This Week in Solar

Earnings season has finally begun for the solar industry, and so far the numbers look encouraging. In my review this week I'll cover SunPower's (SPWR -2.17%) second-quarter numbers and what they mean for the rest of the industry, the potential sale of a leasing leader, and a solar battle brewing in the Arizona desert.

Let the earnings begin
SunPower reported earnings after the market closed on Wednesday, and the numbers couldn't have been much better. The company generated a GAAP gross margin of 18.7% and earnings per share of $0.15, both well ahead of the company's own estimates. On a non-GAAP basis, gross margin was 19.5% and the company made a profit of $0.45 per share, crushing Wall Street's $0.11 estimate.  

The stock dropped in trading Thursday, but I don't think that's bad long-term and actually provides investors a nice entry point. But what can we decipher about the rest of the industry from SunPower's report?

SunPower's North American demand was led by the systems business, which will be similar at First Solar (FSLR -2.09%). But First Solar's thin-film product is so much different from SunPower's that it's difficult to draw conclusions for First Solar from SunPower's earnings. What we can take is that management was bullish on the systems business everywhere from Japan to the Middle East to Chile, and First Solar would benefit from utility-scale solar in each country. Look for momentum in bookings for First Solar, something the company desperately needs after a year of falling backlog.  

We can draw a lot more from SunPower's success in Japan, which is the hottest market in solar this year. The Asia-Pacific region was 16% of SunPower's revenue in Q2, generating a 16.6% gross margin, and accounted for 28% of shipments. That's an increase of 30% sequentially and should be similar for other manufacturers. Canadian Solar (CSIQ -3.90%) was one of the first to benefit financially in the first quarter, and I'd expect that trend to continue. Yingli Green Energy (NYSE: YGE) and Trina Solar have been slower to get into the Japanese market, but I expect them to have gained momentum in the second quarter, which should help both sales and margins.

SunPower's leasing business was also strong, constrained more by financing than the ability to sell to customers. That's a good sign for SolarCity (SCTY.DL), which is growing more quickly in leasing than SunPower is and also has more financing lined up. I expect the company to have at least hit its own installation targets if not beat them, given growing demand across the country.

Is Sunrun for sale?
Residential solar leasing company Sunrun was in the news this week after Power Intelligence reported that Goldman Sachs has been hired to do a "strategic evaluation" of the company. The company's spokesperson quickly shot down sale rumors, but given SolarCity's success as a public company and the growing appetite for solar, it wouldn't be surprising to see the company either go public or find a strategic buyer.

There's a big difference between Sunrun and SolarCity or SunPower, though. Sunrun doesn't make panels like SunPower does and doesn't have boots on the ground installing solar like SolarCity does. It's more of a middleman, providing financing and software installers use to bid for solar projects. It is also dependent on leasing and net metering, which is more risky than a company like SunPower, with multiple downstream channels, or SolarCity, which can build and sell systems to homeowners or commercial developers.

With that said, it would be an interesting company to see hit the public markets, because the capital-light business model should allow it to grow faster than SunPower or SolarCity. That's the upside, and investors would love to have more exposure to the rapidly growing leasing market. For now these are just rumors, but I wouldn't be surprised to see the company go public some time in the next year or two.

Does Arizona love or hate solar?
The battle over the future of net metering is taking place in Arizona, and it's a brutal fight right now. Arizona's monopoly utility Arizona Public Service has proposed putting either a monthly fee on owners of solar for access to the grid or a lower rate than net metering for solar, both of which would reduce the return on installing solar.

On the surface, it seems like a reasonable request, because solar owners have access to the grid when they're not producing energy and pay very little to the utility because their net use is low. APS also argues that solar pushes the cost of the grid (transmission and distribution costs) onto those without solar.

What APS doesn't talk about is the benefits of solar. The use of solar offsets power from other energy sources, providing cleaner energy, and also reduces stress on the grid because it's used locally. From a financial perspective, solar power is also produced when grid demand is at its highest in Arizona. When air conditioners are blasting, it's most likely sunny, and when it's sunny, solar is producing power. If it weren't for solar power, APS would have to buy that power from a peak producer, which can be four or five times the cost of the average power bill, so solar is much lower cost than the peak power it is often replacing.

It's also hotly debated whether more solar actually raises electricity costs overall. Germany recently hit a new solar peak of 23.9 GW, which is about 40% of the country's power needs, and there hasn't been chaos or spiking prices as a result. Arizona is only a fraction of that exposure to solar, so the stress on the system is far less.

APS appears to be losing the battle against net metering, and that's good for SunPower, SolarCity, Sunrun, and others, but this is the first of many battles to come. The industry needs to learn how to live with solar and profit from it, rather than fighting solar's inevitable adoption. That'll take time and will often take different shapes, given the localized nature of both utilities and solar power's adoption rate. There will no doubt be more to come about this topic.