The solar industry seems to be constantly changing, and this week was no different. Reports of fast cost reductions for buying solar panels and solar energy dominated last week's news cycle. Here are a couple of things every investor should know about the week.
A new solar record at eye-popping prices
The amazing number of the week is 2.4 cents. An auction in Abu Dhabi has resulted in an electricity bid for 2.4 cents per kWh from JinkoSolar (NYSE:JKS) and Japanese firm Marubeni.
It's hard to explain how incredible that bid is, but to put it into perspective, it's about one-fifth the cost of electricity for the average residential customer in the U.S.
I'm not sure if a developer can make money selling solar electricity for 2.4 cents per kWh, but the fact that they're going to try is a sign of how fast this industry is reducing costs and winning in countries that have traditionally been heavily focused on oil.
SolarCity/Tesla deal facing challenges
Tesla Motors (NASDAQ:TSLA) revealed this week that it's facing at least four lawsuits attempting to block the acquisition of SolarCity (NASDAQ:SCTY.DL). What's notable is that most of the lawsuits are coming from the Tesla side, arguing that the deal isn't in the auto company's best interest.
The concern here probably isn't for Tesla Motors, but for SolarCity's future if the acquisition flounders in the courts. SolarCity is in need of continual financing from investors and rounds of financing have already been delayed because of the deal. If that continues the company will have to offer investors higher rates to accept more risk -- something it's already starting to do -- and lose money on each installation. Delays are bad for SolarCity and if they continue the company could be in real trouble.
Solar panel prices are plunging
Reports out of the Solar Power International conference and industry sources say that solar panel prices have dropped to $0.40 per watt on the spot market Friday. That's down from $0.59 per watt in Q2 2016, according to GTM Research and SEIA, so there could be a terrible fallout ahead. Manufacturers are trying to clear inventory that's piling up and with projected weak demand in 2017 the solar industry could be in for a lot of hardship ahead.
Consider that Canadian Solar (NASDAQ:CSIQ), which is one of the lowest cost suppliers in the world, said its cost per watt was $0.39 in Q2 2016. And with just $40.4 million in net income on 1,290 MW of shipments last quarter it only had a net margin of about $0.03. If panel prices fell $0.19 per watt in the matter of a few months we could see losses on the horizon.
Even seemingly profitable solar panel manufacturers like Trina Solar (NYSE:TSL) and JinkoSolar will probably swing to losses in the next year. And if they do it'll be a battle to see which can simply survive. Cutting back production in a business that's capital intensive isn't really an option, so they have to hope to make back cash costs on each panel. The last time the industry was in that position was in 2012 and that didn't end well. The industry could be heading back there again.
The solar-coaster is far from over and investors will have to stay on their toes in the next year to make it to a bright future for the industry.