The last year saw significant turbulence within the solar market but 2015 is ending the year on a high note. In fact, we have not been this positive on the fundamental trends for the solar industry since early 2013. The primarily has to do with political motives and moves made in recent weeks, which we think has added significant visibility for the industry in the coming years.
During the month of December, we witnessed an extension to the investment tax credit (ITC) that was set to expire at the end of 2016 and removes an enormous overhang for the industry, in our view. In addition, high ranking officials across the globe came together in Paris providing a commitment/framework to reduce global carbon emissions, which is surely expected to help support global demand for solar in the coming years.
Despite these positives, the industry also observed notable negatives in 2015, with the decline of the yieldco, a vehicle similar to a master limited partnership, space being at the top of this list. Without further ado, below are our solar predictions for 2016:
- We anticipate global solar installations to exceed 60 gigawatts for the first time ever, as we forecast growth of 8% in 2016. This is a sharp deceleration compared to our 2015 installation growth of over 20% but still represents a healthy global solar landscape.
- We no longer expect U.S. solar demand to peak in 2016. Previously, we envisioned a robust 2016, with annual solar installation growth of as much as 40%-50%, driven by a pull-in of orders ahead of the ITC expiration. However, with an extension of the ITC, we now envision U.S. installation growth of about 10% as 3 GW to 4 GW of projects get pushed in 2017 rather than a sharp increase in 2016 followed by a steep drop-off in 2017. The ITC has been extended from December 31, 2016, with the 30% credit remaining intact through the end of 2019 and phased-out thereafter. Projects that begin construction in 2020 and 2021 will receive an ITC of 26% and 22%, respectively. The incentive drops to 10% thereafter.
- China solar installations will grow again in 2016 but tough comparables likely limits upside to a 10% increase. China made a statement in 2015 by upping its installation target and will install over 20 GWs of panels, a near doubling compared to 2014 levels and which was viewed as a year of disappointment. China will remain the largest solar market and we estimate will comprise about a third of total global installations in 2016.
- The 'Big 3' solar markets (China, U.S., and Japan) will represent about 65%-70% of total installations in 2016, similar to a range that we anticipate for 2015. While this may assume a lack of geographic diversification, we believe that 2016 more than likely represents a peak in terms of market share for the 'Big 3' markets. The historic global climate agreement in Paris, where 195 countries committed to tackle climate change and report back on initiatives every 5 years, should help contribute to greater participation among other regions of the world.
- We anticipate an improving yieldco market in 2016. We believe dislocation within the yieldco space reached an extreme in late 2015 and should see stabilization in 2016, as investors recognize the value of the underlying securities embedded with the vehicles. However, we do not anticipate any new yieldco offerings being launched in 2016 as solar companies await more favorable market conditions. We note that we did anticipate a number of solar companies announcing new yieldco offerings in 2016, but that did not come to fruition. Should the dislocation in the yieldco market improve by the second half of 2016, we think it is plausible to hear announcements for 2017 yieldcos.
- Similar to 2015, we expect residential growth to exceed that of the commercial and utility solar markets in 2016. This reflects greater financing for consumers and knowledge by the public about the advantages/cost savings potential of solar. In addition, we note that the utility market is much more mature and larger in scale than the residential side.
- We see solar system prices declining at a healthy 5%-10% pace in 2016 as lower costs flow to customers.
- We anticipate a greater amount of focus and attention on the energy storage market in 2016 but the market size for storage solutions likely remains small. We think the likes of SCTY, SPWR and others are investing heavily in this arena as a cost-efficient solar storage market would likely have huge positive implications for the industry.
- Financing has become more readily available for consumers/corporations in regions of the world like the U.S. in recent years and we expect this trend to continue. Despite the potential for higher rates in the U.S., we see attractive loan programs and securitization among the more attractive options around. Also, more global regions are likely to emerge and offer attractive programs associated with solar installations in an effort to promote and attract new consumers.
- We believe SunPower, our top solar pick, will outperform both the solar peer universe and S&P 500 in 2015. We believe SPWR is best-positioned to succeed given its Total relationship, favorable balance sheet and technology advantage.
Solar companies under our coverage universe include: First Solar (FSLR 63****), JA Solar (JASO 10***), SolarCity (SCTY 57***), SunPower (SPWR 29*****), SunEdison (SUNE 7***), and Trina Solar (TSL 10***).
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