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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.

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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.

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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).

Solar stocks extend this year’s rally; Chinese solar growth surges; Utility solar costs are now comparable to natural gas and have fallen below coal and nuclear; Trump administration’s Section 201 trade remedy decision is due by January – Dec 2017
 

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

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has rallied sharply since May and is up +45% year-to-date.

Recent bullish factors for solar stocks include (1) a surge in Chinese solar installs in 2017 and broadening solar strength coming from India, Latin America, the Middle East, and Southeast Asia (see page 5 for the world solar growth outlook), (2) stronger demand for solar power due to the increasingly competitive price of solar versus alternatives as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (3) continued low valuation levels that indicate that solar stocks are conservatively priced even after the recent rally.

Bearish factors for solar stocks include (1) uncertainty about whether the Republicans’ U.S. tax reform plan will hurt the availability of tax equity financing for the U.S. solar industry, (2) uncertainty about whether the Trump administration in January will impose U.S. import tariffs on solar cells and panels as a remedy for Suniva’s Section 201 trade complaint, (3) continued downward pressure on solar pricing caused by ample global production capacity, (4) uncertainty about the strength of global climate policy after the Trump administration earlier this year withdrew from the Paris climate agreement, and (5) ongoing solar trade disputes that have resulted in tariffs and various market dislocations.

Solar stocks are still trading at low valuation levels compared with the broad market even after the recent rally in solar stocks. The median forward P/E of companies in the MAC Solar Index is currently 13.9, which is well below the forward P/E of 19.8 for the S&P 500 index. In addition, the median price-to-book ratio of 1.30 for the companies in the MAC Solar Index is well below the 3.27 ratio for the S&P 500. The median price-to-sales ratio of 1.55 for the MAC Solar Index is well below the 2.22 ratio for the S&P 500.

Solar stocks see a sharp recovery rally

Solar stocks have rallied sharply since May on signs of improved solar industry fundamentals and reduced concerns about Trump administration policies. The oversupply of panels that plagued the market in late 2016 has eased and company profit fundamentals are improving. In addition, the market was very encouraged to see a surge of about +45% in Chinese solar demand installs in 2017.

Solar stocks have also been boosted by the stabilization of solar cell and panel prices, which has helped company profit results. Part of the reason for the recovery in U.S. solar panel prices, however, is stockpiling and strong demand ahead of a decision in January on Suniva’s trade complaint, which could result in tariffs or import curbs (see discussion on page 2).

Regarding U.S. politics, the solar market has already absorbed the negative moves that President Trump took earlier this year, including his intention to exit the Paris climate agreement and to rescind the EPA’s Clean Power Plan. There was relief, however, that the Trump administration did not go so far as to pull the U.S. out of the entire UN climate treaty framework nor to rescind the EPA’s legal obligation to regulate CO2 emissions.

Chinese PV growth surges

Forecasts for 2017 global solar installs have risen substantially because of a surge in Chinese installs. The China PV Industry Association (CPIA) reported that Chinese PV installs in the first half of 2017 were stronger than expected at 24.4 GW, up +19% year-on-year. The unexpected strength is mainly coming from distributed solar as opposed to utility solar.

CPIA said that Chinese solar installs for 2017 will likely reach 50 GW, which would be up by a blistering +45% from the 2016 install amount of 34.5 GW. In response to the first-half strength, Bloomberg New Energy Finance (BNEF) raised its 2017 Chinese solar forecast to 54 GW from its July forecast of 30 GW. IHS Markit is forecasting 45 GW of Chinese solar installs in 2017.

In July, China met the government’s 13th Five-Year-Plan (2016-2020) target for cumulative solar installations of 105 GW. As a result, the government raised its target to 150 GW. However, total Chinese installs are likely to be significantly higher than the target since the target does not include rooftop solar, which is booming.

Utility solar costs are now comparable to natural gas and have fallen below coal and nuclear

The levelized-cost-of-energy (LCOE) for utility-scale solar PV has dropped by -86% over the last eight years, by -36% over the last four years, and by -9% in 2017, according to Lazard’s latest LCOE report (link). Lazard’s report is the most comprehensive LCOE analysis available for alternative and conventional energy sources.

The latest Lazard report found that unsubsidized utility solar PV costs now have fallen by so much that solar is now competitive with new natural gas plants and is cheaper than new coal or nuclear plants.

Specifically, Lazard pegs the unsubsidized utility solar LCOE cost of 4.6-5.3 cents per kWh as comparable to the 4.2-7.8 cent cost of natural gas (combined cycle) and lower than cost of 6.0-14.3 cents for coal and 11.2-18.3 cents for nuclear.

U.S. is now the lone holdout from the Paris climate agreement

The U.S. is now the only country in the world that has refused to abide by the Paris COP 21 global climate accord. The only other holdouts, Syria and Nicaragua, recently acceded to the agreement. Nicaragua signed the Paris climate agreement in October and Syria in November announced its intention to sign the agreement.

The rest of the world is continuing with the Paris climate agreement without the United States. China and Europe have flatly rejected the Trump administration’s request for a renegotiation of the agreement. It makes little sense to renegotiate the agreement since the emission reduction targets are voluntary, which means that any country including the U.S. can simply change their goals if they wish.

Even though President Trump on June 1 announced that the U.S. plans to leave the Paris climate agreement, the U.S. exit will not actually occur until the end of President Trump’s term. The Paris agreement is binding on the U.S. for the next three years and then requires a 1-year notice to withdraw. The earliest date for a U.S. exit is November 4, 2020, one day after the next presidential election. At any time during that period, the U.S. could drop the exit process and recommit to the Paris agreement. The U.S. could also recommit to the agreement at any time in the future if desired by a new president.

The Obama administration originally signed the Paris climate agreement with a voluntary goal of reducing U.S. carbon emissions by 17% by 2020, by 26%-28% by 2025, and an intent to reduce emissions by 80% by 2050. Most climate experts believe the Paris agreement was not tough enough in the first place to meet its goal of limiting global warning to two degrees Celsius (3.6 degrees Fahrenheit) from pre-industrial levels.

Trump administration’s Section 201 trade remedy decision is due by January

The U.S. solar industry is on edge as it waits for the Trump administration’s decision on the remedy, if any, to the decision by the U.S. International Trade Commission (ITC) that U.S. solar cell and panel manufacturers have been harmed by foreign competition.

The Section 201 solar trade case began in spring 2017 after two foreign-owned solar manufacturing companies based in the U.S., Suniva and Solarworld, pursued a Section 201 trade case with the ITC. The companies alleged that they had been driven into bankruptcy by foreign competition. Section 201 is a little-used U.S. trade complaint that was last used by the steel industry in 2001.

ITC commissioners on Sep 22 ruled by a vote of 4-0 that American solar manufacturers were in fact harmed by foreign competition. The ITC on Oct 31 then released its remedy recommendations, which were less severe than the markets had feared. The ITC recommended tariffs of 30-35% on imported cells and panels and a possible import quantity limit. The tariff recommendation was substantially weaker than Suniva’s request for an import duty of 40 cents per watt and a minimum price of 78 cents per watt. Suniva’s requested remedy would have more than doubled the cost of imported panels from the current price of about 32 cents per watt.

The Trump administration currently faces a deadline of January 26, 2018 to announce its decision on remedies, although that deadline could slip. The Trump administration is not bound by the ITC’s recommendations and is free to choose whatever remedy it wishes, or even decline to apply any remedy at all. The Trump administration has given no indication of what remedy it might choose.

If the Trump administration does impose tariffs under Section 201, there is a chance that those tariffs will eventually be struck down by the World Trade Organization (WTO). President Trump’s U.S. Trade Representative Robert Lighthizer recently asked the ITC to identify any “unforeseen developments” that might come from tariffs, such as the impact on the solar install industry or a challenge to the tariffs at the WTO.

Section 201 solar import tariffs would be negative overall for the U.S. solar industry, which is heavily dependent on imported solar panels to support the rapid installation of solar in the U.S. Indeed, U.S. factories manufactured fewer than 10% of the solar panels that were installed in the U.S. in 2016, according to Bloomberg New Energy Finance. In fact, U.S. installers in 2016 heavily relied on imported panels for more than 90% of their U.S. solar installs.

Any increase in the after-tariff price of imported panels would make U.S. solar projects less economical in the U.S. and would therefore hurt the U.S. solar install growth rate. GTM Research estimates that U.S. solar installs would be cut by -9% from what they would otherwise be if the Trump administration levies a tariff of 10 cents per watt, which would be close to the ITC’s recommendation of a 30-35% tariff.

The problem for the Trump administration is that any tariff on imported solar panels will likely result in a net reduction of U.S. solar jobs. Of the 260,000 solar jobs in the U.S., 85% are in installation and only 15% are in manufacturing, according to the Solar Energy Industry Association (SEIA). Import tariffs might give a small boost to U.S. solar manufacturing jobs, but that small boost would be swamped by the number of jobs that could be lost in the solar install industry. For that reason, the Solar Energy Industry Association (SEIA) strongly opposes any tariff or trade restrictions on imported cells and panels.

The Section 201 trade case has been a positive factor for First Solar (FSLR) because the ITC decision exempted thin-film manufacturers from any trade remedies or tariffs. The ITC decision also exempted manufacturers from Canada and Singapore. By contrast, the ITC decision was negative for Chinese and other global solar manufacturers because they could see a tariff slapped on the solar panels that they export to the U.S. The decision was also negative for U.S. companies that specialize in installing solar panels, such as SunRun (RUN) and Vivent (VSLR), since they would face higher prices for imported solar panels.

The Section 201 trade case has already hurt the U.S. solar install industry by pushing solar panel prices as high as 52 cents per watt since installers are hoarding what panels they can find. In addition, many solar projects have been delayed, waiting for the remedy decision and to see how solar pricing shakes out in 2018.

While the Section 201 trade case has been a negative factor for the U.S. solar industry, the industry will nevertheless survive what would be the latest example of governmental trade interference in the solar industry. A 30-35% tariff on imported panels would push up the price of imported solar panels to the 43-44 cent per watt area from the current 32 cent level, but many solar projects can still be economical at that level. In addition, installers would try to adapt to the tariff by buying domestically-produced panels or otherwise exempted panels. Moreover, some Chinese solar manufacturers are already talking about setting up solar panel factories in the U.S. to avoid the tariffs.

Regarding the impact of the Section 201 trade case on the global solar industry, it is worth remembering that the U.S. market in 2016 accounted for only 18% of global solar installs, according to BNEF. That means that a drop in U.S. installs from tariffs would have a limited effect on the overall global solar market. For example, if the U.S. solar installs suffered a -10% hit from Section 201 remedies, that would translate to a decline of only about -2% in worldwide installs (i.e., a -10% U.S. decline multiplied by the 18% U.S. market share).

Trump administration moves to rescind Clean Power Plan

The EPA on October 10 took formal steps to repeal the Obama administration’s Clean Power Plan (CPP), which was designed to cut CO2 emissions from U.S. power plants. That action, however, was in line with the Trump administration’s well-known intentions and had little stock market impact.

When President Trump was elected in November 2016, the markets were already aware that the CPP would not go into effect during the Trump administration’s watch. The CPP, in any case, was already bottled up with a legal challenge at the U.S. Supreme Court when Mr. Trump took office. There was a chance that the Supreme Court would have struck down the plan anyway as an overreach of regulatory authority even if Hillary Clinton had been elected as president.

Nevertheless, the loss of the CPP is a blow for U.S. efforts to reduce its carbon emissions. Without the CPP, the U.S. is unlikely to meet the Obama administration’s former goal under the Paris climate agreement of reducing U.S. carbon emissions by 17% by 2020, by 26-28% by 2025, and by 80% by 2050.

The EPA’s repeal of the CPP will be a long and torturous process since the repeal must go through the EPA’s regular rule-making procedures from scratch. The repeal is then likely to be challenged by environmental supporters in court. That whole process is likely to extend well past the end of the Trump administration’s first term. In the meantime, the CPP will not be implemented and will have no effect.

The good news for the solar industry is that the EPA is still under a legal requirement to regulate CO2. The EPA’s obligation to regulate CO2 emissions has already been litigated all the way up to the U.S. Supreme Court and would be extremely difficult to reverse. The Trump administration has already decided not to challenge President Obama’s 2009 CO2 endangerment finding, which established the legal structure by which the EPA is legally obligated to regulate CO2 emissions.

The EPA said it plans to issue a replacement rule for the CPP in order to meet its legal obligation to regulate CO2 emissions. The EPA has requested ideas from stakeholders about the content of a replacement rule. However, few believe that a significant CO2 emission reduction rule is likely to emerge during the Trump administration.

Republicans’ tax reform plan may have negative implications for tax equity financing

The Republicans have not yet finalized their tax reform plan, which means the implications of the plan for solar are not yet clear.

In a very positive development for solar, Republicans appear to be headed towards leaving intact the existing solar investment tax credit (ITC) provisions through 2021, which is an important support measure for the U.S. solar industry. The solar ITC is currently set at 30% through 2019 and is set to step down to 26% in 2020 and 22% in 2021.

The ITC in 2022 will expire entirely for direct-owned residential projects, but will permanently remain at 10% for utility PV projects, non-residential, and third-party-owned residential solar installations. The Republican tax bill, however, may end that permanent tax credit at some date in the future such as 2027. The elimination of the permanent tax credit would be mildly negative for the U.S. solar industry, but would only take effect far out into the future.

The solar industry’s main area of concern about the Republicans’ tax bill is the impact on tax equity, which is an important source for financing for solar projects. Tax equity accounted for about 21% of the $58.5 billion of U.S. renewable energy investment in 2016, according to BNEF.

Through tax equity, an investor can take passive partial ownership of a solar project to capture the tax benefits, which might not otherwise be available to the developer. Tax equity helps reduce the overall financing costs of a solar project.

The Republican tax bill aims to reduce the corporate tax rate to 20% from 35%, which by itself means that companies may allocate less capital to tax equity since they will be paying lower taxes. Moreover, there is major concern that tax equity could take a heavy hit depending on whether Republicans go through with ideas to impose a tough alternative minimum tax (AMT) on U.S. corporations and/or put what amounts to an AMT on U.S. affiliates of foreign corporations with a Base Erosion Anti-Abuse Tax (BEAT).

The effect of alternative minimum taxes is to reduce or eliminate the benefit of tax equity financing. The reduction of tax equity financing would mean that some solar projects would have higher overall financing costs, which would translate to less advantageous project economics.

See PDF for more commentary and graphs…

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

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

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has rallied sharply since May and is up +30.0% year-to-date.

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

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

Solar stocks are still trading at low valuation levels compared with the broad market even after the recent rally in solar stocks. The median forward P/E of companies in the MAC Solar Index is currently 15.3, which is well below the forward P/E of 19.0 for the S&P 500 index. In addition, the median price-to-book ratio of 1.18 for the companies in the MAC Solar Index is well below the 3.15 ratio for the S&P 500 and the median price-to-sales ratio of 1.63 for the MAC Solar Index is well below the 2.11 ratio for the S&P 500.

Solar stocks see a sharp recovery rally

Solar stocks have rallied sharply since May on signs of improved solar industry fundamentals and reduced concerns about Trump administration policies. The oversupply of panels that plagued the market over the last two years has eased and company profit fundamentals are improving. In addition, the market was encouraged to learn that Chinese solar demand remains very strong with 24 GW of solar installed in the first half, indicating that China should be able to easily exceed forecasts for full-year installs of 30 GW.

Solar stocks have also been boosted by the stabilization of solar cell and panel prices, which has helped company profit results. Part of the reason for the recovery in U.S. solar panel prices, however, is stockpiling and strong demand ahead of a decision later this year on Suniva’s trade complaint, which could result in import curbs or duties (see discussion on page 3).

Regarding U.S. politics, the solar market has already absorbed the negative moves that President Trump took earlier this year, which included exiting the Paris climate agreement and moving to rescind the EPA’s Clean Power Plan. There was relief, however, that the Trump administration did not go so far as to pull the U.S. out of the entire UN climate treaty nor did the administration try to rescind the EPA’s legal obligation to regulate CO2 emissions. The solar market has also been relieved that the Trump administration has not mentioned any desire to curb or repeal the solar investment tax credit that lasts through 2021.

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

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

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

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

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

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

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

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

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

Mr. Trump’s exit from the Paris climate agreement is clearly a major setback for the global effort to address climate change. Most climate experts believe the Paris agreement was not tough enough in the first place to meet its goal of limiting global warning to two degrees Celsius (3.6 degrees Fahrenheit) from pre-industrial levels. Without the U.S. in the agreement, meeting that 2-degree goal is even less likely. Global warming is now likely to become an even bigger problem that will likely result in panicky reaction down the road as the world realizes it must dramatically slash carbon emissions in order to avoid the worst effects of climate change.

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

Climate change warnings abound

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

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

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

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

Trump administration shows hand on domestic clean energy policy

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

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

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

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

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

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

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

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

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

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

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

Solar Index Performance

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

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

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

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

Solar industry rolls on despite Trump administration

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

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

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

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

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

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

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

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

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

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

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

Markets await Trump policy plans

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

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

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

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

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

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

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

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

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

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

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

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

U.S. solar ITC rolls on

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

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

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

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

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

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

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

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

Solar Index Performance

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

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

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

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

Trump victory will be only a temporary obstacle for global solar

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

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

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

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

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

Trump administration seems likely to cancel Clean Power Plan

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

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

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

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

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

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

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

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

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

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

Trump’s approach to COP21 Paris agreement remains uncertain

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

U.S. solar ITC likely to remain in place

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has sold off sharply this year and is currently down -37% year-to-date. The MAC index in 2015 closed -15% lower after the -2% decline seen in 2014 and the +127% gain seen in 2013.

Solar stocks have recently seen weakness due to (1) downward pressure on solar pricing and panel oversupply caused largely by a hangover from solar install spikes seen in 1H-2016 in China and the U.S., (2) uncertainty about whether the EPA’s Clean Power Plan will ultimately survive the presidential election and its court challenge, (3) uncertainty for the U.S. residential solar market amidst a shift to purchase/loans from leases and cutbacks in net metering in some states, (4) concern about the outcome of the Nov 8 U.S. presidential election and the post-election political climate for alternative energy, and (5) ongoing trade disputes that have resulted in tariffs and various market dislocations.

Recent bullish factors for solar stocks include (1) strong overall world demand for solar with the sector set to grow by at least 20% this year (see page 4 for the world solar growth outlook), (2) the strong prospects for U.S. solar in coming years after Congress in December 2015 approved a 5-year extension of the U.S. solar investment tax credit (ITC), (3) strong demand for solar power worldwide due to the increasingly competitive price of solar versus alternatives and as countries seek to meet their carbon-reduction targets under December’s Paris COP21 global climate agreement, (4) the partial recovery in oil and natural gas prices from the early-2016 lows, (5) M&A activity in the solar sector after Tesla (TSLA) offered to buy SolarCity (SCTY) and Trina Solar (TSL) received a management go-private buyout offer, and (6) low valuation levels that indicate that solar stocks are very conservatively priced.

Solar stocks are currently trading at very low valuation levels compared with the broad market. The median forward P/E of companies in the MAC Solar Index is currently 8.7, which is well below the forward P/E of 18.6 for the S&P 500 index. In addition, the median price-to-book ratio of 0.86 for the companies in the MAC Solar Index is well below the 2.87 ratio for the S&P 500 and the median price-to-sales ratio of 0.83 for the MAC Solar Index is well below the 1.95 ratio for the S&P 500.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Despite the good news for solar on Amendment 4, Florida continues to be a tough place for solar to flourish due to anti-solar regulation and the lack of a renewable portfolio standard (RPS) for utilities. Florida ranks only 14th in installed solar capacity among U.S. states despite having the 3rd best solar potential in the nation, according to the Solar Energy Industries Association (SEIA).

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

Florida is already one of the very few states in the country that makes third-party leasing effectively impossible because the solar owner/lessor would need to register as a utility. Pro-solar advocates are worried that Amendment 1 might pass because it is intentionally couched in language that makes it look to the voter as if he or she is voting in favor of solar when in fact a vote in favor of the measure would significantly damage solar potential in Florida.

The Amendment 1 measure is formally called “Rights of Electricity Consumers Regarding Solar Energy Choice,” which on its face sounds like a good thing for solar, when in fact the opposite is true. The fact that anti-solar utility interests need to use a deceptive title to try to get their anti-solar measure passed shows they know they are on the wrong side of the public on solar.

Nevada PUC bows to pressure and allows net metering grandfathering

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

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

Clean Power Plan oral arguments will be heard on Sep 27

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

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

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

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

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

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

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

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

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

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

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

Solar Index Performance

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), sold off sharply early this year and has since remained weak. The index is currently down -34% year-to-date. The MAC index in 2015 closed -15% lower after the -2% decline seen in 2014 and the +127% gain seen in 2013.

Solar stocks have recently seen weakness due to (1) the general risk-off equity trading mode with the upcoming Brexit vote and the ongoing concerns about the Chinese and global economies, (2) concern that a temporary drop-off in Chinese solar installs in the second half of 2016 could lead to supply overhang and downward pressure on solar pricing, (3) uncertainty about whether the EPA’s Clean Power Plan will ultimately survive the presidential election and its court challenge, (4) uncertainty for the U.S. residential solar market amidst a shift to loans from leases and cutbacks in net metering in some states, (5) investor uncertainty about the solar sector after SunEdison filed for Chapter 11 in April, and (6) ongoing trade disputes that have resulted in tariffs and various market dislocations.

Recent bullish factors for solar stocks include (1) the strong overall world demand for solar with the sector set to grow by 10%-20% this year, (2) the strong prospects for U.S. solar in coming years after Congress in December 2015 approved a 5-year extension of the U.S. solar investment tax credit (ITC), (3) strong demand for solar power as countries seek to meet their carbon-reduction targets under December’s Paris COP21 global climate agreement, (4) the sharp 89% rally in crude oil and 70% rally in natural gas prices from the recent lows, and (5) low valuation levels that indicate that solar stocks are very conservatively priced.

Solar stocks are currently trading at very low valuation levels compared with the broad market. The median forward P/E of companies in the MAC Solar Index is currently 9.4, which is well below the forward P/E of 17.7 for the companies in the S&P 500 index. The median price-to-book ratio of 0.98 for the companies in the MAC Solar Index is well below the 2.79 ratio for the S&P 500. The median price-to-sales ratio of 1.19 for the MAC Solar Index is well below the 1.86 ratio for the S&P 500.

Global solar growth slows

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

World renewable energy jobs soar to 8.1 million

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

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

Clean Power Plan oral arguments are delayed until Sep 27

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yieldco model navigates current difficulties

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

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

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

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

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

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