2017 continues to be a surprisingly strong year for the solar industry, particularly in the U.S. But there are some speed bumps ahead as installers work through changing subsidies and rate structures across the country.
On Monday morning, the Solar Energy Industries Association (SEIA) and GTM Research released their Q3 2017 U.S. Solar Market Insight report (covering the second quarter) and gave a peek into what happened last quarter and what to expect over the next few years.
U.S. solar hits another record
The headline number is that U.S. solar installations rose 8% versus a year ago to 2,387 MW, or enough to power 391,000 homes. Utility solar led the way with 1,387 MW, 437 MW comprised commercial installations, and 563 MW of residential solar was installed.
The surprise overall was the rise of some new solar markets. Texas was the second-biggest solar state with 378 MW and North Carolina was No. 3 with 227 MW. No surprise that California was first at 751 MW, but it's slowing down as installers adapt to new rate structures for commercial and residential projects. The big surprise was Minnesota in the No. 4 spot, topping Arizona. Minnesota has been a big community solar market this year and shows that there are few states where solar can't be a success story.
What the report also projects is that 12.4 GW of solar installations will be completed in 2017, down 17% from a year ago. Here are some key details from the report that investors should keep in mind.
Residential solar is going through a transition
The residential solar market that has been dominated by Tesla's (NASDAQ:TSLA) SolarCity, Sunrun (NASDAQ:RUN), and Vivint Solar (NYSE:VSLR) is going through a major transition as large, old markets like California transition to new rate structures (time-of-use rates) and new growth states emerge. Installations were down 17% versus a year ago as "the industry is experiencing the impact of national installers scaling back operations." They've reduced sales efforts in some states that have been low margin, choosing to focus on profitable markets in 2017.
For the full year, SEIA and GTM Research expect a 3% drop in residential solar installations as states like California, Massachusetts, New York, and Maryland all experience declining rooftop solar. But Texas, South Carolina, and Florida are growing as state solar policies become more favorable and they leverage the cost effectiveness of residential solar. Look for these states to drive growth in the future rather than the subsidy-driven installations on the East Coast in past years.
Commercial solar is finally booming
Commercial customers continue to be of growing importance for the solar industry in the U.S. Large companies are choosing to buy solar energy from developers that install projects on both rooftops as well as utility-scale projects. Installations in the commercial segment jumped 31% from a year ago to 437 MW.
SunPower (NASDAQ:SPWR) is the big player to watch here as the biggest commercial solar company in the country. Its high-efficiency solar modules and a commercial solution called Helix makes solar projects turnkey for installers, helping businesses, schools, and municipalities across the country save money by going solar.
Utility solar is facing short-term challenges
Utility solar, which still accounts for over half of the U.S. solar market, is in a strange place right now following a rush of installations before potential tariffs imposed by the Trump administration. Also not helping matters is the overall decrease in installations as the record pace of 2016 subsides. For the short term, companies are trying to install as much as they can to get ahead of any tariffs that could make utility solar less economical the moment they're announced.
Long term, installations are down from 2016 when the solar investment tax credit was set to expire. Utilities signed contracts for projects they wanted to be completed last year to take advantage of the subsidy, and when it was extended, there was less of a rush to complete projects this year. As a result, installations were down from 10.6 GW in 2016 to an expected 8.1 GW in 2017 and 6.5 GW in 2018. After that, installations are expected to jump as companies install large solar projects ahead of a step down in solar subsidies in 2020, but there will be some challenges ahead.
The companies to watch here are First Solar (NASDAQ:FSLR) and to a lesser extent SunPower. First Solar's business relies almost entirely on utility-scale projects and will likely look overseas for a growing percentage of their demand. What First Solar has going for it is a lower risk if solar tariffs are implemented late this year or early next year because of its U.S. manufacturing plant. Even if installations drop, First Solar may see a windfall as the U.S. solar industry collapses under tariffs.
The cloud ahead for solar energy
A seemingly positive report for the solar industry is clouded with the Section 201 trade case that President Trump will likely decide on in the next few months. And if he's looking for tariffs, he could see Chinese solar panels as an easy target, crushing the economics that drives solar installations today.
Over the next few months, the solar industry will be watching proceedings closely to see if we're in for more positive news about solar installations or whether there will be thousands of people laid off. It's hard to see the solar industry installing another 2.4 GW of solar in second-quarter 2018 if there's a massive tariff on imported components, and that could undo years of progress for the industry.
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