The State Of The Solar Industry In The United States

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Includes: KWT, TAN
by: Sandro Mijatovic

Summary

This article provides a look at US solar growth in recent years.

We'll also look at government (both federal and state) policy that has contributed to this growth.

Lastly, we'll examine some considerations for determining the viability of solar, independent of the government.

To the general public solar energy has long been, and mostly still is, an abstract futuristic technology that has little relevance in their everyday lives. They may have seen increasingly impressive looking solar plants in movies, but have no conception of the power generating capabilities of such installations or the effect they may have on their cost of living in the future. The scientific community has long implicitly contended that the effect of solar should be large because it is far better for our planet than fossil fuels. It seems that investors are finally starting to agree. Competitive forces and governmental backing have given the solar industry some financial appeal. The economic figures for the solar industry in the United States in the last few years indicate that there is a chance solar energy becomes a more relevant part of peoples' everyday lives.

In 2013, the industry installed 4751 megawatts (MW) of new photovoltaic (PV) capacity in the United States. That is a 41% increase over 2012, and the best year on record. Of all the new electricity generation capacity added in 2013, solar accounted for 29% of the pie (behind only natural gas). At the end of 2013 there were 13k MW of energy producing capacity within the US, enough to power 2.2m average American homes. The forecast at the end of 2013 for installations in 2014 was 6k MW (a ~46% increase). That number has since been revised upward to 6.6k MW. This kind of explosive growth for a geographical segment as large as the United States is very impressive. As the graph below indicates, utility scale projects make up the majority of the installations, while residential and commercial projects take smaller pieces of the market.

The growth in installations was primarily driven by the decline in prices for solar power. The price per watt of electricity is down 60% since early 2011 to a price of $2.59 per watt.

The direction of the trend is readily apparent:

Average cost per watt: 2009 (7.50), 2011 (4.75), 2012 (3.63), 2013 (2.89)

A downward movement of this magnitude is very appealing to the consumer, as evidenced by the increase in installations, but what kind of effect does it have on producers? Long term, the movement is necessary if the industry is to become viable on a stand alone basis (much less governmental backing). Currently though, the depressed price hurts margins, making many producers quite unprofitable. Fortunately for solar producers, the government is still firmly behind them, and investors seem to be optimistic long term.

The government has two major policies concerning the solar industry: the Investment Tax Credit (ITC) and the 1603 Treasury Grant program. The ITC permits a 30% tax credit for residential and commercial purchasers of solar installations. The 1603 Grant program allows developers to take a federal grant in lieu of the ITC. The government is no longer taking applications for the 1603 program, but for those that applied before the deadline, benefits will extend to projects that will be finished by the end to 2016 (sequestration cut funding by 7.2% between Oct. '13 and Oct. '14). Unlike the 1603 program, the ITC will continue allowing consumers to apply for tax credits until the program is up for review by the end of 2016.

In addition to the above programs, the Department of Energy offers loan guarantee programs for solar projects. The guarantees have secured some $25b in private financing for the industry. State governments are involved in solar as well, though to varying degrees. Pro solar state governments may offer property and sales tax benefits, and net metering. Net metering allows consumers to sell excess energy accumulated by their systems back into the grid. This lowers the cost of owning a system and is good for the solar industry, but it also gives utility companies more competition. The result is a set of state level battles between pro solar forces, and pro traditional utility forces. The outcome of said battles should be relevant to every current and potential solar investor.

The other half of the solar industry coin, and certainly the more important half long term, is the private half. The two halves are currently very interconnected, given that the appeal of the industry is currently premised on the unsustainable benefits associated with government subsidies. Going forward, it is incumbent upon solar producers to chart a path of independence. As the industry is weaned off of subsidies it will have to learn to stand on its own. It will not happen overnight, but it is imperative that investors today believe there is a good chance of it happening in the not so distant future. That means solar companies will have to show some positive marginal trends.

Solar companies have recently proven themselves adept at cost cutting and streamlining, but they've barely managed to keep pace with the ever decreasing price of solar power. Utility scale projects tend to have better margins so they make up the largest portion of the sales pie. Until last quarter, commercial was the second largest segment, but last quarter it was displaced by residential. Analysts expect commercial to retake the second slot by year end, but it is nonetheless a positive development because it indicates solar is gaining traction with retail consumers.

The primary means of selling solar power systems is through two different third party financing agreements: Power Purchase Agreements (PPAs) and leases. The PPA is structured so that the investor finances and holds the solar installation, and then sells the power the installation creates to the end customer under a fixed agreement. Whereas a lease stipulates that the investor finances the solar installation and then loans it to the end customer for the customer to with as they please. If the distinction between these two methods seems muted, that is because it is. Ultimately both serve the same purpose: to allow the end customer access to solar installations at minimal upfront cost. The current low rate environment has made third party financing quite attractive; rates swinging upwards would definitely dampen the appeal of such arrangements.

In conclusion, the solar industry has shown promising growth trends in the last few years, but there are still some significant headwinds to an independent, strong, and profitable solar industry. The primary determinant of whether the industry will reach an area of independent sustainability is the relationship between the price of solar and the cost of producing it. If that relationship doesn't tilt more favorably towards higher prices and lower costs, the future investability of solar will be called into question, and its relevance to the life of the average Joe will be as tempered as ever.

All factual information derived from seia.org

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.