Solar Industry Hustles As Tax Credit Deadline Nears

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T he City of Los Angeles announced on Friday that it had opted out of an arrangement to buy solar power from a facility that privately owned engineering firm Bechtel is developing in California's Mojave Desert.

Studies by the city found that Bechtel's Soda Mountain Solar Project wasn't the most cost-effective renewable energy option available and that the project infringed on several wildlife species, according to the Los Angeles Times. The combination was enough to scare off the customer that Bechtel hoped would buy the bulk the 264-megawatt plant's output.

Now, San Francisco-based Bechtel, the largest U.S. construction and engineering firm, is scrambling to piece together enough customer commitments to rescue the project -- which, in order to be profitable, must be built before the end of 2016, when a 30% federal tax credit decreases sharply.

The situation shows that the solar industry has grown plausible enough to attract some of the world's largest energy and construction interests but continues to face daunting challenges. The still-fragile industry is entering a healthier phase, with "a good combination of high demand in a vast number of countries, no collapsing end-markets and stabilizing prices," said Ash Sharma, senior research director for solar at market research firm IHS.

Overall, this year is shaping up to be a lot like last year, Sharma said. That means double-digit growth in installations, moderate revenue expansion and a return to "almost respectable margins." It also means the restarting of capital investment, plus further M&A activity and consolidation within the supplier base.

Like Bechtel, solar companies across the industry are ramping up installations to take advantage of the 30% federal investment tax credit before the end of 2016. After that, the tax perk drops to 10% for commercial and expires entirely for residential.

The Solar Energy Industry Association (SEIA) says that since the federal tax credit was passed in 2006, more than 150,000 American solar jobs have been created and $66 billion has been invested in solar installations nationwide. Last year, 32% of new electric generating capacity in the U.S. came from the solar projects.

As the tax credit heads toward apparent expiration, more than 32 gigawatts of photovoltaic ( PV ) projects, each greater than 5 megawatts in size, are in development or under construction and slated to be operational by the deadline, IHS reported this month.

A megawatt can power 164 homes, on average, according to the SEIA. A gigawatt, which equals 1,000 megawatts, can power roughly 216,000 homes in California or 155,000 homes in New York.

Canadian Solar ( CSIQ ) is headquartered in Canada but has the bulk of its manufacturing operations in China. It dramatically increased its project pipeline in the U.S. with its February acquisition of Recurrent Energy, said Christine Beadle, IHS senior analyst. "Many of these projects are set to be completed prior to the 2016 deadline, including a 150 MW project for Austin Energy in Texas and several other projects in California."

SolarCity ( SCTY ) installed 153 megawatts in Q1, up 87% year-over-year. It affirmed its full-year installation projection of 920 MW to 1,000 MW, compared with 502 MW the previous year. The San Mateo, Calif.-based company performs primarily residential and small-business installations. It added 28,000 customers in Q1, bringing its total to 218,000. It is aiming for one million customers by mid-2018.

"The whole mission here is to make solar more affordable and to provide a lower cost of energy than you get from the utility," SolarCity CEO Lyndon Rive told IBD in January.

In the company's first-quarter conference call, he told analysts, "Even with some of our key growth markets pounded by snow, residential installations grew 108% year-over-year to 138 MW (in Q1). On many days, our installation crews literally dug their way to doorsteps and shoveled snow off rooftops to ensure many of our new East Coast customers were able to go solar."

China Leads Solar Build-Out

More than 40 countries will install at least 100 MW of new solar capacity in 2015, IHS forecasts. It expects global solar PV installations to grow 30% to 57.3 gigawatts this year, with total global PV generation capacity soaring 177% by 2019, to 498 GW.

China alone has a goal of installing 17.8 gigawatts of solar capacity this year, more than the entire global solar PV capacity deployed in 2010. The country appears to be on track, adding more than 5 GW in Q1, an 18% year-over-year increase that brought China's total solar capacity connected to the grid to more than 33 GW, according to the National Energy Administration.

Although solar PV inverter shipments to China increased last year, significant price declines have caused overall revenues within the industry to drop. Despite an 18% increase in PV inverter shipments, to 13.3 GW, to the Chinese market last year, revenue dropped 6%, IHS reported. Price wars among Chinese suppliers have become so fierce that many small suppliers have left the market entirely.

India is targeting new installations of 5 GW per year through 2022. In the U.S., solar PV installations are expected to grow 31% year-over-year to 8.1 GW, according to the SEIA forecast, reaching 40 GW of cumulative capacity by 2016.

At least 89 countries with solar PV end-markets will show growth in solar installations this year, IHS predicts. The top 10 markets are China, Japan, U.S., U.K., Germany, India, South Africa, Italy, Canada and Australia. IHS predicts that Chile will be the next emerging market after South Africa to reach the milestone of 1 GW in installed PV solar capacity.

IHS expects robust solar demand to trigger a four-year record high profit across the industry supply chain this year, with PV module makers' gross profits expected to top $5 billion -- more than double last year.

Solar stocks have surged in recent months after falling in tandem with oil prices , although many analysts see little real direct correlation. TheGuggenheim Solar ( TAN ) exchange traded fund has climbed about 20% so far this year, and IBD's Energy-Solar group soared on Friday to rank No. 10 among the 197 industry groups that IBD tracks.

Companies benefiting from further build-out includeSunEdison ( SUNE ), which shipped an all-time record of 273 MW of modules in Q1, up 123% year-over-year. China-based solar cell and module makerJinkoSolar (JKS) reported a better-than-expected 36.5% jump in Q1 revenue to $443.5 million, noting that it had benefited from expansion in the U.S., Japan and emerging markets such as China and Brazil.

The Energy Storage Angle

Although global solar growth was somewhat disappointing last year, 2015 is setting up to be stronger. So said Bernstein Research analyst Michael Parker in a 32-page report, released April 8, that assessed the solar market.

Parker and other Bernstein analysts expect two factors -- energy storage (essentially more efficient battery packs, such as those thatTesla Motors (TSLA) introduced this year) and costs of solar falling 24 cents per kilowatt hour without subsidies -- to make 2018 a "breakthrough year" for the industry.

"We are saying solar, plus energy storage, will be a credible, low-cost alternative in some markets by 2018 without any form of subsidy," Parker said in the report. "Adoption of solar and energy storage technology will accelerate. That scale will help lower costs."

Annual installations of grid-connected, PV solar systems paired with energy storage is expected to grow more than threefold to 775 MW this year, IHS forecasts.

Currently, when factoring in subsidies, a fully-financed, average-size rooftop solar system will reduce energy costs for 93% of single-family households in the 50 largest American cities, a recent Energy Department-based study by North Carolina State University said.

Growth Drivers

Another take on the plummeting cost of solar components and systems comes from the SEIA, which reports that the cost per watt of silicon PV cells has fallen from $76 in 1977 to 36 cents today. Analysts say that a relatively stable regulatory and policy environment is also helping to drive industry growth.

In the U.S., approximately 20 states have incentives with expirations after 2018 or later. Some of the most beneficial are in Arizona, Hawaii, Maryland, New Mexico and New York, said UBS analyst Julien Dumoulin-Smith.

A key question remains the timeline for implementing carbon regulations -- and to what extent the regulations, late in the decade, will affect the decline in the renewables industry that may follow the end of the federal tax credit in 2016, Dumoulin-Smith said.

"While many investors have largely attributed the growth of renewables in the U.S. to (federal) tax credits, the real driver in our view has been state-level renewable portfolio standards, with the tax credits only making the state standards that much more palatable to implement," Dumoulin-Smith said. "As we look forward, EPA's carbon mandates will effectively force states to double-down on their existing renewable portfolio standard mandates through 2030."

Meanwhile, companies called yieldcos are gaining traction among solar companies as a way to appeal to dividend-oriented investors. Yieldcos are publicly traded subsidiaries that earn cash flows based on electricity generated from solar plants, then pay the bulk of the cash out as dividends. Solar companies already earn tax benefits but can increase the benefits by forming and owning yieldcos.

A year ago, SunEdison launched itsTerraForm Power (TERP) yieldco with a $599 million initial public offering , with power production facilities in the U.S., Canada, the U.K. and Chile. In September, SunEdison filed with the SEC for another IPO to create a yieldco with assets in Asia and Africa.

Yieldcos represent an alternative financing option that could have a significant impact on how solar and other renewable energy projects are developed, financed and sold,SunPower (SPWR) CFO Charles Boynton told IBD.

In March, SunPower andFirst Solar (FSLR) said that their new yieldco joint venture,8point3 Energy Partners (CAFD), will own and operate a portfolio of selected solar-generation assets. The new subsidiary has filed with the SEC for an initial public offering and said on Wednesday that it expects to price between $19 and $21 per share.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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