- Utilities are working to discourage residential solar with high fees
- First Solar bypasses the controversy by selling plants directly to utilities
- SolarCity is a company worth watching, but not worth buying
“First they ignore you. Then they laugh at you. Then they fight you. Then you win." The famous aphorism of Mahatma Gandhi can also be applied to businesses, and new industries.
The Fight For Residential Solar
U.S. solar energy has now reached the third stage, having added 7 GWatts of power this year alone. Utilities and politicians are stepping up their fight against the industry. With solar panels now costing less, per-kilowatt, than other forms of grid energy in many places, residential solar is becoming a partisan issue. This is impacting solar stocks.
The leading companies in the sector – First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR), Solar City (NASDAQ:SCTY) and Trina Solar (NYSE:TSL) – have all lost one-third of their market cap over the last year. That’s more than 20% loss of oil majors like Exxon Mobil (NYSE:XOM), but much less than the 80% loss of oil exploration firms like Whiting Petroleum (NYSE:WLL).
Utilities like Southern California Edison have fared better, gaining 4%, but solar threatens the CapEx used to calculate rates, since a homeowner owns his own energy supply. So there is a growing movement , which Southern California Edison has now joined, to impose monthly fees on residential panel owners, in order to discourage that part of the industry.
SolarCity, which is in that residential business, is in the utilities’ crosshairs. The company is fighting back by selling its own storage systems, hoping to make its customers completely independent from utility grids. This is not the same battery as the PowerWall that Tesla (NASDAQ:TSLA) introduced earlier this year.
First Solar Sidesteps the Battle
For companies like First Solar, which focus on utility-owned solar power, none of this is not relevant. The company reported strong earnings in August, net income of $94.5 million, 93 cents per share, on revenue of $896 million, which compared with $4.5 million in net income and $544 million in revenue a year earlier. But the controversy has hit Sun Edison (NYSE:SUNE), which does residential installations, and whose shares have cratered 65% since July after posting a loss of $263 million, 89 cents per share, on revenues of $455 million for June, compared with a loss of just $41 million, 21 cents per share, and revenue of $431 million a year earlier.
Residential companies also differ from utility companies on their balance sheets. Since they finance what they sell their books show enormous debt, over 50% of assets in SUNE’s case, while First Solar’s balance sheet shows negligible debt.
The irony here is that First Solar is using a cadmium-telluride technology where efficiency improvements are modest. The best First Solar modules convert less than 20% of the energy striking them into electricity.
SunPower, by contrast, currently sells a silicon-based solar module with an efficiency of 21.5% and Sharp’s “triple junction” cells, which has not yet reached commercial production but also use silicon, showed efficiency of 44%.
The Bottom Line
The bottom line is that buying solar stocks is not like buying other energy stocks. The company’s technology matters, how it sells its product matters, and its ability to keep up with competition matters, as Chinese-maker Yingli Solar (NYSE:YGE) could be gone within a year. Right now First Solar stock is the pick of the litter, but speculators like SolarCity stock because of the Musk connection. I think they’re paying too much for the name given the risk, but watch the company closely.