Industry Overview and Competitive Landscape
Extend tax credits for solar for five years
The U.S. lawmakers agreed to extend tax credits for solar for another five years – a surprising move. The 30% solar tax credit that was set to expire at the end of 2016 has been extended through 2021 before tapering to 10% in 2022. This extension, we believe, would serve as a driver for continued and steady growth of the solar industry and positively impact deployment of solar, amongst other renewable technologies in the U.S.
We believe this extension would accelerate shift away from fossil fuels in the U.S. The continued growth of the industry would enable solar to become cheaper than traditional technologies in most markets. At present, solar has already reached grid parity is certain states where offset rates are high. The continued demand of solar products would drive further technological advancements, operational efficiencies and continued standardization across the industry for lower soft costs – all suggest lower deployment costs – solar could be cheaper than fossil fuel in the very near future.
The tax credit aggregating to ~$25 billion across the renewable industry would drive investments of ~$80 billion of the next 5-years. We base this estimate on tax equity representing ~30% of the capital stack. Assuming an equal distribution between solar and wind, the stimulus would add more solar power in the U.S. in the next five years than the installed based through the end of this year.
The following chart depicts the U.S. photovoltaic annual installed base for years 2011 to 2015i across all segments of the industry. Despite challenges of product pricing, cost of capital, CVD & ADT, amongst other things, the solar industry has realized a respectable YOY growth with a current total installed base of over 22.7 GWp.
The estimates for solar installations in 2016 have ranged between 12 and 15 GW after factoring in volumes pulled forward from 2017 due to ITC expiration. The industry was expected to realize a sizable pull back in 2017 installations. We believe that the tax credit extension would ease the pace of installations in 2016 to about 9 GW and normalize the YOY of installation rate through the tax credit extension period to approximately this annual rate.
With ITC expiring in 2016, we estimated that 2017 would have been a ~6 GW market. The ITC extension adds to this pace by an additional ~4 GWii per annum for an annual average installation rate of ~10 GW per annum.
The above forecast, we believe is more attainable as it alleviates the pressures on the entire supply chain from product supply, financing, installations and utility inspections, amongst other things. The revised annual add-on capacities would enable industry participants to further their efforts in operational efficiencies, rationalizing supply versus demand, pare down debt and build sustainable enterprises.
Are All Solar Segments Equal Beneficiaries?
While all segments would benefit from the ITC extension, the utility segment, we believe, would be the largest gainer in the industry as the large scale developers were responsible for ~39% of the installations in the U.S. between 2004 and 2011iii. ITC expiration would have impacted this segment the most as the economics tend to be exacting.
On the other hand, we believe that the residential segment would have been least impacted without tax credits. We had expected with ITC expiring, ownership and loans would have fueled growth. To date, the primary drivers of growth in this segment were the innovations in financings (i.e. leases and power purchase agreements). Notwithstanding, this segment has been fraught with high costs. Associated with growth are costs: higher growth = higher costs. For companies focused on this segment, they are challenged to reduce their operating costs so that, they can reach cash flow breakeven before profitability. Amongst various things, the TPO participants have to slow down their growth rates to reach their objective. SolarCity recently announced that they would be cutting their growth rate by 50% and increase their lease rates to reach cash flow breakeven by the end of 2016. Continued growth in the residential segment is not disappearing.
The various factors driving our opinion of growth in the residential segment are the continued reductions in cost of capital based on innovations in financings, large untapped addressable market, continued lowering of total installed costs and our assumption that retail electricity prices will continue to rise over the next few years.
We Believe Electricity Prices Will Continue to Rise
As depicted in the chart below, residential electricity prices in the US has consistently increased every year since 2002iv on a national average price per kilowatt hour basis.
Today, solar is competitive in more than 14 states without any additional state subsidies. Solar levelized cost of energy (LCOE) in these states ranges between 10-15c/kWh and compared to retail electricity price of 12-28c/kWh. Before the end of the tax credits, using our cost estimates, we believe, nearly all of the 50 states would be at grid parity in the US.v
Excluding incentives, utility electricity prices are the main form of competition for residential/commercial solar projects. We believe the top 10-15 states provide the most compelling possibilities for cost parity, particularly as fossil fuel based generation has been in relative oversupply and this environment begins to shift. Tax incentives drive this disparity further.
Lower Financing Costs
With the tax credit extension, leasing and PPAs would continue to be the primary funding vehicles in the residential segment. With greater acceptance of consumer credit by institutional investors as evidenced by the multiple securitizations consummated, we believe that the cost of capital would be lowered. Based on our estimate every 100 bps or 1% reduction in financing costs equates to 1c/kWh reduction in LCOE.
Lower financing costs that would in part, drive lower LCOE, coupled with the increasing retail electricity costs creates a solid business case for homeowners to adopt solar and realize greater savings. We believe the residential segment would continue to maintain an above industry YOY growth for the foreseeable future. Profitability of participants in this segment is entirely dependent on such companies to achieve efficiencies, realize cost reductions and leverage technology and other means to increase consumer reach at lower costs.
An Environment for More Securitizationsvi
A decline in equity prices for solar companies may chart a course for more securitizations. In a report published by Moody’s Investors Service, analysts predicted that both the volume and number of bonds packaging solar assets in the U.S. would grow in 2016.
The primary driver behind this growth, we believe would be the high cost of yieldco financing. Yieldcos are publicly listed entities sponsored by various solar companies to fund projects developed by them. Investors acquire these shares as they generate dividends from cash flows realized from solar projects. Developers looked to yieldcos as a source of low cost funds to finance projects. However, throughout 2015, the yeildco share prices have plummeted making them an unattractive source of capital.
With depressed stock prices for listed solar companies and yieldcos – asset securitizations could see an uptick in preference as a funding source. To date, there have been ~$230 million of asset securitizations consummated using solar assets (i.e. leases and PPAs).
Securitization of Solar Loans
Loans finance ~20% of all residential systems installed in the U.S. Despite the fact that tax credit extension impacts this financing source the most, we believe, loans will maintain or increase their market share of funding sources. Loans offer unique attributes relative to leases and PPA. There are no built-in escalation clauses, payments remain fixed for the tenor of the loans (10 to 30 years), homeowners are sole beneficiaries of all incentives – thereby providing a true hedge against inflationary trends in electricity prices. Over time, the savings to home owners increase with principal pay downs and free ownership for years beyond loan amortization. This asset class offers simplicity for securitizations provided that credit underwriting, documentation, amongst other things, are standardized.
Securitization of solar loans could serve to further reduce capital costs. The lower financing costs would make this financing source an attractive alternative to leases and PPAs.
Given the continued growth in the solar industry, the need for additional investment capital and the drive for low cost financing, solar asset securitizations may serve the need. We believe the TPO and the consumer lending participants could tap into this segment of the capital markets and further fund growth in the residential segment.
We continue to make investments at Centrosolar as we grow and remain committed to our presence in the industry.
On January 1, 2016, we launched the redesign of our new corporate logo and our website www.centrosolar.com. It is part of a rebranding effort that is currently underway. As we continue to deliver profitability, a superior and differentiated product and services offering, exceptional customer service and a relentless commitment to all our stakeholders, we are confident of achieving significant growth in 2016 and beyond.
Investment in Products – our product line up today includes an enviable portfolio of mono-crystalline and multi-crystalline products in both 60 and 72 cell format. These products are specifically tranched for all solar segments. Each product offering provides unique attributes to our customers from – power density, aesthetics, technology and price.
Our product development roadmap through end of the current year is even more exciting. Our products are ARRA, BAA and TAA compliant as well. The table below summarizes our current offerings.
Investment in Services
Centrosolar’s Eco System is the industry only fully integrated offering that encompasses the entire value chain for the residential market. We launched this initiative in early 2015 and today, we are embedding into the offering more services and markets. This Eco System offers our partners all the requisite tools to continue growing their businesses. Our proprietary portals enabling system design and consumer quotes are now being integrated into Salesforce (CRM and project management purposes) and SAP (for order management and fulfillment).
We are continuing to add more partners to our offering so that, a greater share of the residential market can be better serviced. The Eco System offers unique attributes for all members of the solar value chain, namely,
- Continued focus on core competencies while outsourcing all other functions
- National scope of the offering enables new market entry
- Growth tools such as financing and qualified leads
- Integrated technology platform promotes operational ease and expediency
- User friendly interface enables rapid training and field utilization
- Unique opportunity to leverage excess capacity e.g. sales, engineering, inspection, installation and O&M services – a opportunity to amortize fixed cost across a larger revenue base
- No investment to grow your business
- Entire offering is managed by an OEM participant – Centrosolar
We look forward to your continued support and feedback so that, we may analyze our offerings and continually make further investments to better address your respective needs.
i Source: GTM Research/SEIA U.S. Solar Market Insight® Report
ii Centrosolar estimate – ITC driven new investment of $37.5 billion at an average installed cost of ~$1.90/watt
iii Source: GTM Research
iv Source: EIA
v Calculations do not account for any subsidies current or future. Electricity Prices are estimated for residential consumers
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