What To Expect From The Solar Industry In 2017

The solar sector had a challenging year, amid falling panel prices, weaker power plant contracting activity and mounting regulatory uncertainty. The MAC Global Solar Energy Index, an index comprised of solar stocks, declined by roughly 45% year-to-date, with the stock prices of major solar names such as SunPower (NASDAQ:SPWR) and First Solar  (NASDAQ:FSLR) falling by roughly 75% and 50%, respectively. Below we provide a glimpse of what 2017 could have in store for the solar industry.

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Another Solar Manufacturing Shakeout Is Possible

The solar industry has been contending with weakening demand, brought about by a decline in installations in China after the reduction of feed-in-tariffs in June and also due to higher inventories in the United States. Things could get worse next year, as Chinese demand looks set for a sharp decline (by as much as 40% per GTM Research) Things have been challenging on the supply side as well, with over 20 GW of module manufacturing capacity  added during 2016. The price of solar panels has declined by roughly 30% in the international markets this year, and the decline in the U.S. market has been steeper. Pricing is expected to remain tough over 2017 as well, with industry bellwether First Solar predicting panel ASP declines of about 9%. The weaker demand and pricing could potentially cause a shakeout and bring about consolidation in the solar manufacturing space, along the lines of what was witnessed back in 2012, with highly leveraged firms coming under stress.

Weaker Power Plant Construction Activity

Solar power plant contracting activity has also been weak, amid stronger competition from independent power producers and smaller players. The bankruptcy of SunEdison – the world’s largest renewable power developer – has driven up the required rates of return that solar investors are seeking to compensate for higher risks on their projects, putting pressure on systems pricing. In the United States, the strong project build-up in anticipation of the December 2016 expiry of the U.S. solar investment tax credit (which was eventually extended) has also played a role in keeping activity down as developers have more time to build their projects. Project revenues recognition at major developers such as SunPower and First Solar is expected to trend lower in 2016.

Regulatory Uncertainity

The election of Donald Trump to the U.S. Presidency could bring about changes in the regulatory environment for solar energy and climate change policy the United States, with potential repercussions overseas. Firstly, there is a possibility that the U.S. solar investment tax credit – which is seen as the bedrock of solar growth – could be scaled down or dismantled. Mr. Trump’s proposal to slash the corporate tax rate (from 35% to 15%) could put pressure on the federal budget, requiring such incentives to be reduced. Even if the credit is left untouched, a lower tax rate would harm the flow of tax equity financing to solar firms, as it would reduce investor requirements for write-offs via tax-equity investments. There could be a sharp reversal in the U.S.’s stance on climate change as well.  Mr. Trump also indicated during his campaign that he intended to rescind the Obama Administration’s Climate Action Plan (which aims to cut carbon emissions from power plants), with intentions to cancel the Paris climate agreement that world powers signed in December 2015.

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