U.S. residential solar production is booming and has the potential to catch up, but there’s still a long way to go.
Against a backdrop of economic uncertainty, the price of polysilicon, an essential component in the manufacture of solar panels, has been melting like snow in the sun ever since the warm weather arrived. It reached USD 7.8/kg in June, down nearly 48% since May. This fall is reflected in the final cost of panels, with prices at their lowest ever. This could breathe new life into the US residential solar market, which is certainly growing fast, but is also undergoing fundamental changes. (Bloomberg 2023)
BOOMING SOLAR MARKET
For investors interested in the energy transition, solar energy is a must. Indeed, this sector is growing faster than any other renewable energy. By 2022, installed solar power capacity will have grown by 23.1% worldwide, compared with 15.2% for wind power and 3.4% for hydro power.
THE PANEL STARS
This growth is mainly driven by the three titans: China, Europe and the United States. By the end of 2022, they alone will have installed more than 700 gigawatts (GW) of capacity, or almost 70% of the world’s solar capacity. It is interesting to note that penetration – represented by the number of watts installed per capita – varies drastically from one region to another. Where Europe has a capacity of 400 W/capita, China has almost half that at 217 W/capita. The United States is halfway there at 289 W/capita, demonstrating the New World’s potential to catch up with the Old World (IRENA, 2023).
THE UNITED STATES UNDER THE MICROSCOPE
As a reminder, there are two categories in the solar installation market: residential and commercial. The former are mainly installed on the roofs of single-family homes or residential buildings. Production is largely dedicated to household consumption, with any surplus fed back into the grid in return for a fee from electricity suppliers. Commercial installations or solar farms, on the other hand, are comparable to sunflower fields, with rows of panels that rotate according to the orientation of the sun’s rays. While a residential installation has an average production capacity of 2 to 5 kilowatts (kW), a commercial installation, like Solar Star’s in California, produces the equivalent of the consumption of 255,000 households (SunPower, 2016).
Political will, raw material costs, pricing pressure and market structure seem to be the stars aligned to counter the effects of the few clouds that lurk.
The size of their respective markets also varies enormously. By the end of 2022 in the USA, around 15 GW of residential installations were in operation, compared with over 80 GW of commercial installations. This apparent disparity is narrowing, since of the 18 GW of panels installed last year, around two-thirds were residential. (SEIA, 2023)
In view of this strong catch-up, it’s the residential segment that seems to be the most attractive, and which we’re going to focus on.
FROM EARTH TO SUN
The U.S. residential solar market is not only booming, but also has a vastly under-exploited potential. The low number of watts installed per capita is largely explained by the small number of homes equipped with solar panels. Across the United States, only 4% of the housing stock is equipped with solar panels. Of course, the figures vary greatly from state to state. After Hawaii, where 30% of homes are solar-powered, it’s California that comes out on top, with a penetration rate of almost 18%. On the other hand, in the Midwestern states, solar energy is not really catching on. That said, by 2032, the construction of more than 12 million installations is planned. (Sunrun, 2023)
THE NEM 3.0 CLOUD
California therefore has a considerable head start, thanks not only to its favorable climate, but also to the political will to develop this renewable energy. Since 2020, all new construction has been required to include solar panels.
However, since April 15, 2023, the skies over the American West have become somewhat cloudy. The cloud is called Net Energy Metering 3.0 or NEM 3.0. This program governs the amount at which energy fed into the grid by solar installations is remunerated. Since mid-April, this amount has been reduced by an average of 75%. NEM 3.0 aims to bridge the gap between periods of solar energy production – during the day – and periods of peak consumption – morning and evening. California wants to promote the installation of batteries in every home and increase the proportion of self-consumption of solar energy. (CPUC, 2022)
L’IRA OR THE RAY OF HOPE
Solar, on the other hand, can benefit from the Inflation Reduction Act, or IRA. This act, published by the US administration in August 2022, provides for measures to curb rising inflation in the United States and boost domestic renewable energy production. In the residential solar category, this translates primarily into the Solar Investment Tax Credit, which allows the owner of a solar installation commissioned as of 2022 to deduct 30% of costs on his or her tax return. This tax credit will remain in place until the end of 2032, after which it is expected to fade gradually before being phased out in 2035. (UC, 2023)
BILLS FAR FROM THE ZENITH
The price of electricity supplied by utilities continues to rise. In fact, the expected annual increase in tariffs over the next three years is in the region of 20%, above and beyond the rise in the price of a barrel of oil.
Thanks to structurally lower installation costs and rising electricity prices, those who opt for a “home” solar system continue to enjoy lower electricity bills.
RESIDENTIAL MARKET CONSTELLATION
For the investor, the configuration of the U.S. solar installation market has some interesting features. On the one hand, 55% of the market is served by thousands of small, independent solar installers, while on the other, 45% depends on four listed companies: Sunnova, Sunrun, SunPower and Tesla. The latter tend to integrate teams of installers or sign partnerships with them, thereby increasing their weight in the market. The US residential solar market is approaching a form of oligopoly, which, with its barriers to entry, protects existing players and reduces the risk of new entrants.
ALIGNING THE STARS
Looking at the U.S. residential solar market means analyzing its strong growth, but also how far it still has to go to realize its potential. Of course, the field is not limited to the installation niche. Investors interested in this strong trend can explore other adjacent sectors, such as batteries or solar panel production. Political will, the cost of raw materials, price pressure and market structure all seem to be stars in alignment that can counter the effects of the few clouds on the horizon
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Source: Allnews| 3 août 2023 | Raphaël Gilliéron, BCV
Raphaël Gilliéron, Equity manager
Raphaël Gilliéron is an equity manager. He joined BCV in 2020 as a university trainee in the Asset Management department, first in the Investment Risk & Performance teams, then in Swiss Indirect Real Estate Management. Prior to this, he completed various internships in the banking sector in Switzerland and abroad. He holds a Master of Arts in Accounting & Finance from the University of St. Gallen. He is a CFA charterholder.
BCV is a universal bank that has been present in the canton of Vaud since 1845. It is particularly active in institutional asset management in Switzerland. It offers its expertise in the form of tailor-made mandates, advisory services and investment funds covering all major asset classes for institutional and private clients.