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.