The rapid growth of solar power could be facing a near-term slowdown.
In a recent report, UBS analyst Julien Dumoulin-Smith noted a “drastic slowing” of residential solar installations based on data from the firm’s “Evidence Lab.”
The firm’s “lab” has a multi-year data set of online hiring activity for sales roles in the solar sector that shows declines on an absolute basis, driven by “dramatic” year-over-year reductions in online sales job postings. The report calls the decline in their data set “unprecedented,” but notes that it could be disproportionately affected by SolarCity’s 30% to 40% market share of the residential solar market, especially in light of the fact that the company has been scaling back on costs and focusing on preserving cash since Tesla Motors’ acquisition bid.
In fact, earlier this month, in an earnings call with analysts, the company trimmed its expectations of solar deployments to 170 MW this quarter, down from 201 MW installed in the second quarter.
SolarCity was not the only solar company to cut its guidance estimates. SunPower dropped a “guidance bomb” on the market earlier this month, saying it expects to lose as much as $175 million this year, an about-face from earlier guidance estimating it would earn as much as $50 million. The company cited slowing demand for utility-scale solar projects and lower panel prices.
First Solar also cut its guidance. The company said it was still on track to complete 1,000 MW of solar project in 2017, but was “meaningfully below” its 2016 target of 2,300 MW.
UBS noted that the peak in online solar sales hiring activity was nearly coincident with the year-end extension of the Investment Tax Credit (ITC), and that could provide an explanation of some of the slower hiring activity. Companies geared up in advance of the ITC extension, moving quickly to hire staff and get projects under the deadline wire, but now are settling down to execute on a backlog of work. Dumoulin-Smith, in fact, sees “steady growth opportunities for the sector” and expects residential solar to continue to expand its footprint through the next several years.
UBS also provided another view of the hiring slowdown. It is “indicative of the growing competition in the sector,” Dumoulin-Smith wrote. He noted that solar companies have achieved significant reductions in costs and increased efficiencies, but the cost to acquire customers has trended up in recent years, offsetting “any such successes.”
For UBS that could translate into a shift in market leadership. SolarCity is still the leader in the market, but the gap is closing with Sunrun showing “significantly growing market share of both online sales and installation jobs” and SunPower increasing its recruiting efforts, UBS noted.
Taking exception with too broad a conclusion from UBS’ jobs data, the Solar Energy Industries Association (SEIA) says its installation and capacity data for 2015 and projections for 2016 shows “growth across the board between 2015 and 2016,” spokesman Dan Whitten said. And while the numbers will “reflect healthy growth over last year, our projections are likely to drop somewhat when we release the data for the second quarter next month,” he said.
The expected dip reflects the fact that after the ITC passed, “there was less urgency to get projects in under what we thought was the wire, but what it set up was effectively eight years of record-setting growth, including job growth, and we are very optimistic about the outlook for rooftop and utility-scale solar,” Whitten said.
A growing glut of panels
It is worth noting that the discussions about the outlook for residential solar are occurring within a context that embraces the fundaments of the wider industry. Recent reports note that manufacturers of solar panels have increased solar panel production capacity to the point that they could face a glut that could result in lower prices and tighter margins.
In a June report, consulting firm IHS predicted that solar PV installations in China in the third quarter will fall by 80%, setting off a “sharp global slowdown in global demand and an oversupply, particularly solar modules.”
The consulting firm expects gross margins for module suppliers to drop from about 20% to the single digits in the second half of the year. Many of the suppliers are already under “extreme financial pressure with precarious balance sheets,” IHS noted, and the result could be a shakeout and consolidation in the industry. Demand for new installations is still “exceptionally strong” in the U.S., IHS says, but inventory levels remain high at installers and, with the extension of the ITC, many developers are pushing plans to complete solar projects into 2017.
In an Aug. 2 report, Morgan Stanley predicted a 7% year-over-year decline in global solar installations in 2017, a 5,000 MW decline and far below the consensus estimate of 7,000 MW.
The investment firm sees the combination of oversupply and lower demand resulting in 10% to 13% declines in wafer and module prices in the second half of the year followed by further 10% to 15% declines in 2017.
Despite lower panel prices, Morgan Stanley notes that the levelized cost of large-scale solar power remains well above local power generation in most markets, which means that incentives will remain a critical factor for solar deployments. And the largest markets for solar power, China, Japan and Europe, all face a tightening regulator market, the report says.
Morgan Stanley does identify an exception to its cautionary note about the importance of incentives. Solar power is becoming increasingly competitive in Texas, the report says, to the point where the analysts expect costs to fall low enough to make solar competitive on a merchant basis by 2019-2020. As a result, Morgan Stanley reduced its target stock prices for NRG Energy and Calpine, which both have a large portfolios of conventional generation in the state.
Overall in the U.S., Morgan Stanley sees a rush of development in 2016 followed by a slowdown in 2017. Longer term, however, the firm see “very favorable longer-term support” for solar power in the U.S., both in terms of the now extended ITC, as well as state incentives such as renewable portfolio standards.
The current boom in solar installations has been driven in part by falling panel prices. If prices fall further because of an over-supplied market, that could be good for U.S. installers, Jade Jones, senior analyst at GTM Research says. But “in general, lower module prices are a secondary driver to demand growth while things like policy and downstream company strategy are primary.”
In terms of residential installations, net metering policies, which vary by state, play an important role. Dumoulin-Smith at UBS noted a year-over-year decline in in net metering applications in California, possibly linked to the state’s transition to “Net Metering 2.0,” its latest iteration of the policy. But he sees a growing focus on states other than California.
“We see an increased focus on the Northeast states with high retail rates: New York, Massachusetts, New Jersey, and Connecticut,” he wrote. And he noted that Southern states are slowly gaining steam with online job postings in the region recently reaching double digits for the first time. He sees solar power in the South as “one of the most misunderstood opportunities over the next several years.” UBS expects to see “significant utility procurement of large scale solar going forward” with utilities such as Dominion and Georgia Power putting an increased emphasis on solar procurement.
But in a subsequent, Aug. 11 report, UBS noted that utility-scale solar projects also face headwinds. At year end, Congress extended corporate bonus depreciation benefits. Many utilities that have taken advantage of the extension have used up their tax appetite for ITC credits which are front-end loaded. As a result, many are now favoring wind power projects with tax benefits – the production tax credit (PTC) – that are less front loaded.
“We're not surprised by the paucity of utility-scale solar projects as much of the focus in the sector is on incremental wind given the PTC extension and [Internal Revenue Service] clarification on repowering,” Dumoulin-Smith said. UBS noted that many solar developers have reported that opportunities for solar projects have proven “slower and more competitive than originally contemplated heading into 2016.”
That slowdown bolsters the case of manufacturers such as SunPower and First Solar to diversify away from panel and equipment sales and toward the residential and commercial projects. “We don’t see easy answers to meaningful returns available anywhere within the sector,” Dumoulin-Smith said, but residential and commercial do offer higher nominal returns for the risk.