1-year high in May 2019 from the 2-year low seen in October 2018. The index is currently up +38% on the year, more than reversing the -27% decline seen in 2018. The index in 2017 showed a strong gain of +52%.

Bullish factors for solar stocks include (1) the improved global solar demand picture that has resulted from the sharp drop in solar module prices in 2018-19 and the fact that solar has now reached grid parity in many cases, (2) the stabilization of solar cell and module prices in late 2018 and early 2019 that helped the profitability of solar manufacturers, (3) expectations for strong solar growth in Europe in 2019 as unsubsidized solar grows due to lower solar pricing and the end of Europe’s minimum import price (MIP) scheme, (4) broadening solar growth from India, Turkey, Latin America, Middle East, and Southeast Asia (see page 3 for the world solar growth outlook), (5) strong demand for renewable energy in general as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (6) the reasonable valuation level of solar stocks.

Bearish factors for solar stocks include (1) low Chinese solar installs in the first half of 2019 as China transitions to its new solar policy that should produce strong solar installs in the second half of 2019, (2) the continued negative effect on U.S. solar from the Section 201 tariff on imported cells and modules that took effect in February 2018, and (3) the obstacle to India’s solar growth from the government’s safeguard tariff on solar modules.

Solar stocks are trading at reasonable valuation levels compared with the broad market. The estimated positive P/E of 17.79 for the companies in the MAC Solar Index is mildly above the comparable figure of 16.95 for the S&P 500 index, according to Bloomberg data. However, the price-to-book ratio of 1.54 for the companies in the MAC Solar Index is far below the 3.27 ratio for the S&P 500. The price-to-sales ratio of 1.14 for the MAC Solar Index is far below the 2.09 ratio for the S&P 500.

Solar stocks rally on expectations for solid 2019 solar growth

Solar stocks in early 2019 have rallied sharply due to (1) the recovery of global stock markets in early 2019 after the sharp downside correction seen in Q4, (2) the recovery of the global solar industry after the blow from China’s subsidy cut in May 2018, and (3) expectations for strong global solar growth in the second half of 2019.

Solar stocks were hit hard in mid-2018 after the Chinese government in May 2018 announced a sharp cut in its subsidy support, which caused a big drop in Chinese solar demand and a big drop in global solar pricing. However, the drop in Chinese demand was less severe than initially expected and solar pricing stabilized in late 2018, which helped to stabilize the profitability of solar manufacturers. Meanwhile, the sharp drop in solar pricing in 2018 was a windfall for solar developers, who can now bring more projects to market since solar is now even more competitive against alternatives like natural gas and wind.

The sharp drop in solar pricing in 2018 has made large-scale solar very competitive and is drawing major purchasing interest from utilities and corporations. There is now a big pipeline of global solar projects that supports expectations for a strong year for solar installs in 2019. In China, the new year has brought the return of China’s solar subsidy programs as well as a pilot program for unsubsidized solar projects. In the U.S., solar growth is expected to be strong over the next several years as developers take advantage of the investment tax credit (ITC) before it progressively steps down to 10% in 2022. In Europe, utility-scale project pipelines are filling up now that solar has become competitive on an unsubsidized basis.

Solar-plus-storage goes big

The combination of solar plants with battery storage systems (“solar-plus-storage”) is taking off quickly in the U.S. and the size of the battery systems is multiplying. Florida Power & Light is planning to build what would be a record-sized battery plant with 409 MW of capacity. The battery plant will be powered by an existing solar plant that has 900 MW of capacity. The battery plant will be built by 2021 and will help accelerate the decommissioning of two nearby natural-gas power plants.

Not to be outdone, the Electric Reliability Council of Texas, which operates most of the Texas electricity grid, will build an even larger 495 MW battery storage system in Texas. The storage system will be powered by a newly-built 495 MW solar plant.

Meanwhile in Hawaii, regulators approved seven solar-plus-storage projects totaling 262 MW of solar and 1.048 GWh of battery storage. The projects are being built by Hawaii’s utility company, Hawaiian Electric, on three different Hawaiian islands.

The average price of 9 cents/kWh for the Hawaiian solar-plus-storage projects is well below Hawaii’s cost of about 15 cents per kWh for generating electricity by burning oil, which is currently Hawaii’s primary means of generating electricity. The average price of 9 cents is also below Lazard’s LCOE estimate for a solar-plus-lithium-battery system of 10.8-14.0 cents/kWh in its November “Levelized Cost of Storage Analysis V4.0” report. The low prices of the recent solar-plus-storage projects in Hawaii are particularly impressive given the relatively high construction costs on islands in Hawaii.

On the U.S. mainland, solar-plus-storage systems are coming in at significantly lower prices. A solicitation last year by Xcel Energy for a solar-plus-storage plant in Colorado saw a median bid of an extremely low 3.6 cents/kWh for delivery in 2023. That was even lower than a deal signed by Tucson Electric in May 2017 of 4.5 cents/kWh.

Solar-plus-storage will become even cheaper in coming years. Lithium-battery prices have already plunged by 85% since 2010 and will fall by another 52% by 2030, according to BNEF.

U.S. raises tariffs on Chinese inverters to 25%

President Trump on May 10 announced a hike in the penalty tariffs on Chinese solar inverters to 25% from 10%. Solar inverters are electrical devices that convert the direct current (DC) from solar panels into the alternating current (AC) that is used on the grid. Inverters were included in the Trump administration’s hike in the penalty tariff to 25% from 10% on $200 billion worth of Chinese goods.

However, the tariff hike on Chinese inverters is not likely to have much impact on the U.S. solar market since U.S. solar developers have already moved away from Chinese-built inverters due to the initial 10% tariff that was imposed in September 2018.

The higher tariff will make it nearly impossible for Huawei Technologies, the world’s largest inverter manufacturer, to build a larger market share for U.S. sales. That gives a boost to smaller U.S.-listed inverter manufacturers such as SolarEdge Technologies (SEDG US), Enphase Energy (ENPH US), and European-listed SMA Solar Technology (S92 GR).

Separately, the Trump administration is threatening to slap a 25% penalty tariff on another $300 billion of Chinese goods as soon as June if there is no US/Chinese trade agreement. Batteries are on the list of goods that would be subject to that 25% tariff. If batteries get hit with a tariff, that could slow the rapid pace of solar-plus-battery installations in the U.S. due to a higher cost of the batteries. The U.S. currently imports about 40% of its lithium-ion batteries from China, although most of those batteries are for end-markets other than grid-storage. The good news is that China currently supplies less than 5% of the batteries used in large-scale energy storage products, according to BNEF.

The Trump administration in early 2018 already slapped tariffs on most imported solar modules and cells, which means there isn’t much more damage that can result for solar cells and modules from the US/Chinese trade war.

See full PDF report for more commentary and graphs

Solar stocks recover in January with expectations for solid 2019 solar growth; Solar’s electricity cost falls 12% and becomes even more competitive vs fossil fuels and nuclear; IEA forecasts that solar will become second largest electricity source by late-2030’s
 

Read full report in PDF with graphs: MAC-Solar-Sector-Update-Jan-2019

Solar Index Performance

The MAC Solar Energy Stock Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN), rebounded sharply higher in January from the 1-3/4 year low posted in October 2018. The index is currently up +18% on the year, reversing part of the -27% decline seen in 2018. The index in 2017 showed a strong gain of +52%.

Bullish factors for solar stocks include (1) the improved global solar demand picture that has resulted from the sharp drop in solar module prices in 2018 and the fact that solar has now reached grid parity in many places, (2) the stabilization of solar cell and module prices in late 2018 that helped the profitability of solar manufacturers, (3) expectations for strong solar growth in Europe in 2019 as unsubsidized solar grows due to lower solar pricing and the end of Europe’s minimum import price (MIP) scheme, (4) broadening solar growth from India, Turkey, Latin America, Middle East, and Southeast Asia (see page 5 for the world solar growth outlook), (5) strong demand for renewable energy in general as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (6) the low valuation level of the solar sector.

Bearish factors for solar stocks include (1) the tail-end impact of China’s reduced subsidy support for solar that was announced in May 2018, which caused a big solar module inventory overhang and sharply lower solar module pricing during mid-2018, (2) the continued negative effect on U.S. solar from the Section 201 tariff of 30% on imported cells and modules that took effect in February 2018, and (3) the obstacle to India’s solar growth from the government’s safeguard tariff on solar modules.

Solar stocks continue to trade at low valuation levels compared with the broad market. The forecasted 2019 P/E of 14.6 for the companies in the MAC Solar Index is below the comparable figure of 15.8 for the S&P 500 index. The price-to-book ratio of 1.11 for the companies in the MAC Solar Index is well below the 3.17 ratio for the S&P 500. The price-to-sales ratio of 0.86 for the MAC Solar Index is well below the 2.03 ratio for the S&P 500.

Solar stocks recover in January with expectations for solid 2019 solar growth

Solar stocks in January recovered due to (1) the partial recovery of global stock markets in January after the downside correction seen during October-December, (2) the recovery of the global solar industry after the blow from China’s subsidy cut in May 2018, and (3) expectations for solid global solar growth in 2019.

Solar stocks were hit hard in mid-2018 after the Chinese government in May 2018 announced a sharp cut in its subsidy support, which caused a big drop in Chinese solar demand and a big drop in global solar pricing. However, the drop in Chinese demand was less severe than initially expected and solar pricing stabilized in late 2018, which helped to stabilize the profitability of solar manufacturers. Meanwhile, the sharp drop in solar pricing in 2018 was a windfall for solar developers, who can now bring more projects to market since solar is now even more competitive against alternatives like wind and natural gas.

The sharp drop in solar pricing in 2018 has made large-scale solar very competitive and is drawing major purchasing interest from utilities and corporations. A big pipeline of global solar projects has built up over the past year, which supports expectations for a strong year for solar in 2019. In China, the new year has brought the return of China’s solar subsidy programs as well as a pilot program for unsubsidized solar projects. In the U.S., solar is expected to be strong over the next several years as developers seek to take advantage of the investment tax credit (ITC) before it steps down to 10% in 2022. In Europe, utility-scale project pipelines are filling up now that solar has become competitive on an unsubsidized basis.

Solar’s electricity cost falls 12% and becomes even more competitive vs fossil fuels and nuclear

The levelized cost of electricity (LCOE) for newly-built utility-scale solar PV plants in late 2018 fell by -13% yr/yr to a midpoint of $43 per MWh ($40-46 range) for crystalline PV on an unsubsidized basis, according to Lazard in the latest annual edition of its comprehensive “Levelized Cost of Energy Analysis-Version 12.0” released in November 2018. The LCOE for thin-film solar fell by a similar -12% yr/yr to a lower mid-point price of $40 per MWh ($36-44 range).

While the cost of residential and corporate solar PV systems remains substantially higher than the cost of utility-scale solar, it also fell from year-earlier levels. The Lazard report found that the unsubsidized mid-point LCOEs are as follows: Community Solar -4% yr/yr to $109/MWh ($73-145 range), Roof-Top Commercial and Industrial -10% yr/yr to $125.5/MWh ($81-170), and Rooftop Residential -16% yr/yr to $213.5/MWh ($160-267).

Lazard’s latest LCOE report shows that solar PV now easily beats the cost of newly-built coal plants ($60-143/MWh), nuclear plants ($112-189/MWh), and gas-peaking plants (($152-206/MWh). The Lazard data shows that in most areas it is no longer economical for a utility to build any new coal or nuclear plants.

Regarding the natural gas comparison, the crystalline solar PV cost range of $40-46/MWh is now at the lower end of the range of $41-74 for gas combined cycle plants, illustrating how solar either beats or at least matches natural gas, depending on the parameters of a specific project. The $43/MWh mid-point of solar crystalline PV is actually -25% below the mid-point of $57.5/MWh for natural gas for an average project.

While solar clearly wins against coal and nuclear for newly-built plants, the fact remains that existing coal and nuclear plants are still relatively cheap to operate. Lazard estimates the average marginal cost for running a nuclear plant is only $28/MWh for nuclear and $36/MWh for coal.

That comparison shows that solar and wind are not yet cheap enough that utilities have an economic incentive to mothball all their existing nuclear and coal plants and build new solar, wind and gas plants. However, as coal and nuclear plants reach the end of their useful life, utilities will clearly decide to switch to building new gas, solar and wind plants based on economics, with gas being their preference for baseload until storage starts to play a bigger role.

The average age of power plants in the U.S. is 39 years for coal plants and 37 years for nuclear plants, illustrating that utilities are facing pressure to build new electricity plants as old coal and nuclear plants reach the end of their useful life and must be retired. In addition, increased pollution and carbon constraints mean that the marginal cost of operating coal plants will be headed higher over the long run, thus encouraging utilities to phase out their aging coal plants sooner rather than later.

NextEra Energy is going big on Florida solar

Utility-giant NextEra Energy Inc. is planning $10 billion worth of utility-scale solar PV farms in Florida. The program would be the world’s largest-ever solar build-out by a regulated utility. The plan involves building about 130 solar farms through 2030 with a total of 30 million solar modules generating 10 GW of electricity.

The utility is asking regulators to approve the plan based on its estimate that the solar plants will substantially reduce electricity costs for Florida’s electricity users. The utility says that each of the 130 solar farms could save electricity rate-payers some $40 million in fuel costs over its life.

Solar beats wind in head-to-head auctions in Europe

Solar has consistently beat wind on cost in recent head-to-head contests in European power auctions. In Germany, for example, solar parks took all of the 201 MW of renewable power tendered in October. The only wind proposal that was submitted in that German tender was dropped because of its high price. The average winning solar bid was an impressively low 52.7 euros ($60.1) per MWh.

In France, solar was awarded all of the 200 MW of capacity in a renewable power auction that was held in November. A total of 16 solar projects were chosen. No wind projects were chosen because of higher wind pricing. The average price of the accepted solar projects in the auction was 54.9 euros ($62.6) per MWh.

Separately, Germany in 2018 received more of its electricity from renewables than it did from coal for the first time ever. Renewables (wind, solar, hydro and biomass) generated just over 40% of Germany’s electricity in 2018, beating coal’s 39% share, according to the Fraunhofer Institute. Solar’s electricity-generation share grew by 20% in 2018. Coal lost ground as old plants were mothballed. Germany is working on a plan to eventually phase out its nuclear plants.

U.S. National Climate Assessment sees grim future

The U.S. “Fourth National Climate Assessment” offered a grim warning for the U.S. if action is not taken on global warming. The report found that global warming is already negatively affecting the U.S. with a 1.8 degree Fahrenheit rise in temperatures in the last 100 years, a 9-inch rise in ocean levels on the coasts, and far worse heat waves than have been experienced as recently as 50 years ago. The report said that damage from climate change is “intensifying across the country.”

The report warns that millions of people may have to be relocated away from the coasts. The report says, “The potential need for millions of people and billions of dollars of coastal infrastructure to be relocated in the future creates challenging legal, financial, and equity issues that have not yet been addressed.”

The report estimates the dollar costs related to global warming. The report says that in the worst-case climate-change scenario, labor-related losses as a result of extreme heat could rise to $155 billion annually by 2090, deaths from temperature extremes could represent an economic toll of $141 billion, and coastal property damage could total $118 billion annually.

The report notes that other effects of climate change include reduced snow and water supplies in the western U.S. mountain ranges, bleached coral reefs, increased wildfire damage, and disruption to Alaska’s ecosystems such as ice-clogged coastlines and thawing permafrost.

The report is the U.S. government’s fourth comprehensive assessment of U.S. climate-change impact issued since 2000. The report is mandated by Congress and is issued every four years. The November report was compiled by 13 federal departments and agencies and by the U.S. Global Change Research program. The report was compiled independently of the White House and a NOAA spokeswoman said the report was not “altered or revised in any way because of political considerations.”

IEA forecasts that solar will become second largest electricity source by late-2030’s

The International Energy Agency (IEA) in its latest annual “World Energy Outlook” published in November predicted that solar by the late-2030s will become the world’s second largest electricity source behind natural gas, as seen in the above graph. The IEA predicted annual growth for solar of +8% through 2040, reaching 2,500 GW in 2040 from about 400 GW in 2017.

The IEA in the past has woefully under-estimated solar’s actual growth rates. Indeed, the IEA in its latest report was forced to raise its solar forecasts by 20% from the year-earlier report. Even after that hike, the IEA is still lagging far behind solar forecasts by Bloomberg New Energy Finance (BNEF). BNEF is forecasting that solar will beat even natural gas to become the largest source of electricity by 2032 and that solar will show an annual growth rate of +12% through 2040.

The IEA report also warned that “unprecedented” investment action is needed to avert a climate crisis. The IEA says that global CO2 emissions rose by +1.6% in 2017 and will continue to rise slowly through 2040.

Solar-plus-storage takes off in Hawaii

The Hawaiian utility company Hawaiian Electric in early January sent seven solar-plus-storage contracts to state regulators for approval with a record-low average price of 9 cents per kWh ($90/MWh). Two of the projects came in at 8 cents/kWh. The combined size of the seven solar-plus-storage systems is 262 MW of solar and 1.048 GWh of storage. The projects will be built on three different Hawaiian islands.

The average price of 9 cents/kWh for the Hawaiian solar-plus-storage projects is well below Hawaii’s cost of about 15 cents per kWh for generating electricity by burning oil. Hawaii is heavily dependent on burning oil for its electricity since oil accounts for 74% of Hawaii’s total electricity generation, according to the U.S. Energy Information Administration (EIA). Hawaii has adopted a goal of going 100% renewable by 2045. Hawaii currently generates about 14% of its power from renewable sources with the rest being oil (74%) and coal (12%), according to the EIA.

Meanwhile, a solar-plus-storage project on the island of Kauai that is owned and operated by AES Corp is ready to go on line with power-purchase-agreement (PPA) pricing of 11 cents/kWh. The size of the plant is 28 MW of solar PV and 100 MWh of lithium-ion battery capacity.

The 8-11 cent/kWh pricing of these various Hawaiian solar-plus-storage projects is at or below Lazard’s LCOE estimate for a solar-plus-lithium-battery system of 10.8-14.0 cents/kWh in its November “Levelized Cost of Storage Analysis V4.0” report. The low prices of the recent solar-plus-storage projects in Hawaii are particularly impressive given the relatively high construction costs on islands in Hawaii.

On the U.S. mainland, solar-plus-storage systems are coming in at significantly lower prices. A solicitation last year by Xcel Energy for a solar-plus-storage plant in Colorado saw a median bid of an extremely low 3.6 cents/kWh for delivery in 2023. That was lower than a deal signed by Tucson Electric in May 2017 of 4.5 cents/kWh.

Solar-plus-storage will become even cheaper in coming years. Lithium-battery prices have already plunged by 85% since 2010 and will fall by another 52% by 2030, according to BNEF.

See more on PDF

Subsidy-free solar is spreading quickly as solar reaches grid parity; Chinese solar shake-out results from government’s “China-531” subsidy cut; UN IPCC says renewables growth must greatly accelerate to curb climate change.
 

Read full report in PDF with graphs: MAC-Solar-Sector-Update-Oct-2018

Solar Index Performance

The MAC Solar Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN), has fallen sharply from May’s 1-3/4 year low to post a new 14-month low. The index is currently down -24.2% on the year, reversing part of the annual +52% gain seen in 2017.

Bearish factors for solar stocks include (1) China’s sharply reduced subsidy support for solar that was announced on May 31, 2018, which caused an inventory overhang and sharply lower solar panel pricing, (2) the Trump administration’s 4-year 30% tariff on imported cells and tariffs that took effect in February, which dampened U.S. solar install growth, and (3) ongoing solar trade disputes that have resulted in tariffs and various market dislocations.

Bullish factors for solar stocks include (1) the improved solar project economics that have resulted from the sharp drop in solar panel prices, (2) Europe’s decision to end its duties and minimum price scheme on Chinese solar panels, which will improve European solar growth, (3) broadening solar growth from India, Turkey, Latin America, the Middle East, and Southeast Asia (see page 5 for the world solar growth outlook), (5) strong demand for solar power as solar reaches grid parity and as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (6) low valuation levels that indicate that solar stocks are very cheaply priced.

Solar stocks are trading at very low valuation levels compared with the broad market. The median trailing P/E for the companies in the MAC Solar Index is currently 14.6, which is far below the comparable figure of 20.0 for the S&P 500 index. Meanwhile, the median forecasted 2018 P/E of 15.5 for the companies in the MAC Solar Index is well below the comparable figure of 17.0 for the S&P 500 index. The median price-to-book ratio of 1.21 for the companies in the MAC Solar Index is well below the 3.34 ratio for the S&P 500. The median price-to-sales ratio of 1.12 for the MAC Solar Index is well below the 2.16 ratio for the S&P 500.

Solar stocks are undercut by reduced Chinese subsidies

Solar stocks have fallen sharply since the Chinese government on May 31, 2018, surprised the industry with a sharp cut in its subsidy support for solar. That resulted in a sharp overhang of excess panel supplies and a sharp decline in solar cell and panel pricing, which in turn put downward pressure on the profits of solar manufacturers.

However, the lower pricing is bullish for the solar industry as a whole on a longer-term basis since it means that solar is becoming even more competitive against alternatives and can increasingly stand on its own without government support. The lower pricing is supportive for solar developers and installers who can boost their profit margins and who will see increased demand due to more attractive project economics.

Solar stocks also saw weakness in early October as the broad market fell into a sharp downward correction and as Chinese stocks fell to a 3-3/4 year low. On the bullish side, solar stocks are now priced at very cheap levels that should attract value buyers. Solar stocks should be able to recover in coming months as the industry works down the excess inventories and as demand strengthens.

UN IPCC says renewables growth must greatly accelerate to curb climate change

The UN Intergovernmental Panel on Climate Change (IPCC) in early October released a report saying that the annual growth of renewables needs to accelerate by seven-fold from current levels if the world wants to come close to halting the worst effects of climate change.

The IPCC report was written by 91 scientists from 40 countries drawing upon more than 6,000 scientific studies. Commenting on the IPCC report, former Norwegian Prime Minister Gro Harlem said, “This report is not a wakeup call. It is a ticking time bomb. Climate activists have been calling for decades for leaders to show responsibility and take urgent action, but we have barely scratched the surface of what needs to be done.”

The world has already warmed by 1 degree Celsius (1.8 degrees Fahrenheit) since pre-industrial times and the effects of climate change are already being felt. The Paris Climate agreement seeks to limit global warming to “well below” 2 degrees Celsius (3.6 F). However, the fact that the world is not living up to its Paris commitments suggests that the world is on its way to a temperature rise of at least 4 degrees (7.2 F) by 2100.

A temperature rise of just 2 degrees Celsius (3.6 F) would be bad enough with IPCC forecasting that: (1) coral reefs would mostly disappear, (2) the sea level would rise by nearly three feet and subject 32-80 million people to flooding, (3) about 37% of the world’s population would be exposed to severe heat waves, (4) 411 million more people would be exposed to the effects of severe drought, and (5) the need would arise for a “disproportionately rapid evacuation” of people from the tropics. CarbonBrief.org has an informative factsheet on the impact of climate change at various temperature increases.

In order to avoid the worst effects of climate change, the IPCC concludes that the world must limit warming to 1.5 degrees Celsius (2.7 F). The IPCC says that this would require CO2 emissions to be cut by 45% by 2030 from 2010 levels and to zero by 2050.

The IPCC’s middle-range recommendation to meet that 1.5 degree Celsius goal is that (1) renewables should supply 70-85% of power generation by 2050, (2) coal should be cut to 2% of power generation capacity or less, and (3) natural gas should be cut to 8% of total capacity if sufficient carbon capture technologies can be deployed to offset the emissions from burning natural gas.

To get to that goal, the world would need to boost annual investment in clean energy to $2.4 trillion per year through 2035, representing a seven-fold increase from current levels.

If the global temperature continues to rise unchecked, the IPCC estimates the damage at $54 trillion from 1.5 degrees Celsius (2.7 F) of warming and $69 trillion from 2 degrees Celsius (3.6 F) of warming.

Subsidy-free solar is spreading quickly as solar reaches grid parity

With its subsidy cut in May, China became the latest country to realize that it is no longer necessary to provide big subsidies to the solar industry since solar pricing has reached grid parity in many areas.

Recent competitive auctions, for example, have produced extremely low subsidy-free solar pricing of under 2.5 cents/kWh in Jordan and under 3 cents/kWh in Egypt for projects financed by the European Bank for Reconstruction and Development.

Indeed, subsidy-free solar is spreading quickly throughout the world in Europe, Latin America, Middle East, and southeast Asia. The U.S. and Japan are now the only major countries that are still providing strong subsidy support to solar, although both of those countries are progressively stepping down that support. The U.S. solar investment tax credit (ITC), for example, is already scheduled to largely phase out by 2022.

The move to subsidy-free solar is being seen in Europe where governments have largely dropped their previous solar support via generous feed-in tariff (FIT) programs. Europe is moving quickly towards competitive auctions and private development without subsidies. SolarPlaza reports that 2.5 GW of subsidy-free solar has been announced in the last six months just in Portugal, Spain, Italy and France.

In Spain, there is a pipeline of 29 GW of subsidy-free solar projects in the planning or construction stage, including 3.9 GW tendered by the government, according to Spain’s national solar trade group, UNEF.

UNEF chief Jose Donoso said, “The market has realized that they can expect very little from the government and they aren’t going to wait around for a new support scheme. With the degree of competitiveness that solar has, we can go straight to the market on a merchant basis or we can look for PPAs, without any need for input from the government.”

Spain’s Energy Minister Jose Dominguez Abascal said at a recent London conference, “We are not thinking of subsidies at all. At this moment the cheapest way of producing electricity in Spain is the sun. It’s much cheaper than any other form of energy. At this moment in Spain there are gigawatts that are under construction without any knowledge of the government.”

The growing use of power-purchase agreements (PPAs) is accelerating the ability of solar developers to build and finance subsidy-free solar projects. When a large corporation or utility signs a long-term contract to buy electricity from a solar facility with a PPA, the solar developer can then use that PPA to help guarantee the bank financing. Subsidy-free solar projects are also being built on a merchant power basis where the owner of the solar facility takes on the risk of electricity price fluctuations and sells electricity directly to the wholesale electricity market.

Chinese solar shake-out results from government’s “China-531” subsidy cut

The Chinese government on May 31, 2018 surprised the industry by announcing a dramatic cut in its subsidy support for solar. The Chinese government’s policy action has become known as “China-531” since it was announced on May 31.

Before May, the Chinese government had been providing generous subsidy support to the industry, thus causing runaway solar production and demand. In addition, the Chinese government’s subsidy backlog reached an unsustainable $17 billion. The government in May therefore bowed to reality by cutting subsidy support and forcing the industry to downsize to more sustainable long-term levels.

The Chinese government’s 531 order was contained in the “2018 Solar PV Power Generation Notice” issued jointly by the China’s state planner The National Development and Reform Commission (NDRC), the Ministry of Finance, and the National Energy Administration. The order removed subsidy support for utility-scale solar until further notice. For roof-top distributed generation (DG), the order capped support at 10 GW for 2018 (which was already reached by mid-2018), and also shifted responsibility for the feed-in tariff (FIT) to the local level from the central government level.

The government also cut the tariff for ordinary solar farms by -9% and cut the subsidy for DG projects by -14% or 0.3 yuan/kWh. The government instructed utility-scale solar projects to use competitive bidding to choose developers. The government left its solar Poverty Alleviation and Top Runner programs unchanged. The government also left residential solar policies unchanged.

The Chinese government clearly intends to move over time to subsidy-free auctions for providing solar resources, which is a strategy that is working well in many other countries. While the Chinese solar industry is currently experiencing a serious dislocation from this policy switch, the industry will come out on the other side as a much more sustainable and competitive industry.

The China-531 action caused a sharp drop in forecasts for China’s 2018 solar installs to about 30-40 GW from previous forecasts near the 2017 install rate of 53 GW, indicating an expected year-on-year decline of 25%-40%. China already installed 24 GW of solar in the first half of 2018, according to the China Photovoltaic Industry Association, which indicates that Chinese installs will be very low in the second half of 2018.

The cut in forecasts for Chinese solar installs caused a cut in forecasts for global installs as well since China in 2017 accounted for 54% of global market share. Indeed, BNEF, as a result of China-531, cut its 2018 global install forecast by 12 GW to 95 GW from its January forecast of 107 GW, implying a -3% year-on-year drop in 2018 installs.

The sharp slow-down in Chinese installs in the second half of 2018 means that the industry must work off a big overhang of excess inventories, which is driving down solar prices. In addition, there is no doubt that a significant number of smaller solar companies with me-too technology and a lack of scale will be forced to shut down. Over the medium-term, that will force the inefficient players out of the market and allow the Tier 1 solar companies to stabilize their pricing and profitability.

China-531 has caused silicon module prices to plunge by -20% since May to a record low of 23.3 cents/watt, according to PV Insights. Meanwhile, multicrystalline silicon solar cell prices have plunged by -52% since May to the current record low of 11 cents/watt, according to BNEF. Polysilicon prices have plunged by -30% since May to a record low of $10.87/kg.

The main impact of the Chinese government’s cut in solar subsidies is being felt by domestic producers in mainland China. However, China-531 is having a major impact on the world solar markets as well due to the sharp drop in solar pricing and the attempt by Chinese solar companies to off-load excess panels overseas.

The current solar shake-out is somewhat similar to the last major solar shake-out in 2012/2013, which was also driven by excess subsidies and temporary overcapacity. However, the current shake-out should be substantially less severe since the solar industry is now spread out across the whole world and there are now many countries that can absorb solar inventories, particularly at such low and economically attractive prices.

California mandates 100% carbon-free electricity by 2045

California in September passed a law that requires 100% carbon-free power for the state by 2045. That made California the second state after Hawaii to adopt a 100% carbon-free mandate.

The mandate is expected to allow large-hydro and nuclear to qualify for the carbon-free goal, which is important since large-hydro currently accounts for 15% of California’s electricity and nuclear accounts for 9% of California’s electricity. The main goal of the legislation is to phase out fossil fuels, which currently account for 47% of California’s electricity (natural gas 34%, coal and other 13%).

The need for California to meet its carbon-free goals means that California will significantly step up its efforts to build solar and wind facilities. In addition, California will step up its focus on using batteries to compensate for the intermittent nature of solar and wind resources, thus allowing solar and wind plus storage to provide 24/7 base-load electricity to the grid.

U.S. solar industry adjusts to import tariffs

The U.S. solar industry since the beginning of this year has been buffeted by import tariff challenges but is adapting and moving forward.

The biggest challenge came from the Section 201 safeguard 30% tariff on imported solar cells and modules that took effect on February 7, 2018. That tariff started at 30% in 2018 and then steps down by 5 percentage points per year to 25% in 2019, 20% in 2020, and 15% in 2021, expiring in 2022. The first 2.5 GW of solar imports are exempt from the tariff. Thin-film solar panels, such as those produced by First Solar, are exempt from the tariff even if those panels are imported from overseas factories.

The tariff applies to imports from all major countries in which solar cells and panels are produced, including U.S. free-trade partners Canada and Mexico. There are a number of countries that are exempt from the tariffs, including India, Turkey, Brazil, and South Africa. However, imports from those exempted nations are capped at 300 MW each and at 900 MW as a group.

The tariff has been a negative factor for the U.S. solar industry, which is dominated by installation companies and has very few American-based solar factories. In fact, the U.S. has so few manufacturers that it needs to import more than 80% of the solar panels that are installed in the U.S. The tariff is putting upward pressure on the cost of solar installs, thus making solar project economics less attractive. However, the good news is that the sharp drop in solar panel pricing seen from the China-531 policy move has partially offset the upward price effects from the U.S. 201 tariff.

The U.S. solar installation industry is adjusting to the tariff by using stockpiled or non-tariffed panels, such as those produced by First Solar (FSLR) and those imported from countries not covered by the tariff. SunPower (SPWR) can now also supply non-tariffed panels since it received an exemption from the tariff for its IBC panels.

In addition, several Chinese companies have announced plans to build manufacturing facilities in the U.S. so that they can sell panels not subject to the tariff. Unfortunately, those new factories will take time to build and will be highly automated, which means they will not produce a large number of new jobs.

In some good news related to the Section 201 safeguard tariff, the IRS in June announced that solar developers will be able to qualify for the Investment Tax Credit (ITC) in the year in which “construction” begins, which is defined as either the beginning of physical work or upon the expenditure of at least 5% of the total project cost. That means that developers of big utility solar plants that take multiple years to complete will be able to qualify for a 2018-2021 ITC credit while delaying the actual purchase of their panels until later years when the 201 safeguard tariff will be lower or phased out.

Aside from the 201 safeguard tariff, the U.S. solar industry was also hurt by the Trump administration’s tariffs on imported steel and aluminum implemented on May 31. Those tariffs sparked higher prices for the steel and aluminum that is used in the ground and roof racking systems that are used to support solar panels.

Another challenge emerged when the Trump administration placed a 10% tariff on Chinese inverters as part of its move to place tariffs on $200 billion of Chinese goods effective September 24. That tariff will rise to 25% on January 1, 2019. The inverter tariff will make it difficult for the big Chinese inverter companies such as Huawei and Sungrow to achieve market penetration into the U.S, with inverters they manufacture in China.

The good news for U.S. solar industry is that there are already plenty of inverter sources for U.S. installers other than China. Major inverter companies such as Enphase (ENPH) and SolarEdge (SEDG) are expected to see little impact from the tariffs on Chinese-built inverters since they can shift what production they have out of China to other countries in order to avoid the tariffs.

Europe ends its failed anti-dumping program

The EU ended its anti-dumping duties against solar panels imported from China and the associated minimum import price (MIP) scheme effective September 3. That MIP scheme had been in place since 2013 when the EU tried to protect local European solar manufacturers from Chinese competition.

The EU was forced to finally end the MIP scheme as its failure became clear. The scheme did not lead to a flourishing European solar manufacturing base. The MIP instead only caused higher solar panel prices for European solar projects, thus curbing the growth of solar power installs in Europe. The failure of Europe’s MIP is a lesson to other countries that protectionist measures are unlikely to meet their intended goals.

Commenting on the end of the EU’s MIP scheme, the president of SolarPower Europe, Dr. Christian Westermeier, said, “This is a watershed moment for the European solar industry. By removing the trade duties, the European Commission has today lifted the single biggest barrier to solar growth in Europe. The Commission’s move to end the trade measures is unquestionably the right one for Europe. We expect to see a significant increase in solar jobs and deployment — which will only propel the energy transition in Europe.”

The end of the European MIP scheme is a bright spot for the global solar industry since European solar installs should now see a significant increase due to more attractive project economics.

Solar stocks rally to 2-1/4 year high; Solar-plus-battery is quickly gaining momentum; California mandates solar on newly-built homes – May 2018
 

Read full report in PDF with graphs: MAC-Solar-Sector-Update-May-2018

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), rallied to a new 2-1/4 year high in May, extending the rally seen in 2017. The index is currently up +6% on the year, adding to the annual gain of +52% seen in 2017.

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

Bearish factors for solar stocks include (1) reduced subsidy support as countries move more towards using competitive auctions to acquire solar power now that solar has become grid-competitive in many areas, (2) the Trump administration’s 4-year 30% tariff on imported cells and tariffs that will dampen U.S. solar install growth, and (3) ongoing solar trade disputes that have resulted in tariffs and various market dislocations.

Solar stocks are trading at modest valuation levels compared with the broad market. The median trailing P/E for the companies in the MAC Solar Index is currently 17.0, which is below the comparable figure of 20.9 for the S&P 500 index. Meanwhile, the median forecasted 2018 P/E of 17.1 for the companies in the MAC Solar Index is slightly below the comparable figure of 17.2 for the S&P 500 index. The median price-to-book ratio of 1.48 for the companies in the MAC Solar Index is well below the 3.27 ratio for the S&P 500. The median price-to-sales ratio of 1.93 for the MAC Solar Index is below the 2.19 ratio for the S&P 500.

Solar stocks rally to 2-1/4 year high

Solar stocks in mid-May rallied to a 2-1/4 year high due to improved company fundamentals and reduced policy uncertainty. The solar market is also encouraged about the strong growth of solar demand in the emerging world, which is reducing the industry’s reliance on a few key areas such as China, the U.S., Japan and Europe. Solar stocks have also been boosted by the stabilization of solar cell and panel prices, which has helped profits for solar manufacturers.

Solar stocks also received a boost in early May after California announced that all new homes and low-rise multi-family units built after January 1, 2020, will be required to have solar systems installed. That announcement illustrated how solar is becoming a mainstream solution for the world’s energy problems.

The U.S. solar market is still adjusting after recent government policy moves on tariffs and taxes. The markets now have clarity on the Trump administration’s 30% tariff on imported solar cells and panels, with some possible good news if the administration happens to grant exemptions to the tariff for particular companies or products such as 72-cell solar panels for utility solar plants.

Solar continues to receive generally favorable treatment from U.S. grid regulators. In addition, the Trump administration has made little progress thus far on trying to provide artificial support for coal-fired plants, which could dampen solar adoption.

Solar-plus-battery is quickly gaining momentum

The main knock on solar, of course, is that it produces electricity only during the day. However, that situation is quickly changing as battery costs drop sharply and allow developers to offer price-competitive solar-plus-battery systems. The result is a plant that can provide 24/7 base load electricity such as that provided by nuclear, coal, and natural gas plants. Solar has the added advantage of having zero safety risk (vs nuclear) and zero emissions and zero fuel-cost risk (vs natural gas and coal).

The solar-plus-battery combination also solves the so-called “duck curve” pricing problem whereby wholesale power prices in areas with heavy solar resources experience depressed prices during mid-day due to the large amount of solar power on the grid. Adding a battery storage system allows a solar-plus-battery plant to produce a smoother flow of electricity over a 24-hour period, thus avoiding a disruption of wholesale electricity pricing.

The sharp drop in battery prices has made the solar-plus-battery combination more economically attractive. The price of lithium-ion battery packs last year fell sharply by -24%, according to Bloomberg New Energy Finance (BNEF). In fact, battery storage has become cheap enough that California is starting to require utilities to use battery storage as a substitute for natural gas peaker plants.

The solar-plus-battery solution is quickly becoming more popular among utilities. Lightsource, a solar developer backed by BP, recently said that it is not submitting any utility-scale solar proposals without battery storage to any utilities west of Colorado where sun resources are high.

The reduced cost of a solar-plus-battery system was recently seen in an electricity plant solicitation by Minnesota-headquartered Xcel Energy. The solicitation received a median bid for solar-plus-battery plants of only 3.6 cents/kWh for facilities scheduled to go online in 2023.

Battery and solar costs have fallen to the extent that a “solar peaker plant” has become a reality. A “peaker plant,” which in the past has typically been driven by natural gas turbines, is a plant that can be quickly fired up to temporarily provide electricity to a utility during times of peak demand.

In fact, First Solar (FSLR) recently won a 15-year power-purchase agreement (PPA) to provide NextEra Energy, Arizona’s largest utility, with electricity during its peak demand period of 3-8 p.m. The plant includes a 65 MW solar panel system that will charge a 50 MW battery system, allowing the battery system to provide the electricity during the needed period of 3-8 p.m.

The solar-plus-battery peaker plant was less expensive than competing natural gas peakers and thereby won the contract. The solar-battery peaker plant is due to begin running in 2021. Pricing on the contract was not made public.

California mandates solar on newly-built homes

California in early May announced that most new homes built after January 1, 2020, will be required to have solar power systems. The mandate applies to all single-family homes and multi-family units of three stories or less. There is an exception for homes built on a shady plot.

The announcement was important as a sign of how solar is quickly becoming a mainstream solution for clean and cost-effective electricity generation.

The solar system will add an average of about $9,500 to the up-front cost of a home but will save the homeowner about $19,000 in energy savings over 30 years, leading to a net benefit of about $9,500 for the homeowner, according to the California Energy Commission.

The new mandate means that residential solar installs in California in 2020 will receive an extra boost of 200-300 MW (23-34%), adding to the already expected growth rate of 9%, according to BNEF.

U.S. homebuilders should have no problem adding solar systems to newly-built homes since many large homebuilders already offer solar power as an option. Most solar systems are likely to include batteries, which will further reduce the homeowner’s need to pay for grid electricity and reduce the homeowner’s exposure to any change in state net metering policies.

U.S. solar industry adjusts to Section 201 tariff

The U.S. solar industry is adjusting to the 30% tariff on imported solar cells and modules that the Trump administration announced on January 22. The 4-year tariff was less severe than feared but will nevertheless dampen U.S. solar growth over the next several years due to the increased cost of imported solar cells and panels.

The 30% tariff on imported crystalline solar cells and panels took effect on February 7. The tariff starts at 30% in 2018 and then steps down by 5 percentage points per year to 25% in 2019, 20% in 2020, and 15% in 2021, expiring in 2022. The first 2.5 GW of solar imports are exempt from the tariff. Thin-film solar panels, such as those produced by First Solar, are exempt from the tariff even if those panels are imported from overseas factories.

The tariff applies to imports from all major countries in which solar cells and panels are produced, including U.S. free-trade partners Canada and Mexico. There are a number of countries that are exempt from the tariffs, including India, Turkey, Brazil, and South Africa. However, imports from those exempted nations are capped at 300 MW each and at 900 MW as a group.

The Trump administration’s tariff decision was a response to the Section 201 safeguard trade case brought by foreign-owned manufacturers Suniva and SolarWorld, which had U.S. solar manufacturing plants that went bankrupt because they could not compete with non-U.S. factories.

The tariff is a net negative for the U.S. solar industry, which is dominated by installation companies and has very few American-based solar factories. In fact, the U.S. has so few manufacturers that it needs to import more than 80% of the solar panels that are installed in the U.S. The tariff will raise the average cost of solar installs, thus undercutting solar project economics and reducing the amount of solar installs.

The tariff will raise the cost of solar panels by 10 cents/watt to an average of 42 cents/watt in 2018, according to BNEF. That cost will fall over the next four years as the tariff steps down. Since the cost of a panel is only one part of an overall solar installation, BNEF expects the tariff to raise the total system cost by 8-10% for utility scale plants and by about 4% for residential rooftop systems.

Because of the tariff, BNEF reduced its forecast by an average of 16 percentage points per year during 2018-2021 for U.S. utility-scale solar installs. BNEF forecasts a smaller negative effect of 7 percentage points for the residential market during 2018-2021 because the panel cost is a smaller percentage of the overall system cost in residential solar systems.

The tariff will result in a net loss of about 23,000 U.S. solar jobs from the current total of about 250,000 solar jobs, according to Solar Energy Industry Association (SEIA). The SEIA points out that about 85% of the solar jobs in the U.S. are involved with installing solar installation systems. SEIA expects the tariff to reduce the number of solar installations and by extension the number of jobs involved with installations.

The tariff should marginally increase the number of solar manufacturing jobs, but not by nearly enough to offset the number of lost installation jobs. The SEIA estimates that there are about 38,000 solar manufacturing jobs in the U.S. but that only 2,000 of those jobs are involved with manufacturing solar cells and modules. The other 36,000 jobs are involved with manufacturing other solar products such as metal racking systems, tracking systems, and inverters.

The tariff is not expected to produce any big increase in the number of U.S. solar factories because the tariff provides only modest protection from foreign competition and lasts for only four years. The tariff does not provide enough protection for a company to justify sinking millions of dollars into a new U.S. solar manufacturing plant that over the long-term may have higher operating costs than overseas plants.

While the Section 201 tariff is a negative factor for the U.S. solar industry, the industry will nevertheless survive the latest of the many instances across the world of governmental trade interference in the solar industry. The tariff will reduce the U.S. solar growth rate from what it otherwise would have been. However, most U.S. solar projects will still have attractive economics and the U.S. solar industry will continue to grow at a solid clip.

Moreover, it is possible that the tariff could eventually be eliminated as part of a trade deal or by Congressional legislation. It is also possible that certain companies, or categories of solar imports, could be exempted from the tariff. For example, a group of eight Republican Senators from five solar-heavy states recently asked the Trump administration to provide a tariff exemption for the 72-cell, 1,500-volt panels that are typically used in large utility-scale solar farms.

From a global perspective, it is important to note that the U.S. solar tariff will have only a minor effect on the overall global solar growth rate. The U.S. accounted for only 11% of global solar installs in 2017, according to BNEF. That means that slower U.S. solar installs will have only a modest effect on the overall global solar growth rate. For example, if overall U.S. solar installs in 2018 suffer by an average of 15 percentage points from the Section 201 tariff, that would translate to a decline of only about 2% in worldwide installs (i.e., the 15 point U.S. decline multiplied by the 11% U.S. market share).