by Shawn Kravetz, Esplanade Capital
What happened to solar industry fundamentals in 2016?
- Global demand shattered records growing ~40% to ~80 GW
- The U.S. grew ~75% to ~14 GW with solar accounting for 40-50% of new generation capacity in 2016 (vs. close to 0% in 2004 when Esplanade started investing in solar.)
- China installed 34 GW, a massive but volatile figure with record H1 installations giving way to an air pocket in the third quarter followed by a fourth quarter rebound
- Solar now competes against natural gas, coal, and other wholesale electricity sources not just in the US but throughout the world
- Bloomberg New Energy Finance estimates that utility scale solar produceselectricity at ~$45/MWh with no fuel price risk versus coal at $50-$90/MWh
- Major global corporations such as Apple, Google, Amazon, and Wynn Resorts are shifting almost entirely to renewable sources to power their energy-intensive businesses
Why did solar indices get halved in light of record demand?
- The extension of the US solar investment tax credit late in 2015 ignited a sharp but short-livedDecember rally thereby starting 2016 at elevated levels
- In April 2016, former industry darling SunEdison filed for bankruptcy casting a cloud over the sector including buyers of solar project assets
- In June 2016, Tesla bid to acquire sister-company SolarCity in what many, including Esplanade, believed a bailout of another financially stressed former industry bellwether
- Record demand catalyzed outsized midstream capacity expansions ensuring oversupply and supply chain price collapse in H2 16 as Chinese demand waned
- Trump’s victory further torpedoed the sector at the end of 2016 as his campaign pronouncements against renewable energy injected further uncertainty into investors sentiment
- Various policy and macroeconomic factors – most notably rising interest rates – also nipped at benchmark performance as well
What do we foresee in 2017 (big picture)?
- Our intelligence suggests that Trump very likely ignores renewables (at least at theoutset) and certainly has not aired any plans to dismantle an industry that employs more than coal
- While Trump presents medium-term risks to the status quo, we do not expect any meaningful changes in the near-term
- In fact, the new administration has already publicly confirmed their preference to maintain current federal renewable policies
- Globally, we expect front-end loaded demand in 2017 with perhaps the first annual decline in Esplanade’s history due to:
- Chinese demand potentially exceeding record H1 2016 levels but likely to collapse after the June 30, 2017 subsidy step-down
- US demand likely declining as utility scale procurement cycle resets after record 2016 installations
- India emerging as the newest mega-market but only partially offsetting China and US headwinds
- Japan’s gradual decline mitigated by emerging market growth
- Like demand, we expect value chain pricing to remain relatively stable (and possibly up) in H1 2017 but face pressure in H2 as China demand wanes
- Continued escalation in interest rates could factor slightly on 2017, but we estimate that current rates neither create nor destroy demand given that most solar debt is benchmarked to LIBOR not Treasuries
- LIBOR has already increased 100-150 basis points since January 2014 while solar installations continued to break records in 2014-16 despite higher borrowing costs.
Shawn Kravetz is President and Chief Investment Officer of Esplanade Capital LLC, an investment management company he founded in 1999. The firm manages private investment partnerships including Esplanade Capital Electron Partners LP, launched in 2009, which intends to be the world’s premier private investment fund dedicated to public securities in solar energy and those sectors impacted by its emergence..
