The State of Solar Today

Last week, Saudi Arabia announced plans to build the world's largest solar project. The finished farm would be 100 times bigger than any existing solar farm and would cost a whopping $200 billion.

In this week's episode of Industry Focus: Energy, host Sarah Priestley and Motley Fool contributor Taylor Muckerman lay out what we know so far about the project and what it would mean for both Saudi Arabia and the world's solar industry. Also, they take a closer look at how the U.S. solar industry has fared in the last few months, a few solid solar companies for your watch list (and one you'll probably want to avoid), why SunPower's (SPWR -1.02%) fourth quarter wasn't as bad as it might initially seem, and more.

A full transcript follows the video.

This video was recorded on April 5, 2018. 

Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking Energy and Industrials. It is Thursday the 5th of -- I was going to say March, but it's April. April came upon us very quickly.

Taylor Muckerman: Catching up to everybody.

Priestley: I'm your host, Sarah Priestley, and joining me on Skype is Motley Fool Canada Premium analyst, Taylor Muckerman. Taylor, you are preparing for the baseball.

Muckerman: Yes, that's it. Opening day in Nationals Park.

Priestley: Well, I really appreciate you fitting us in to talk a little about solar stocks before you go and enjoy the nachos and all the other good things.

Muckerman: Yeah. Hopefully I'll be soaking up solar energy of my own.

Priestley: [laughs] So, we wanted to talk about solar this week because last week, Saudi Arabia announced plans to build the world's biggest solar project in the desert. The project could result in 200 gigawatts of power becoming available by 2030, which actually is not that long away. To put that into perspective, that's the same amount as the total global supply last year, so that's pretty huge. 

Muckerman: It's wild to think about. 

Priestley: It is. It's going to be absolutely ginormous. I think it's going to be 100X bigger than any other solar farm that's around. It's also being backed by SoftBank as part of the VisionFund that we've talked about before on the show with Saudi Arabia. If completed in its entirety, it could cost $200 billion. So, it's just crazy expensive, very, very big. It could triple the kingdom's entire electricity capacity. What's interesting about this is it could become a net exporter of renewable power. What do you make of it all, Taylor? 

Muckerman: Yeah. I mean, whenever you hear the name Saudi Arabia associated with anything but oil and gas, you kind of have to raise an eyebrow. This is basically trying to wean the entire country off of oil and gas, other than the need to sell it, to fund infrastructure and social spending and things like that. It's the biggest endeavor ever in renewable energy, and to see it backed by SoftBank, I think, lends a lot of credence to it. I see very little doubt that this is actually going to move forward. Maybe it's not quite as big as they planned when it's all said and done, but SoftBank is known for making things happen. They won't be funding all of it because their fund is slightly less than $100 billion. But, just them being a partner is certainly something that adds some notoriety. 

It's kind of a head scratcher when you think about it. The times were changing, and this is one of the biggest signs of that that I can remember reading about over the last several years. Just, Saudi Arabia and solar, not two words that you would normally put together. 

Priestley: Yeah, I think you're exactly right. I may be butchering this, but if I remember it correctly, I think SoftBank has committed about $50 billion, maybe just under, to the VisionFund. Then, Saudi Arabia is bringing potentially up to $200 billion, plus that 5% of Saudi Aramco that they're planning to IPO. So, pretty well-funded as an entity. And it makes sense that they would do this. I mean, if you think about it, solar power is obviously going to work well in the desert. There's a lot of sun, a lot of empty space. The biggest difference between that kind of climate and our kind of climate is the peak demand is aligned with peak supply. The issue that we have, obviously, is that when it's cold is when we want to stay inside and be warm and things like that. And when it's hot there, people are running their air conditioners. So, it's a much more conducive environment. The Prince Mohammed had an interesting quote. He said, "The kingdom has great sunshine, great size of available land and great engineers, great labor, but most importantly, the best and greatest vision."

Muckerman: [laughs] Goes right along with the VisionFund, I guess, there.

Priestley: Yeah. So, for what you said, I think you're exactly right. I think that we may see a more diluted version of this project, but it's certainly interesting, and it's definitely kind of a bastion of what can be done with solar energy.

Muckerman: Yeah, and you're looking at maybe close to 100,000 jobs being created. Granted, some of those will be temporary, just during the construction phase. But, a big driver of growth there for their economy, and they're talking about building a solar panel manufacturing plant within the country that can handle this. So, you're not going to be looking at outside producers of solar panels to be really helping out, maybe, at the very beginning. But it seems like Saudi Arabia is kind of bent on producing everything that they need for this all in-house, which won't necessarily have huge global implications within the solar industry, but once this is done, it'll certainly have big global implications in the fossil fuel industry, just simply by reducing the demand from within Saudi Arabia. Meanwhile, they still need to sell a similar amount of oil and natural gas to fund their budget, so it'll be interesting to see how this all shakes out in a relatively short period of time, since they're trying to get this up and running in under just a couple of decades.

Priestley: No, you're exactly right. I mean, it's under 12 years, and so much potential, but I think you're exactly right, it's a balancing act for them. Especially with, you know, oil prices fluctuating as they have been, obviously stabilizing now, but they will definitely be hoping that long time that will continue. 

So, I wanted to bring it back to the U.S. and talk about the U.S. solar industry and what's been going on, because we talked about tariffs, I'm trying to remember, probably a couple of months ago now.

Muckerman: Sounds about right. 

Priestley: And that's all shaking out in earnings reports and things like that. So, just kind of an overview, how is the U.S. solar market doing right now? 

Muckerman: Well, it's still growing quite rapidly, although growth is somewhat slowing. You saw a loss of about 10,000 jobs in the industry last year, and that's mainly due to some slowing growth. So, not reversal of growth, but just some slowing growth. And California, which is by far the largest solar market in the United States, when you look at total installations and generating capacity from just about a year ago, you're looking at California being more than 4X the size in terms of generating capacity than the second biggest state, which was Arizona. It's also 4X larger than about 40 states combined, the bottom 40 states combined. So, obviously, if that market slows down, you're going to see some pullback in terms of overall employment, and that's what we saw last year. 

Although, when you look at growth in terms of solar power providing from the industry, massive growth still. You look at, solar power accounting for about 25% of new power plant capacity last year, so still making huge, huge inroads. But, we're starting from a small base, so it's still only a few percent of total power produced within the country. But, it is making a dent, slowly but surely, on a grand scale, but very rapidly within the renewable energy space. Roughly about $210 million in revenue within the U.S., up from only about $40 million about a decade ago. About 5X larger than it was 10 years ago and continuing to grow.

But, yeah, we're still trying to see how those tariffs are going to shake out. Probably going to see that impact this year, maybe a little bit more on the job loss side. You could see some slowing on the installation side, especially on the utility scale, commercial scale opportunities.

Priestley: Yeah, generally, there seems to have been a pullback in terms of the allocation of budget, in terms of sales and marketing, too. I think, Tesla's (TSLA 12.06%) SolarCity commented on this, that they're usually very aggressive in terms of their salespeople that they're sending out to pitch a lot of residential solar. And it's natural that there's a contraction in the market when you stop pushing, when you stop marketing to the extent that they have been.

So, solar kind of went from this sort of futuristic, expensive and not widely adopted technology, because it was pretty inefficient in the 70s and 80s, to where is today, which is efficient and reasonably cheap. So, just on the residential side, the total cost of a rooftop solar system fell by 61% between 2010 and 2017. That's pretty staggering. Do you think that we've uncovered the efficiencies that can be found, especially on the residential side? 

Muckerman: I would say, I guess, on a total basis, yeah, probably, we're pretty close to reaching maximum efficiency, unless something really wild happens. But I imagine you're still seeing some percentage gains over the next 5-10 years. Something could come along and totally revolutionize the way that we manufacture these panels. It wouldn't surprise me. I mean, we saw it with oil and gas. Things were pretty much steady-eddy for about 20-30 years, and then all of sudden, shale technology comes along and totally disrupts everything. So, it wouldn't surprise me to see some new technology come out and change the game again for solar. 

But, I think right now, you're probably scratching for more growth rather than seeing it happen fairly easily. But, it's near parity or at parity with most other options. So, it's an option for everyone right now, much more so than it used to be even a year ago. The durability of the cells is also much higher, so you're going to see these panels lasting longer, and that's a big deal for residential installations. If you think, "I'm going to have to replace these in the next five years," you might be a little bit more hesitant. But if they're going to last a decade or two, then certainly you'll get that payback. 

Although, in California, you've seen such an increase in solar panel production that the price of electricity that folks are allowed to sell back to the market has kind of declined to a point where it's almost not really becoming helpful. So, if we scale too quickly in specific areas, it might detour people from signing up and installing residential solar. But, as a whole, I think you're pretty much where you're going to be for the next several years, unless something game-changing comes along.

Priestley: Which, of course, as you said, it definitely could. Interestingly, we've talked about California, but in March last year, there were 14 days where California paid Arizona to take electricity generated from solar.

Muckerman: Yeah, it's pretty wild. Arizona being the No. 2 largest installed state in terms of solar power. That corner of the U.S. is a hotbed for solar. But yeah, to sell power just to take it off your hands. Normally you would be charging people for that.

Priestley: It also kind of underlines another issue that we're having, in terms of the integration of renewable energy with conventional systems. I imagine there was a little bit of power brokering over how that was all disseminated. It's interesting to see these traditional power players, how it's all going to shake out with the new guys on the block, as it were. 

So, Taylor, we've talked all about solar in the U.S. so far. I've seen a lot of kind of bearish commentary, but I think on average, residential solar grew by almost 50% a year over the last nine years, so you're bound to see a pullback at some point. And as you said, it's highly concentrated in California and Arizona. So, I don't necessarily think that people should use that as something to stick to as a reason not to invest. There's plenty of potential opportunity here. 

So, we mentioned SolarCity just briefly. They're tied in with Tesla now, after Tesla bought them in 2016. SolarCity posted the largest declines in the industry in installation. They used to be the biggest solar installer. They were about a third of the national market, but their sales fell 38% in 2017. That's including residential and commercial. And I think a lot of that was tied into this ending their door-to-door sales technique and cutting customer acquisition spending. Are you concerned about that? Or are you kind of staying out of this whole Tesla SolarCity game? 

Muckerman: I'm a Tesla shareholder by way of SolarCity, so certainly still interested in the company. I do wonder, though, if maybe, with so much going on at Tesla and the Gigafactory, that maybe a SolarCity's kind of taking a back seat to some of the things that are going on there. So, maybe that's a little bit of the reason why. 

But also, you're seeing the utility and commercial side being somewhat of a larger driver now that major companies are getting involved in the solar power game. And so, I think maybe, if you're going to take a step into solar energy as an investor, maybe take a look at a couple of other companies than Tesla. Obviously, Tesla gives you a little bit more of a diversified approach to renewable energy with electric cars, batteries and solar, but a lot going on there and a pretty volatile stock, and some questions on the automotive side. So, if you just want a pure-play solar investment, that's not the proper way to go about it. 

Priestley: Yeah, I mean, I love everything they're doing with the Gigafactory, and I certainly think that SolarCity has potential, when you look at some of the projects that they're working on. If you're on their site, I think they have a couple of their prototype industry set ups. I think they have a couple of vineyards that they're working with to store -- they're collecting this energy through the solar cells, and then they're storing it using batteries that they're creating at the Gigafactory. So, I think it kind of makes sense. It's very easy to buy into that story. But as you said, there's too much drama for a lot of people right now.

Muckerman: Yeah, absolutely. I mean, if you want to look at a couple of companies, I think SunPower is one that you could certainly take a close look at. It's one of the best and biggest manufacturers in the world and makes one of, if not the most, mass-produced and efficient solar panels, which they call the X-Series. A very innovative company, been in the business a long, long time. It's No. 1 market share in commercial solar in the U.S. because of this product, and it's one of the top spots in residential solar, as well. So, I think that you kind of get access to both markets there with SunPower.

And then, if you want to focus a little bit more strictly on the residential side, Vivint Solar, ticker VSLR, that's more focused on the residential side, selling and building these systems for several thousands of customers around the country. I definitely think that it gives you a pure-play on the residential side. Certainly a bit more volatile than the commercial side, because you're doing with smaller budgets, smaller projects, more widely distributed, so your sales force is basically needing to go door to door, vs. big companies calling up the likes of SunPower and others and saying, "Hey, we want you to submit a proposal." That's one of big drawbacks of residential. You're either setting up a kiosk in a Home Depot like SolarCity has done in the past, or you have a sales force out on the streets going door to door, which can be a little expensive. And we saw that with SolarCity driving up their cost structure with the sales force. But, Vivint Solar is one option that I think investors could choose, as it's one of the lowest-cost suppliers in the market. And when it comes to residential, low cost is one of the biggest advantages you can have. 

Priestley: Yeah, I'm also a big fan of SunPower and a lot of that is because they've got some of the highest efficiency solar panels, and then, correct me if I'm wrong, but they're fairly vertically integrated, is that right? 

Muckerman: Yes, they are. Yes. They're producing, distributing and installing. So, yeah, it's definitely more vertically integrated than most. That's what SolarCity is trying to do. They bought a manufacturing facility in the northeast a couple of years ago. I'm struggling to remember if it's up and running, I don't believe it is yet. If it is, it's at a small scale. But, SolarCity's attempting to do the same thing. So, we'll see how that plays out. But SunPower has been doing this for several years now, and quite successfully. 

Priestley: And SunPower is definitely one of the companies that's going to be impacted by the tariffs. They actually do have a manufacturing site in Silicon Valley, but it will only be producing about 5% of next year's total expected demand. And if you were to go and google SunPower right now, you would see that they had a pretty big loss in the fourth quarter. However, I think that there's more to that story than the, I think it's $568 million gaap loss. There's one-time charges related to importing about six months' worth of panels, and then an accounting quirk where the company is bundling and selling some leases, selling the debt, and that has led them to reevaluate a lot of the remaining leases on their balance sheet. So, it's not as bad as you would think. Otherwise, the results were in line with guidance. But, just in case anybody sees those headlines and thinks we've gone crazy, there's definitely more to that story.

Muckerman: Yeah, absolutely. You've got to dig a little deeper. Over the last year, shares have outperformed the market a little bit, although in a much more volatile fashion than the benchmark, but certainly something to consider. 

Priestley: Yeah, absolutely. One company I want to talk about was First Solar, which I think you may have already mentioned. They make thin-film semiconductor modules. You are the absolute expert here, so please jump in if I'm getting any of this wrong. We're seeing this move where the crystalline semiconductors are sort of hitting an efficiency limit the thin-film is surpassing. So, even though it is now slightly more expensive to manufacture, it could possibly be more efficient, so there could be some gains to be made there. If these panels can withstand higher heat and operate the same efficiency as cheaper panels under kind of stressful environments, that could be a unique selling point for them. 

Muckerman: I believe that's called their Series 6 panel. And yeah, this is a company that's very similar to SunPower. More vertically integrated than most. A global company that also deals with the commercial and utility scale sized opportunities. And they have had some bookings already in 2018 despite the tariffs, so I think about 1.3 gigawatts have already been booked in this first quarter of 2018, so we'll see how that continues to play out for the rest of the year. But, the company is still announcing business wins despite the tariffs being announced. So, certainly another option, and one that we have recommended in the Foolish universe before, I think as recently as June or July of last year in our co-founder's service, Rule Breakers. So, certainly a company to keep your eye on. If you look at its performance over the last year so, the company has been on fire in terms of the stock and results. So, I would lump First Solar into that same bucket as SunPower, as a more diversified solar company that investors could take a look at.

Priestley: One company that people may have seen in the news because it's just recently invested in a new plant at Jacksonville, Florida that I would probably caution people away from is Jinko Solar. Am I saying that right, Taylor?

Muckerman: I believe so. I don't know a whole heck of a lot about it, but I do think that you're pronouncing it correctly.

Priestley: It's a Chinese firm. It makes solar modules, solar cells, silicon wafers. It operates predominantly internationally, so they're about 70% outside of China, and they do manufacturing and solar projects. It's the lowest cost manufacturer of PV silicon modules. However, just looking at their results last month, they had incredibly high sales growth, but they are not feeling it on the bottom line. So, their margins are shrinking and shrinking, even though they're generating all of this scale. So that's definitely something to watch. It's kind of moving away from a scale game to an efficiency game. Although, it's interesting to see them investing in the U.S.

One other last thing I wanted to mention is, if you do not want to invest in a solar pure-play, there are options with utilities. Just a couple: AES operates in the U.S., Latin America and Asia, is increasingly focusing on renewables. It's formed a company with Siemens called Fluence to develop energy storage solutions, and that's kind of a gap in this technology, is how we store a lot off the energy that's generated. And, NextEra (NEE 0.54%), which, if you're in the game, you will definitely know NextEra. It calls itself the world's largest generator of renewable energy, from the wind and sun. For both of these, they're mixed in with a lot of other projects and things like that. So, it's a different ball game, but they're certainly worth considering. 

Muckerman: Yeah. They've got those energy yieldcos out there, basically drop-down partnerships. So, NextEra Energy Partners (NEP 2.99%), formed by NextEra Energy, where NextEra Energy basically will build the projects and then sell them down to NextEra Energy Partners so that NextEra Energy Partners can run them and pay out the yield to investors, and the parent company, NextEra Energy can then build a new project and then sell it down again. And Brookfield Asset Management (BN 0.40%) has done something similar with Brookfield Renewable Partners (BEP). So, maybe another area to look at there. Big fan of the whole Brookfield family because a long legacy of infrastructure building and projects around the world. And, with the backing of Brookfield Asset Management, that certainly takes out some of the risk involved in running a utility on the renewable side. So, maybe Brookfield Renewable Partners, ticker BEP, would be another option to consider. 

Priestley: Well, that's great. Thank you very much for talking to me about solar. There is one tidbit that I thought you might be interested in, and that's my home country, the U.K., in 2017, had historically low emissions, and solar became part of the country's renewable resource, which accounted for almost 50% of electricity generation last year.

Muckerman: No kidding. That's great!

Priestley: So, I just thought I'd toot that horn. [laughs] 

Muckerman: For sure. Europe has definitely taken the mantle when it comes to not just solar, but wind power as well. You look at a lot of countries over there, the Netherlands, Portugal, Spain all getting involved with renewable energy. 

Priestley: The U.K. actually signed an agreement with Saudi Arabia, this was announced at the same time that this whole huge solar project was announced, that they're going to share knowledge on solar and how to become more efficient and all those kinds of things. It's interesting to see these knowledge sharing agreements being made. But, enjoy the baseball! I will not keep you any longer. 

Muckerman: Oh, it's all good! Happy to help out!

Priestley: Well, thank you very much. That's it from us today. If you'd like to get in touch, please feel free to email us at [email protected] or tweet is on Twitter @MFIndustryFocus. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything they solely on what you hear. Thank you to Steve for producing the show today. For Taylor, I'm Sarah Priestley. Thanks for listening and Fool on!