What: Shares of the country's biggest residential solar installers dropped in January with SolarCity (NASDAQ:SCTY.DL) dropping 30%, Sunrun (NASDAQ:RUN) falling 19%, and SunPower (NASDAQ:SPWR) down 15%. And there may be good reason for the drop.
So what: In late December, the Nevada Public Utilities Commission (PUC) decided to change the way solar customers were compensated for electricity exported to the grid and it destroyed the value of rooftop solar. Instead of getting to net meter electricity, which basically compensates customers the full retail rate for exported solar, the utility will now only compensate this electricity at the wholesale rate. It also tripled the fixed charges each customer will pay, which they pay whether they have solar or not. I went into the details here on the numbers but to understand how bad this is all you have to know is that every major solar installer closed up shop in Nevada within a week of the ruling.
To pour salt in the wound, the PUC decision is retroactive to customers who signed contracts before this ruling came down. That may wipe out their savings for going solar, potentially leading to solar defaults or renegotiated contracts (this grandfather clause may be revisited in 2016).
Make no mistake about it; this is terrible news for the solar industry. Not only does it kill the #2 residential solar market in the country, it gives a blueprint for utilities in the rest of the country to follow when trying to fight rooftop solar.
Now what: The impact of the Nevada ruling on solar companies will be different depending each company's business model. SunPower has a presence in Nevada, but it sells through dealers and most of its business in the state is in utility scale projects that sell energy directly to NV Energy. It also has a much more diverse business than SolarCity or Sunrun, so the negative impact will be negligible.
SolarCity and Sunrun both made big, dramatic announcements about shutting down Nevada operations after the PUC decision so I think they'll both take it hard. We'll have to wait until first quarter earnings are released to see how big the impact is but losing one of the largest residential solar markets in the country can't be good news.
Residential solar stocks struggled in January, but some of those struggles are due to challenges that could persist for years. Keep an eye on how Nevada's ruling changes margins and growth rates because growth in the residential solar industry may not be as easy as many companies have made it appear.