GAVIN MAGUIRE: US solar sector emerges from the dark

Solar stocks have been some of the hardest hit equities in US markets this year, with several major solar firms nursing stock price losses of more than 50% and a major solar-based exchange-traded fund (ETF) down roughly 30%.

High interest rates that caused financing costs for panel installations to surge and enduring supply chain disruptions have stifled residential and corporate solar system orders through much of 2023, hammering sector sentiment.

A reduction in incentives for rooftop installations in California, the largest US solar market, also undercut solar’s momentum in the US power system.

However, a recent steady build-up in industry inventories including panels, racking systems and power inverters has spurred installation firms to start to cut costs on system components, which may reignite consumer demand before year-end.

In addition, as installation firms commonly give new customers six months before they must start paying off their system costs, several firms have only just started to collect revenue from customers who signed up early in 2023.

Those higher earnings may start to show up in the sector’s next round of results due from next month, and in turn might improve the industry’s earnings profile and appeal among investors.

Downbeat, but with a new lease

The share prices of companies engaged across the solar sector in the US have reflected the tough operating environment the firms have faced throughout the country, regardless of their particular function in the industry.

SunPower Corporation, which for nearly 40 years has been one of the largest US residential solar system installers, has been the downside leader in terms of solar share prices, dropping by almost two-thirds sofar this year.

A focus on the residential market has meant the slowdown in solar system purchases by households in 2023 has been particularly painful for SunPower, which along with similar residential-focused firms has not been able to offset weak household business with orders from utilities and corporations.

The changes to California’s rooftop solar incentives that cut the compensation paid to households for excess solar-powered electricity by 75% from April 2023 also hit firms such as SunPower hard.

Interconnection delays between new customers and their local grids also hit earnings for SunPower and many of its rivals, but company filings indicate the connectivity backlog should improve over the remainder of 2023.

The company also expects its leasing business — where it leases instead of sells solar panels to households, and charges homeowners a monthly fee — to show continued growth after expanding 108% in the second quarter.

Due to high interest rates, households can find it more affordable to lease the panels than to buy them with financing, and so the leasing model may become an important  revenue driver for other panel installers if interest rates remain high.

Home grown production

Firms that specialise in manufacturing critical solar components have also experienced steep stock price declines this year.

Enphase Energy is a leading US manufacturer of power microinverters, needed for every solar system, but has struggled to maintain output rates due to the global shortage of semiconductors that play a vital role in measuring voltage and current. Enphase shares are down 55% this year.

Competition from other microinverter and component producers also hit Enphase’s earnings this year, but the company is expected to benefit from its plans to boost US manufacturing capacity and from improved availability of semiconductors from 2024 onwards, according to industry analysts.

Wall Street trackers are also upbeat on the outlook for First Solar, which is one the few solar sector companies to have had share prices gains this year.

First Solar has the biggest solar manufacturing facility in the US, and produces proprietary thin-film photovoltaic (PV) panels that require less semiconductor material, less water and less energy than rival production methods, according to the company.

The company has plans to expand manufacturing capacity in Ohio and Alabama, which should help the firm benefit from tax breaks and subsidies available in the Inflation Reduction Act that aims to support US-based manufacturing in the renewable energy arena.

First Solar is also developing the next generation of its thin-film panels, which stock analysts at Roth MKM say may result in greater energy efficiency and increased pricing power for the company.

Basket case

Investors in the Invesco Solar ETF have also had disappointing returns so far in 2023. The fund, which contains a basket of firms exposed to the global solar industry, is down about 29%.

If the fund closes out the year in the red, 2023 would mark the third consecutive year of losses for its investors. However, historical returns suggest that after such a long run in the red investors may be due strong returns next year.

Since the ETF was launched in 2008, the fund has had two three-year stretches of negative returns (2010-12 and 2014-16). But each of those downbeat runs were followed by steep positive returns the following year, with the ETF gaining 125% in 2013 and 52% in 2017.

If 2024 follows that pattern, investors could be in store for double-digit gains, especially if US interest rates start to come down and overall support for the energy transition continues to grow.

Reuters