Let’s keep talking about what really matters with an ascendant President Trump for investors. In particular, energy generation.
Last week, the topic was coal. Restoring coal to its former glory is a central tenet of Trump’s energy and job proposals to date.
When you get down to brass tacks, we’re looking at clear advantages for almost all fossil fuels, yet little long-term benefit for coal from what Trump can do.
Barring direct subsidies, there is simply too much (nearly) on-demand natural gas production capacity that is sitting idle right now to change the fate of thermal coal.
Without Trump setting national price controls for coal, and pumping federal dollars directly into coal company coffers, it cannot be the cheapest fuel in the U.S. for the foreseeable future.
In spite of a unified legislature on the Federal level, even a strong-willed “leader of the free world” cannot overcome global market forces. It simply is what it is.
On the other side of the coin, we’re going to see prospects significantly dim for, and some direct harm to, renewables.
As talked about last week, we can assume pending environmental controls are gone. CPP for sure, and the Paris climate agreement can be punted as long as anyone in power wants, because it is fundamentally toothless.
If people want to pay more than market cost for the same product, that’s up to them. We’ve lived through that in recent years, with tax credits going to solar, wind, and other renewable investments.
However, I want to dive to the base. Just like with natural gas, if the base cost of unsubsidized renewable energy can compete on cost, renewables will continue to thrive.
So let’s look at what will happen in the solar sector, and what will define the winners and losers as the sector goes through the upcoming policy reversals.
The Stale Subsidy System
The fact that subsidies have been propping up renewables for years should be pretty well known. Roughly 45%, or $7.3 billion, in energy subsidies go to renewables, more than twice what goes to fossil fuels.
However, that has started to change. A number of states are stopping their own subsidies, while the current Federal system can be dismantled.
Under current law, the subsidies will taper no matter what. Last December, on the last day Congress was in session, the 30% Investment Tax Credit for solar was extended for three years. It would then ramp down in increments through 2021, while staying permanently at 10% from 2022 onward.
Even with this money, many solar installation companies simply cannot exist as they are. SunEdison is bankrupt, SolarCity is in the same boat, but will be propped up by Elon Musk, who is more of a genius at selling shares than anything else.
We’re in an environment where borrowing money has never been cheaper, and equities are at all-time highs across the board. Add in massive subsidies, and these companies still can’t keep themselves solvent.
The unified Republican Congress will, at the very least, let these tax credits scale down and phase out. More likely, we’ll see a revised law with a quicker timetable to ramp down.
For the companies that are struggling now, it could very well be a death blow, but the sector needs leaner, meaner companies anyway.
The simple reality is that the sector is stale and highly leveraged, it is time to cut the fat, and the catalyst will be the next bill addressing subsidies that comes before Congress.
States and Utilities
While many companies in the sector are struggling, and Federal funds are imperiled, there is still a whole lot going for renewables, and solar in particular.
SunEdison and SolarCity are just the two biggest companies in the segment of the solar sector that isn’t doing well — residential installation.
It costs a ton up front to install the panels, while the payoff is stretched out, it relies on residential subsidies that are increasingly disappearing, and it disrupts the shared cost structure of electrical grids that people still must connect to.
However, 28 states have mandates requiring a certain amount of their electricity come from renewable or carbon-free sources.
This is creating a massive opportunity for utilities to step in, scale up solar installations to drive down costs, and capture the mandated renewable energy market share in states.
Just this year in Nevada, while the state moved to end subsidies for residential installations, bidding for future solar energy dramatically fell to the lowest cost amongst all power sources in the U.S.
Berkshire Hathaway’s NV Energy secured a 100 megawatt First Solar Inc. project that offers power at just $0.0387 per kilowatt-hour.
Just last year, NV energy was paying $0.1377 cents per kilowatt-hour, marking a nearly 72% decrease in cost.
As Bloomberg noted at the time, “The rapid decline is a sign that solar energy is becoming a mainstream technology with fewer perceived risks. It’s also related to the 70 percent plunge in the price of panels since 2010.”
This wasn’t an outlier. In Texas, Austin Energy opened up bidding to provide 600 megawatts (MW) of solar power.
This sparked an unprecedented bidding frenzy. Khalil Shalabi, Austin Energy’s vice president of resource planning, released data showing that 7,976 MW worth of solar projects were proposed to fulfill the demand.
1,295 MW of those solar project bids came in well below $0.04 per kilowatt-hour.
We’re seeing similarly low costs worldwide, in areas with abundant sunshine. Solar can truly stand on its own in the international market right now, if properly utilized.
The Cost and the Conclusion
The question the solar sector faces is if it can compete on a level playing field, and the answer is yes and no.
Take a look at this chart from Lazard, a large, well-respected financial advisory and asset management firm, to see why.
We’ve reached the point where unsubsidized solar energy on a utility scale has sharply diverged from residential installations, and can beat fossil fuels on cost.
What does this mean for investors? First, it means that SunEdison, SolarCity, and other residential installation companies are not going to see a meaningful bounce after being pummeled in 2016.
In fact, they’re going to need to destroy capital, restructure, and emerge as much smaller companies with much smaller market shares and growth rates.
It means that utilities that can provide a blend of ultra-cheap solar while keeping peak and night power costs to a minimum will outperform their peers and maintain or improve cash flow even as interest rates gradually rise.
And finally it means that companies that create the technologies that drive down solar cell costs and can be deployed on massive scales will soon be inking massive deals with the companies that are now contractually obligated to provide the cheapest electricity in the nation.
All signs point to President Trump and his policies causing a major division within the solar sector. In the long run, it looks like it will be for the best.
The solar sector has grown exponentially. Now it is time for it to mature, drawing a clear line between the companies that can and cannot survive without being propped up by government intervention.
