Why the Solar Farm Business Went Dark Last Quarter

Solar farm at sunset.

The third quarter of 2018 was an unusually slow quarter for the U.S. solar industry, despite some strong long-term signs. According to the Solar Market Insight Report 2018 Q4 from SEIA/Wood Mackenzie Power & Renewables, solar installations dropped 15% from a year ago to 1,700 megawatts (MW) in the quarter, and utility-scale projects had their worst quarter since 2015.

Amid the decline, though, there were a few bright spots for the solar industry -- and it looks like a turnaround could be here sooner than you might think.

Utility solar's year to forget

Large, utility-scale solar projects made up the largest segment of the solar market in the U.S. at 678 MW last quarter, but this was the first quarter since 2015 that the level of installations fell below 1,000 MW. The industry was impacted by the rush in late 2017 and early 2018 to complete projects ahead of solar tariffs, pulling demand forward. This is the same urgency that led to a surge in demand for First Solar 's (NASDAQ: FSLR) tariff-free solar panel supply late last year, but the spike in demand didn't last. The slump in Q3 was something First Solar experienced, along with other manufacturers . Luckily, the slump won't last.

The SEIA/Wood Mackenzie report's analysts expect 3,500 MW of utility-scale solar to be installed this quarter, and there have already been 11,200 MW of utility projects announced this year with a total of 26,500 MW in backlog. Long-term, it looks like the utility-scale solar business is actually getting stronger in the U.S.

Residential solar is a bright spot

Utility-scale solar is in rough shape today in the U.S., but residential solar is starting to look up. Installations were up 11% to 581 MW as sunny locations like California, Florida, and Texas began to grow again. Not coincidentally, Sunrun (NASDAQ: RUN) , Vivint Solar (NYSE: VSLR) , and SunPower (NASDAQ: SPWR) have all reported strong demand and margins in the residential segment .

One of the reasons residential solar is doing well in a world of tariffs is that the solar panel itself is only about 10% of installation costs. Even a 30% tariff only increases costs a few percentage points, which isn't enough to kill the business altogether. Utility solar, where the panels can be 30% to 40% of installation costs, face more headwinds when solar panel prices go up.

Residential solar is likely to be the most stable market going forward because its costs don't swing much quarter to quarter and it's directly competing against the rising cost of retail electricity.

The other rooftop solar

There continue to be ups and downs in non-residential solar, which is what the SEIA calls commercial solar, which was down 6% versus a year ago to 492 MW. Commercial projects rely on local and state level incentives and grid access to be viable, and that can swing demand wildly. New York and Minnesota were bright spots in the quarter, and with commercial solar projects growing in popularity states outside of the Sunbelt like this may be keys to growth.

2019 is looking up

The third quarter of 2018 wasn't as strong as solar investors may have hoped, and utility-scale projects falling under 1,000 MW in a quarter shows that policy pressure is taking its toll this year. But long-term, solar's outlook is showing some good signs for the industry as it becomes more cost effective against both wholesale and retail power prices. And if the policy tides change, the U.S. solar industry could become a booming industry again.

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Travis Hoium owns shares of First Solar and SunPower. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy .

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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