Will Rooftop Solar Stand the Test of Time?

SolarCity and SunPower should be worried about the cracks that are starting to appear in net-metering programs.

Jan 13, 2014 at 11:15AM

Rooftop solar is a great deal. It allows homeowners to make their own electricity, cut their utility bill, and sell back any extra electricity to the grid through net-metering programs. Now it looks like rooftop solar is becoming a victim of its own success. The Hawaiian Electrical Company has stopped connecting new rooftop-solar systems due to grid instability issues.

The problem with rooftop solar and net metering
In Hawaii, 10% of households have rooftop-solar systems, and the island's grid is starting to become unstable. The utility has little incentive to try to resolve the issue. More rooftop-solar systems mean fewer customers who buy electricity.

In other states like California there is a hard limit on the size of net-metering programs. According to current legislation, no more than 5.3 gigawatts (GW) of systems can be enrolled in net-metering programs, or 5% of total generation capacity. Right now the state only has 2 GW of rooftop systems, but it will only take a few years to come close to the limit.

Changes coming to net-metering programs
Utilities are up in arms because net-metering programs shift costs from households with rooftop solar to households without rooftop solar. Proposals are being written up that would decrease net-metering rates so that households with rooftop systems pay part of the grid costs. The danger is that utilities may push net-metering rates down excessively, cutting solar's return on investment and stopping the residential solar boom all together.

Who is at risk?
Less attractive net-metering terms and the hard limits to net-metering programs are threats to SunPower (NASDAQ:SPWR). The company specializes in high- efficiency panels designed for rooftops with limited real estate. Its residential energy solutions division signed 1,375 North American distributed generation leases in the third quarter of 2013, booking $60 million in new net nominal contract payments. In Japan's distributed-generation market, SunPower has also seen a good deal of success, with sales up 130% between Q3 2013 and Q3 2012.

The good news is that SunPower is active in the utility market. It just signed a deal for a 70 megawatt (MW) merchant plant in Chile and a more than 90 MW deal in Japan.

SolarCity (NASDAQ:SCTY) is right in the middle of the distributed-generation market and the net-metering controversy. In 2012 it had 157 MW of installed systems, and by 2014 it hopes to grow that to at least 475 MW. SolarCity has been growing by leaps and bounds. Between Q4 2012 and Q3 2013 its sales have grown from $25.3 million to $48.6 million.

All of SolarCity's growth does not hide the fact that the company is a focused play on the distributed-generation market. Falling net-metering rates would make SolarCity's systems less attractive and hurt its sales. The company has discussed replacing net-metering programs with large batteries, but this would add an extra cost and decrease rooftop solar's ROI.

Companies with less exposure to net metering programs
First Solar (NASDAQ:FSLR) is a big player in the utility market, shielding the company from many of the problems in the distributed-generation market. It recently announced that it will invest $100 million in Japan to develop solar plants in the nation. It has a good history with U.S. utilities and is expected to finalize a deal to sell the 250 MW Silver State South Project when it is complete in 2016. 

Thanks to its profit margin of 12.2% and earnings before interest and taxes margin of 13.6%, First Solar is one of the few profitable solar manufacturers. While its panels are lower efficiency than SunPower's, First Solar's history in the utility market and healthy profit margin are compensating factors.

Yingli Green Energy (NYSE:YGE) is not as profitable as First Solar, but it is turning its business around thanks in part to strong utility sales. Its profit margin of -25.1% and gross margin of 2.9% hide the fact that over the past couple of quarters its gross margin has recovered to 13.7%.

In its U.S. division, utility sales made up around 40% of total sales in 2012, but in Q3 2013 they were around 65% of all sales. Even though China is the company's main market, the U.S. is still important with an estimated 21% of its 2013 shipments. In addition to its U.S. utility sales, Yingli has been drumming up new utility deals in China and South Africa.

Final thoughts
Net-metering programs are limited due to dilapidated grid technology. This is a big issue for SolarCity as less attractive net-metering programs give its solar systems a lower ROI. SunPower is also at risk as distributed generation is a big part of the company. More utility-focused companies like First Solar and Yingli have less to worry about, as utility-scale facilities do not use net-metering programs.

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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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