Despite the Solyndra affair and its aftermath in the political arena, the solar industry in the U.S. continues to see a blistering rate of growth. At the same time, the end of year expiration of the 1603 Treasury Grant Program could have a negative affect on the financing environment for all renewables - including solar.
Sources of Growth In The North American Solar Sector
Source: NPD Solarbuzz North America PV Markets Quarterly report.
The latest survey-based data from Solarbuzz points to a blistering performance from the solar sector in both the U.S. and North America as a whole. As the table above shows, new installations reached 0.6 GW in Q3. Moreover, the solarbuzz survey now suggests that Q4 should see a further pick-up in installations to 0.8 GW. That would represent a growth rate of 33% on the quarter and 101% on the year and would put total installations for 2011 as a whole at 2.2 GW.
For the U.S. market alone total installations in 2011 are expected to come in at 1.9 GW. However, the issue for the outlook for the U.S. solar sector continues to be uncertainties regarding the policy environment. Various forms of incentives have helped provide a financing funnel for solar projects in the U.S. - from tax credits, the 1603 Treasury grant program and loan guarantees. However, the political reaction to the Solyndra affair has put these incentives under threat. The DoE Loan Guarantee Program has already come to an end and the 1603 Treasury Grant program expires at the end of this year.
As we discussed a few days ago, SolarCity´s SolarStrong deal with BoA has shown that the private sector can still provide financing for fairly large-scale projects even in the absence of loan guarantees. This is welcome news. However, the focus is now on the potential loss of the 1603 Treasury Grant program.
The U.S. Partnership for Renewable Energy Finance (U.S. PREF), has suggested that the loss of the 1603 Treasury Grant Program could cause a fall in financing for new energy projects of 52% in 2012. That number is based on its July 2011 survey of major tax equity investors. As a result, 750 companies across 50 states have signed a letter to Congress calling for a one-year extension to the program.
This is a crucial issue for the medium-term health of both the U.S. solar sector and the renewables industry as a whole. However, the good news for the global supply demand situation facing the solar industry is that the coming expiration of the 1603 Treasury Grant Program appears to have accelerated the pace of demand as prospective participants have acted to move forward in order to meet qualifying requirements. Moreover, this will continue throughout 2012 as participants have to make further commitments in order to meet progress requirements.
Irrespective of the changing policy and financing environment, the U.S. is therefore still likely to be making a positive contribution to reducing the current supply-demand imbalance in the sector over the immediate few quarters. This is particularly important at a time when developments out of China and Asia are likely to begin to allow the supply-demand imbalance in the broader global solar sector to finally begin a process of adjustment toward balance. We discussed these factors in two recent articles:
- A number of the top tier Chinese solar players have announced a halt to their previously extensive plans for capacity expansion - for a fuller discussion see here.
- The latest data shows something close to an explosion in demand for solar out of China and the rest of the Asia Pacific. Together with the adjustment to capacity plans mentioned above, this should help erode the current over supply and excess inventory position in the industry over the course of 2012. More details here.
The bottom line here is that solar is heavily undervalued, having been decimated for much of this year. Finally, fundamental adjustment in the supply-demand imbalance in the industry should start to allow solar stocks to recover. For anyone willing to hold solar on a strong medium-term view, we have recently recommended being long some of the main vertically integrated, low cost module manufacturers - with a basket of Suntech Power (NYSE:STP), Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL) likely to work over time. Given the assessment of the outlook in the U.S. provided above, we would add First Solar (NASDAQ:FSLR) to that basket.
Of course, the immediate outlook is likely to be driven by broader macro considerations and the outlook for the overall stock market. However, as we argued last week, the outlook for stocks now seems positive on a reasonable reading of last Friday's non-farm payroll number and what is likely to be better news out of the political situation in Europe. You can read a fuller discussion of those issues here. From where we stand today, it certainly seems that if we are right on the overall market, solar stocks have some potential to recover.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in STP, YGE, TSL, FSLR over the next 72 hours.