The Solar Paradox: Production Up, Stocks Down

Data
from
the
thinktank
Ember
reveals
that
last
year
22%
of
the
EU’s
electricity
was
generated
by
solar
panels
and
wind
turbines,
compared
with
20%
from
natural
gas.
“Europe
has
avoided
the
worst
of
the
energy
crisis,”
says
Dave
Jones,
head
of
data
at
Ember.
“The
shocks
of
2022
caused
only
a
small
increase
in
coal
power
and
at
the
same
time
a
huge
surge
in
support
for
renewables.”

Hard
Times
for
Solar
Producers

According
to
BNEF
estimates,
global
demand
for
solar
energy
is
expected
to
reach
a
record
392
GW
in
2023,
an
increase
of
more
than
55%
on
2022,
but
there
are
some
problems
facing
solar
energy
producers.

“The
biggest
one
is
overcapacity,
as
supply
is
more
than
enough
for
current
demand,”
explains
Fabrizio
Arusa,
senior
relationship
manager
and
ETF
specialist
at
Invesco.
“Solar
modules
are
currently
selling
at
historic
lows
of
16
cents
per
watt,
with
forecasts
that
they
could
fall
even
further
by
the
end
of
the
year.
This
is
weighing
on
margins,
although
it
is
a
boon
for
the
solar
industry.”
The
cost
of
photovoltaic
panels
has
indeed
fallen
by
90%
in
the
last
decade,
which
makes
solar
energy
viable
today,
but
has
consequences
for
the
balance
sheets
of
manufacturing
companies.

“Solar
companies
have
been
negatively
impacted
by
a
number
of
factors,
including
rising
material
costs,
delays
in
permitting,
high
interest
rates
and
political
uncertainty
in
key
markets,”
says
Madeline
Ruid,
research
analyst
at
Global
X
ETFs.
“In
particular,
high
prices
of
polysilicon
[or
crystalline
silicon],
due
to
increased
demand
and
supply
inelasticity,
have
led
to
higher
costs
throughout
the
solar
energy
value
chain.
This
has
led
to
significant
project
delays
and
a
weakening
of
demand.”

But
US
companies,
among
the
most
important,
did
not
face
the
gas
crisis
experienced
in
Europe.
“The
recent
slump
in
solar
energy
is
mainly
due
to
the
disappointing
performance
of
US
producers,
victims
of
higher
interest
rates
and
low
energy
costs,”
says
Fabio
Massellani,
sales
associate
Italy
at
HANetf.
“This
is
evident
if
we
look
at
the
quarterly
earnings
reports
of
industry
leaders
such
as
Enphase
(ENPH),
according
to
which
US
demand
for
new
residential
solar
installations
was
weaker
than
expected.
This
created
excess
inventory
and
slowed
revenue
growth.”

Homeowners,
who
are
the
end
customers
of
companies
such
as
Enphase,
First
Solar
(FSLR)
and
Sunpower
(SPWR),
therefore
face
higher
financing
costs
and
low
grid
energy
prices,
which
together
reduce
their
incentive
to
become
energy
self-sufficient.

“High
interest
rates
hurt
consumer
sentiment
and
change
the
convenience
calculations
for
those
considering
solar
energy,”
Invesco’s
Arusa
continues.
“Utility-scale
solar
power
seems
to
have
a
leg
up
(and
is
an
important
driver
for
overall
demand),
so
larger
players
may
hold
up
a
little
better.”

A
Necessary
Correction

The
sector,
however,
still
has
ample
room
for
growth
in
the
years
to
come.
“We
expect
that
some
of
the
recent
headwinds
will
begin
to
ease
in
the
coming
quarters
due
to
improved
polysilicon
cost
dynamics
and
ongoing
policy
efforts
to
reduce
licensing
hurdles
and
support
clean
technology
growth,”
says
Madeline
Ruid.
“In
particular,
polysilicon
prices
have
gradually
declined
over
the
past
six
months
due
to
increased
production
capacity,
and
solar
cell
and
panel
manufacturers
should
be
able
to
improve
margins
and
stabilise
prices;
this,
in
our
view,
may
lead
to
a
recovery
in
demand
even
in
the
short
term.
In
fact,
the
latest
quarterly
reports
have
revealed
that
solar
power
projects
that
were
previously
delayed
are
picking
up
again
now
that
costs
have
improved.”

For
HANetf’s
Massellani,
the
decline
in
valuations
is
even
a
positive
factor.
“We
are
happy
to
see
a
slowdown
in
the
sector
in
the
short
term.
So-called
animal
spirits
have
helped
to
drive
up
the
prices
of
clean
energy
stocks,
at
all
stages
of
the
value
chain,
particularly
in
utilities
and
specialised
component
manufacturers.”

“But
it
is
in
the
long
term
where
the
really
exciting
aspect
of
this
sector
lies
and
that
is
why
we
welcome
a
drop
in
share
prices
today,”
he
adds.
“According
to
the
US
Department
of
Energy’s
projections,
solar
is
set
to
become
the
largest
contributor
to
US
electricity
generation,
with
40%
of
capacity
by
2035.
In
fact,
one
of
the
risks
was
high
valuations
and
expensive
multiples.
But,
as
mentioned,
this
is
coming
down
sooner
rather
than
later.”

Invesco’s
Fabrizio
Arusa
agrees.
“From
a
longer-term
perspective,
we
continue
to
believe
that
the
energy
transition
is
a
key
issue
and
that
the
increasing
damage
caused
by
climate
change
should
play
a
role
in
driving
demand.

“We
believe
that
this
is
more
of
a
short-term
transition
for
the
industry
and
that,
while
it
is
causing
stress
at
the
micro
level,
it
could
prove
beneficial
for
the
growth
of
the
industry
in
the
longer
term
through
increased
capacity
and
efficiency,
even
if
destocking
and
margin
pressure
are
negative
in
the
short
term.”

Opportunities
And
Risks

As
with
all

thematic
strategies,
investors
need
to
carefully
assess
the
dynamics
and
risks
of
their
chosen
theme,
as
well
as
the
time
horizon
available
to
them.

In
the
case
of
solar
energy,
then,
it
is
not
a
huge
industry
with
hundreds
of
names,
but
30-40
listed
companies
operating
as
subsystem
builders,
aggregators
and
installers
for
both
residential
and
utility-scale
photovoltaic
projects.

“The
projected
growth
rates
for
companies
active
in
the
industry
are
very
attractive
from
an
economic
point
of
view,”
says
Massellani.

“Both
revenues
and
EPS
are
expected
to
rise
between
10
and
20%
per
year
across
the
industry.
Smaller
innovative
players
can
record
even
faster
rates.
This
growth
is
stimulated
both
by
new
installed
capacity
at
the
utility
level
and
by
residential
solar.
Another
opportunity
for
investors
is
offered
by
the
favourable
regulatory
and
policy
environment,
which
is
promoting
solar
in
developed
markets
both
as
a
solution
to
decarbonise
power
generation
and
as
a
way
to
achieve
energy
independence
from
oil-exporting
countries.”

Global
X
ETFs’
Madeline
Ruid
adds
that
the
US
market
represents
a
significant
opportunity
for
solar
companies,
especially
after
the

Inflation
Reduction
Act
(IRA).

“During
the
first
year
of
the
IRA’s
enactment
in
August
2022,
solar
companies
announced
the
construction
or
expansion
of
more
than
50
production
facilities
in
the
US.
Altogether,
these
plants
could
add
more
than
70GW
of
solar
power
equipment
production,
which
could
be
critical
to
meet
the
increased
demand
for
solar
projects.
Canadian
Solar
(CSIQ),
Enphase,
First
Solar,
Meyer
Burger
Technology
(MBTN),
Jinko
Solar
(688223)
and
JA
Solar
(002459)
are
among
the
companies
that
have
made
announcements.”

Among
the
risks
investors
should
be
aware
of,
there
are
certainly
trade
restrictions
that
could
negatively
affect
the
sector,
as
production
is
still
rather
scattered
around
the
world,
with
Chinese
manufacturers
playing
an
important
role
in
the
value
chain.
Prolonged
low
fossil
fuel
prices,
then,
could
slow
down
public
adoption
of
solar.

“One
thing
that
I
think
should
be
kept
in
mind
is
exactly
the
type
of
companies
investors
should
expose
their
portfolios
to
in
order
to
maximize
returns,”
Massellani
further
explains.
“The
real
growth
in
solar
does
not
come
from
additional
gigawatts
of
energy
sold
to
the
public,
but
from
replacing
existing
generation
capacity.
The
real
point
is
to
invest
in
hardware
value
chain
companies
and
only
in
a
few
very
select
utilities
with
favourable
characteristics.”

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