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Solar Index Performance
The MAC Solar Energy Stock Index, the tracking index for the Invesco Solar ETF (NYSE ARCA: TAN), rebounded sharply higher to a 1-year high in May 2019 from the 2-year low seen in October 2018. The index is currently up +38% on the year, more than reversing the -27% decline seen in 2018. The index in 2017 showed a strong gain of +52%.
Bullish factors for solar stocks include (1) the improved global solar demand picture that has resulted from the sharp drop in solar module prices in 2018-19 and the fact that solar has now reached grid parity in many cases, (2) the stabilization of solar cell and module prices in late 2018 and early 2019 that helped the profitability of solar manufacturers, (3) expectations for strong solar growth in Europe in 2019 as unsubsidized solar grows due to lower solar pricing and the end of Europe’s minimum import price (MIP) scheme, (4) broadening solar growth from India, Turkey, Latin America, Middle East, and Southeast Asia (see page 3 for the world solar growth outlook), (5) strong demand for renewable energy in general as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and (6) the reasonable valuation level of solar stocks.
Bearish factors for solar stocks include (1) low Chinese solar installs in the first half of 2019 as China transitions to its new solar policy that should produce strong solar installs in the second half of 2019, (2) the continued negative effect on U.S. solar from the Section 201 tariff on imported cells and modules that took effect in February 2018, and (3) the obstacle to India’s solar growth from the government’s safeguard tariff on solar modules.
Solar stocks are trading at reasonable valuation levels compared with the broad market. The estimated positive P/E of 17.79 for the companies in the MAC Solar Index is mildly above the comparable figure of 16.95 for the S&P 500 index, according to Bloomberg data. However, the price-to-book ratio of 1.54 for the companies in the MAC Solar Index is far below the 3.27 ratio for the S&P 500. The price-to-sales ratio of 1.14 for the MAC Solar Index is far below the 2.09 ratio for the S&P 500.
Solar stocks rally on expectations for solid 2019 solar growth
Solar stocks in early 2019 have rallied sharply due to (1) the recovery of global stock markets in early 2019 after the sharp downside correction seen in Q4, (2) the recovery of the global solar industry after the blow from China’s subsidy cut in May 2018, and (3) expectations for strong global solar growth in the second half of 2019.
Solar stocks were hit hard in mid-2018 after the Chinese government in May 2018 announced a sharp cut in its subsidy support, which caused a big drop in Chinese solar demand and a big drop in global solar pricing. However, the drop in Chinese demand was less severe than initially expected and solar pricing stabilized in late 2018, which helped to stabilize the profitability of solar manufacturers. Meanwhile, the sharp drop in solar pricing in 2018 was a windfall for solar developers, who can now bring more projects to market since solar is now even more competitive against alternatives like natural gas and wind.
The sharp drop in solar pricing in 2018 has made large-scale solar very competitive and is drawing major purchasing interest from utilities and corporations. There is now a big pipeline of global solar projects that supports expectations for a strong year for solar installs in 2019. In China, the new year has brought the return of China’s solar subsidy programs as well as a pilot program for unsubsidized solar projects. In the U.S., solar growth is expected to be strong over the next several years as developers take advantage of the investment tax credit (ITC) before it progressively steps down to 10% in 2022. In Europe, utility-scale project pipelines are filling up now that solar has become competitive on an unsubsidized basis.
Solar-plus-storage goes big
The combination of solar plants with battery storage systems (“solar-plus-storage”) is taking off quickly in the U.S. and the size of the battery systems is multiplying. Florida Power & Light is planning to build what would be a record-sized battery plant with 409 MW of capacity. The battery plant will be powered by an existing solar plant that has 900 MW of capacity. The battery plant will be built by 2021 and will help accelerate the decommissioning of two nearby natural-gas power plants.
Not to be outdone, the Electric Reliability Council of Texas, which operates most of the Texas electricity grid, will build an even larger 495 MW battery storage system in Texas. The storage system will be powered by a newly-built 495 MW solar plant.
Meanwhile in Hawaii, regulators approved seven solar-plus-storage projects totaling 262 MW of solar and 1.048 GWh of battery storage. The projects are being built by Hawaii’s utility company, Hawaiian Electric, on three different Hawaiian islands.
The average price of 9 cents/kWh for the Hawaiian solar-plus-storage projects is well below Hawaii’s cost of about 15 cents per kWh for generating electricity by burning oil, which is currently Hawaii’s primary means of generating electricity. The average price of 9 cents is also below Lazard’s LCOE estimate for a solar-plus-lithium-battery system of 10.8-14.0 cents/kWh in its November “Levelized Cost of Storage Analysis V4.0” report. The low prices of the recent solar-plus-storage projects in Hawaii are particularly impressive given the relatively high construction costs on islands in Hawaii.
On the U.S. mainland, solar-plus-storage systems are coming in at significantly lower prices. A solicitation last year by Xcel Energy for a solar-plus-storage plant in Colorado saw a median bid of an extremely low 3.6 cents/kWh for delivery in 2023. That was even lower than a deal signed by Tucson Electric in May 2017 of 4.5 cents/kWh.
Solar-plus-storage will become even cheaper in coming years. Lithium-battery prices have already plunged by 85% since 2010 and will fall by another 52% by 2030, according to BNEF.
U.S. raises tariffs on Chinese inverters to 25%
President Trump on May 10 announced a hike in the penalty tariffs on Chinese solar inverters to 25% from 10%. Solar inverters are electrical devices that convert the direct current (DC) from solar panels into the alternating current (AC) that is used on the grid. Inverters were included in the Trump administration’s hike in the penalty tariff to 25% from 10% on $200 billion worth of Chinese goods.
However, the tariff hike on Chinese inverters is not likely to have much impact on the U.S. solar market since U.S. solar developers have already moved away from Chinese-built inverters due to the initial 10% tariff that was imposed in September 2018.
The higher tariff will make it nearly impossible for Huawei Technologies, the world’s largest inverter manufacturer, to build a larger market share for U.S. sales. That gives a boost to smaller U.S.-listed inverter manufacturers such as SolarEdge Technologies (SEDG US), Enphase Energy (ENPH US), and European-listed SMA Solar Technology (S92 GR).
Separately, the Trump administration is threatening to slap a 25% penalty tariff on another $300 billion of Chinese goods as soon as June if there is no US/Chinese trade agreement. Batteries are on the list of goods that would be subject to that 25% tariff. If batteries get hit with a tariff, that could slow the rapid pace of solar-plus-battery installations in the U.S. due to a higher cost of the batteries. The U.S. currently imports about 40% of its lithium-ion batteries from China, although most of those batteries are for end-markets other than grid-storage. The good news is that China currently supplies less than 5% of the batteries used in large-scale energy storage products, according to BNEF.
The Trump administration in early 2018 already slapped tariffs on most imported solar modules and cells, which means there isn’t much more damage that can result for solar cells and modules from the US/Chinese trade war.
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