Many have asked if the sector and specifically two of my favorites -- SunPower (NASDAQ:SPWR) and SolarCity (NASDAQ:SCTY.DL) --have room to run. It's important when investing in an industry hit hard by both irrational exuberance and irrational panic to look at the real drivers. Why will this industry grow? Or why won't it?
As I cover in my recent analysis, this market will continue to grow.
There are a few drivers: improving economics, heightened public awareness, climate and environmental concerns, and government support. This last one is what I'll focus on. Much is made of national governments' subsidy schemes -- the 30% Investment Tax Credit here at home and feed-in tariffs for much of the rest of the solar-adopting world. What's often overlooked in the U.S. is the importance of state-level Renewable Portfolio Standards (RPS).
Present in some 30 states plus the District of Columbia, RPS mandate electricity suppliers procure a portion of their electricity from renewable sources. Further, among these states, 16 (as well as DC) include a solar specific provision.
In many of these states, that provision mandates double-digit year-over-year growth, with that annual increase often as much as 25%-50%, or more. The 2014-2015 increase in North Carolina (which installed the second most solar capacity in 2013), for example, is 100%. In Maryland, a more mature solar market than North Carolina, the 2014-2015 increase is more than 40%. To achieve compliance electricity suppliers must either directly own solar energy assets or must purchase environmental credits from solar asset owners.
Taken together, these RPS essentially guarantee robust growth in the domestic market. That's a boon for solar companies like SunPower (majority domestic revenue), First Solar (~85% domestic revenue, 2013), and SolarCity (substantially all domestic revenue, 2013).
And in many years, states have shattered these requirements. A few years ago, Pennsylvania and Maryland both experienced surges in installed capacity, which sent the price of environmental credits through the floor. While the drop in the price of credits was not so great for the owners of solar assets, it was a great development for electricity suppliers, and a huge positive for solar panel manufacturers like SunPower and First Solar.
Understanding state-specific dynamics of the U.S. solar market will equip solar investors to understand and anticipate market developments at the state level that ultimately shape the broader market.