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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.

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

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

The MAC Solar Index, the tracking index for the Guggenheim Solar ETF (NYSE ARCA: TAN), has rebounded somewhat since mid-February after the sharp sell-off seen in the first six weeks of 2016. The index is currently down -28% year-to-date. The MAC index in 2015 closed -15% lower after the -2% decline seen in 2014 and the +127% gain seen in 2013.

Solar stocks have recently seen weakness due to (1) the downward U.S. stock market correction seen in early 2016 and the general risk-off trading environment, (2) the U.S. Supreme Court’s decision in February to stay the EPA’s Clean Power Plan until challenges to the program can be heard in court, (3) concern that slower economic growth in China may translate into reduced solar power growth in China, (4) weakness in crude oil and natural gas prices that have had a negative effect on solar stocks as well the U.S. stock market in general, and (5) continued solar trade disputes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Solar industry gets a final win on net metering in California

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

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

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

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

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

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

SunEdison may be close to bankruptcy filing due to liquidity crunch

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

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

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

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

Solar Index Performance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

American solar jobs now exceed oil/gas jobs

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