Read report in PDF with graphs: MAC-Solar-Sector-Update-Oct-2014
Solar Index Performance
The MAC Solar Index, which is the tracking index for the Guggenheim Solar Energy ETF (NYSE ARCA: TAN), is down -5% year-to-date (through Oct 14) giving back a little of the +127% rally seen in 2013. The MAC Solar Index posted a new 7-month high in early September but has since fallen sharply. The fundamentals of the solar industry remain strong but solar stocks have been caught by the downside correction in the overall U.S. stock market that has hit smaller-cap and higher-beta stocks particularly hard.
Nevertheless, solar stocks are still up sharply from the lows posted in late 2012 due to the surge in end-market demand, the stabilization of polysilicon and solar panel pricing (see charts on p. 3), reduced capacity via the exit of weaker solar players, and the improved profitability of solar manufacturers. The surge in demand has been driven by the sharply lower cost for solar and by the spread of solar growth across the world rather than just the initial concentration in Europe.
Strong solar demand is creating a module shortage
Global demand for solar panels has strengthened substantially in the past year and demand has now caught up with capacity, thus leading to some solar panel shortages. SunPower CEO Tom Werner recently said, “It would be fair to say that our panels are in short supply.” SunPower in July announced plans for a new 700 MW plant that will come on line in 2017. Meanwhile, Trina’s CEO Jifan Gao said in September that, “Right now Trina is producing at 100% of capacity and selling at all rates, and we still can’t meet all customer demand.”
The increase in demand is coming from a variety of geographical sectors and is being driven by the drop in solar pricing that has made many more solar projects economical. China, by far the world’s number one country for new solar installs, had a very weak first half with installations of only 3.3 GW. However, some market observers now believe that a breakneck pace of China installs in the second half may allow China to still reach its 2014 goal of 13 GW. The Chinese government is particularly trying to boost the installation of distributed solar at government, commercial and residential locations.
Meanwhile, solar demand in Japan remains strong as the government continues its efforts to promote solar as a means to reduce the country’s dependence on nuclear energy. Japan will install 10-12 GW of solar in 2014, easily making Japan the second largest solar market behind China, according to Bloomberg New Energy Finance. However, solar growth in Japan is currently seeing some bottlenecks as five of the nation’s utilities temporarily halted grid connection approval for solar farms to provide some time to study the capacity of their grids to integrate solar.
Successful Yieldco IPOs pave the way for more
Clean-energy YieldCos have quickly found acceptance among investors, thus providing solar companies with a valuable way to reduce capital costs and unlock shareholder value by spinning off their project subsidiaries.
In the solar industry, a “YieldCo” is a company that owns solar electricity generation facilities and collects stable electricity revenue from investment-grade utilities or companies through long-term power-purchase agreements. A YieldCo typically has low operating costs and distributes its excess cash to shareholders through relatively high dividends. A YieldCo can minimize or even eliminate its corporate tax liability by taking advantage of clean energy tax credits and accelerated depreciation. A YieldCo can be attractive to an investor who is looking for low risk and strong dividend yield.
The MAC Solar Index in September added two YieldCos as constituents: TerraForm Power (TERP), a spin-off from SunEdison (SUNE), and Abengoa Yield (ABY). YieldCos add a lower beta yield component to a stock index, thus damping the volatility of the index while boosting its overall dividend yield.
There are sure to be more solar YieldCos down the road. SunEdison (SUNE) has already filed an IPO prospectus for a second YieldCo that would own solar projects in Asia and Africa. Companies such as Trina (TSL), Jinko Solar (JKS), SunPower (SPWR), and others are also reportedly considering spinning off YieldCo subsidiaries.
IEA offers roadmap for solar to become the world’s largest power source by 2050
The International Energy Agency in September released a roadmap for solar to become the world’s largest power source by 2050. The IEA report (link) anticipates that solar PV could account for 16%, and concentrated solar power plants could account for 11%, of the world’s energy by 2050. The report anticipates that the levelized cost of solar electricity could drop to 5.4 cents per kWh by 2050 and that rooftop PV could drop to 7.8 cents/kWh.
Chinese and U.S. officials may be working to settle solar trade disputes
The U.S. Department of Commerce on July 25 issued a preliminary ruling for anti-dumping duties on Chinese solar companies, adding to the anti-subsidy duties that the DOC imposed earlier in the year. China then retaliated by clamping down on loopholes to its previous duties on polysilicon imports from the U.S. and Korea. On a brighter note, China’s Ministry of Commerce on Aug 8 sent a letter to the U.S. Commerce Secretary suggesting that China may be open to a possible settlement that would eliminate the tit-for-tat duties. Meanwhile, there was good solar trade news from India as India’s Ministry of Commerce & Industry in early September announced that the government dropped its May proposal to impose anti-dumping duties on solar imports.
Massachusetts posts third year of double-digit clean energy job growth
Clean energy jobs in Massachusetts have grown by nearly 50% since 2010. The clean energy sector in Massachusetts now includes 88,273 employees and 5,985 businesses, according to the 2014 Massachusetts Clean Energy Industry Report. The report said that the Massachusetts clean energy industry has grown to $10 billion, accounting for 2.5% of the state’s GDP. The report highlights the important contributions that clean energy is making to job creation and GDP growth in the United States as a whole, in addition to the benefits of reducing consumer electricity costs and reducing pollution and carbon emissions.
GT Technology’s bankruptcy not caused by solar
GT Technology (GTAT) on Oct 6 surprised the markets by announcing a Chapter 11 bankruptcy filing. GTAT was originally focused only on solar production equipment but then aggressively branched out into sapphire crystal technology. GTAT’s bankruptcy was caused by a cash crunch tied in part to Apple’s decision not to use GTAT’s sapphire glass for its new iPhone 6. GTAT’s bankruptcy was not related to its solar business. Indeed, the solar industry has begun to add new capacity, which is supportive for solar production equipment manufacturers.
Solar industry should see minimal impact from plunge in crude oil prices
The recent plunge in Brent crude oil prices to $85/barrel has had some negative impact on solar stock prices, but only because of a misperception among some investors that solar and crude oil are closely connected. The plunge in crude oil prices could possibly reduce political pressure for alternative energy policy support, but otherwise there is no direct connection between crude oil prices and solar. Solar power is part of the electricity-generation sector of the U.S. economy, whereas crude oil fuel products are mainly used to drive engines in the transportation sector. A sharp drop in oil prices has no significant impact on electricity prices because U.S. utilities derive only about 1% of their electricity from burning petroleum fuel. Lower crude oil prices therefore do not present a competitive threat to solar.