The Solar Industry Beyond 2017

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Includes: CSIQ, FSLR, JASO, JKS, RUN, SOL, SPWR, TSLA, VSLR
by: Bravo Family Fund

Summary

By 2018, there will be ~640 GW of PV capacity installed. Distributed General Solar projects will increase in number, but the size of projects will be smaller.

Industry winners will excel in sales/marketing and cost-efficient construction.

Project development and EPC margins will go down.

EPC developers will diversify into microgrids development and portfolios of stand-alone systems.

Electricity storage systems sales will increase.

The outlook for the solar companies for 2017 is pessimistic. Stock prices for JinkoSolar (NYSE:JKS), Canadian Solar (NASDAQ:CSIQ), JA Solar (NASDAQ:JASO), First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR), Tesla (NASDAQ:TSLA), Vivint Solar (NYSE:VSLR), Sunrun (NASDAQ:RUN) and ReneSola (NYSE:SOL) have all been in freefall for a few months now.

Overcapacity in the sector will last through 2017. Therefore, the costs of PV panels will continue to drop. One of the surprises to the PV installers will be that solar panels will no longer be the single most expensive part of a system. Racking, cables and the installation itself will become a significant part of the total cost by 2018.

It is very easy to overlook the fact that most of the solar electricity that will be operating in the next five years have not been built yet. Companies that are market leaders are the vertically integrated companies with upstream manufacturing of the components to downstream project development and construction. But most of these companies will likely not be the leaders in 5 years. Going forward, solar PV leaders will be champions in sales/marketing and cost-efficient construction. Companies capable of building quality projects at a lower cost and extensive sales network will be able to sell more.

The current module prices are below USD 0.5/W. The cost reductions from modules in the future will contribute less than in the past to total installation cost. The bulk of the global average total PV system cost reduction opportunities in the next decade will, therefore, come from continuous BoS (balance of system) cost reductions. Margins of the EPC developers will depend on installation costs linked to local labour costs and optimisation, or lack thereof, in terms of organisation and planning, logistics and the experience level of key personnel. Competition in the optimisation of the hardware used for the installation, which has the effect of reducing installation time by cutting the labour needed, will define the next generation of Solar industry winners. An example of this is the click and slide-in solutions to replace screws in mounting systems or modular systems with standard interfaces. Automatic and programmable piling machines and further optimised mounting tools for the installers are also expected to become more widely used in the near future.

Improving recognition of the PV projects by banks and private investors will lead to distributed general projects financing being provided by the owners and the project to be built and operated by the PV operators. This will lead to continuous improvement and deleverage of the balance sheet for most of the PV EPC developers, 2018 and beyond will be the time for the return of capital and profits to the shareholders of these companies.

Rooftop solar customers love net metering, the rules that allow solar-equipped homes to sell excess electricity back to the grid. Yet around the world and the US, net metering is under pressure. It's likely, in the US, that the rate at which consumers are paid for their excess electricity will drop, that caps will be imposed. At this stage, batteries in the home would become attractive. Lithium-ion batteries have been seeing rapidly declining prices in recent years. Almost any sunny state in the US that did away with net metering would be at or near solar + battery parity in the next 4 years. Indeed, it's happening in Germany already that "battery parity," meaning home solar plus a lithium-ion battery, makes economic sense. Therefore, electricity storage systems sales will increase.

Conclusion:

We will see continuous improvement and deleveraging of the balance sheet for most of the larger solar companies in 2018 and beyond. This will be the time for the return of capital and profits to the shareholders of these companies. The leaders today may not be the leaders beyond 2018. Going forward, solar PV leaders will be the champions in logistics sales/marketing and cost-efficient construction.

Disclosure: I am/we are long SOL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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