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Would a New Fee Structure Further Dim These Solar ETFs?

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While solar stocks are trying their level best to cope with the backlash of plunging oil prices and the meltdown in the Chinese stock market, changes proposed by California utilities to the fee structure for rooftop solar customers are expected to destabilize the solar industry (read: 4 ETFs Unexpectedly Rocked by China Turmoil ).

The proposals are pending approval by the California Public Utilities Commission ("CPUC"). Hearings are expected to start October 5. Regulators need to decide on new rules by the end of the year, which would take effect by July 2017.

Southern California Edison, a subsidiary of Edison International ( EIX ); San Diego Gas & Electric Co., a subsidiary of Sempra Energy ( SRE ); and Pacific Gas & Electric Co. ( PCG ) have submitted plans that include charging monthly fees of $3 for every kilowatt of capacity they own and lowering compensation to rooftop solar owners for the electricity they generate.

Charging a monthly fee means a customer with rooftop solar installation having a capacity of say 4 kilowatt would be required to pay a fee of $12 per month to the utility just for having the system.

And it's not only this. The utilities have also asked for modification in the compensation received by customers for the net metering system. Net metering is a billing mechanism that credits solar energy customers for the surplus electricity they generate over and above their home energy needs which is sent back to the grid. As a result, customers are only billed for their "net" energy use, motivating them for using solar power.

Utilities have asked for lowering the compensation for electricity sent back to the grid by about 50%, from roughly 18 cents per kilowatt hour to 8 cents per kilowatt hour. According to Solar Energy Industries Association (''SEIA''), about 20-40% of a solar energy system's output goes into the grid on an average.

The rationale for levying the monthly fee and reducing the compensation is simple. According to the utilities, customers need to pay their fair share of cost of maintaining the power grid, transformers, substations and power plants. Further, solar system users don't generate enough power after the sunset. As a result, utilities need to ramp up their power plants to meet the home energy needs after sunset, which is a costly affair.

The proposals regarding the solar fee structure have been decried by proponents of solar energy and the environmentalists, fearing that it would discourage people from accepting solar power as a cost-saving alternative compared to other sources of energy. According to Elon Musk-founded solar power systems provider, SolarCity Corporation ( SCTY ), the modified fee would have a catastrophic effect on the future for rooftop solar industry, if approved by the CPUC.

Recently, Wisconsin and Arizona approved significant increases in fees that utilities can charge solar users. Due to this, the number of applications for rooftop solar installations declined from hundreds per month to only a few in Arizona, per Sean Gallagher, vice president of state affairs for the SEIA. According to North Carolina Clean Energy Technology Center, 16 of the 44 states are considering or enacting changes in their net-metering policies.

ETFs in Focus

Below we discuss two ETFs that exclusively focus on the solar power industry (see all Alternative Energy ETFs here). These funds will undoubtedly be affected by the modified solar fee structure, if approved (read: Cloud Over Solar ETFs? ).

Guggenheim Solar ETF ( TAN )

Launched in April 2008, this ETF follows the MAC Global Solar Energy Index, holding 27 stocks in the basket. First Solar Inc. ( FSLR ) and SolarCity take the first and second positions with a combined 15.7% share. The U.S. firms dominate the fund's portfolio with 37%, followed by China (26%).

The product has amassed over $240 million in its asset base and trades in solid volume of around 249,000 shares a day. It charges investors 70 bps in fees per year. The fund shed 21.2% in the year-to-date timeframe (as of Sep 25, 2015) and has a Zacks ETF Rank of 4 or 'Sell' rating with a High risk outlook (read: TAN vs. YLCO: Which is the Better Solar ETF? ).

Market Vectors Solar Energy ETF ( KWT )

Launched at the same time, this fund manages a nearly $16 million asset base and tracks the Ardour Solar Energy Index. In total, the ETF holds 29 solar stocks in its basket, which is largely concentrated in the top 10 firms at roughly 57.8%. In terms of country exposure, U.S. takes nearly two-fifths of the portfolio, closely followed by China (31.3%) and Taiwan (14.1%). The product has an expense ratio of 0.65% and sees paltry volume of about 2,400 shares a day. The ETF is down 22.6% in the year-to-date period.

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EDISON INTL (EIX): Free Stock Analysis Report

SEMPRA ENERGY (SRE): Free Stock Analysis Report

PG&E CORP (PCG): Free Stock Analysis Report

SOLARCITY CORP (SCTY): Free Stock Analysis Report

FIRST SOLAR INC (FSLR): Free Stock Analysis Report

GUGG-SOLAR (TAN): ETF Research Reports

MKT VEC SOLAR (KWT): ETF Research Reports

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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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