2018 was supposed to be a terrible year for the U.S. solar industry as subsidies, well, subsided and President Trump's tariffs raised the cost of solar panels. But the reality wasn't nearly as bad as feared.
The U.S. Solar Market Insight report for 2018 -- produced by the Solar Energy Industries Association and Wood Mackenzie Power & Renewables -- says that installations fell just 2% to 10,600 megawatts (MW), or enough to power 1.7 million U.S. homes, and that the market shows signs of life in coming years. For investors, this opens a huge opportunity for beaten-down solar stocks.
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Where U.S. solar saw strength in 2018
The strongest segment year over year was residential solar, which grew 7% to 2,400 MW. California once again leads the industry with nearly 1,000 MW installed, but Nevada, Florida, and Utah showed strong growth from very small installation bases of less than 100 MW. For reference, 1 MW of installed solar power capacity can generate enough electricity for 90-260 homes depending on various geographic factors.
Residential solar benefited from the fact that solar panels themselves are a fairly small percentage of installation costs (reducing tariff impacts), and short lead-time installations. As the year progressed, global solar-panel prices plunged by about one-third, offsetting tariffs, which helped bring costs down to 2017 levels.
Residential solar companies like Sunrun (NASDAQ: RUN) , Vivint Solar (NYSE: VSLR) , and SunPower (NASDAQ: SPWR) could adapt quickly to reduce costs , whereas utility-scale developers sign contracts years in advance of development, so the lower costs will take a year or two to start impacting installations.
As more states start to contribute to the residential solar industry, this is a segment of the market that should have a bright future.
Utility solar sets up for growth
Large, utility-scale projects continue to be the biggest segment in solar with 6,163 MW of installations in 2018, but that was down 3% from a year ago. As I mentioned, the utility-scale industry is slower to adapt to falling prices, so it didn't benefit from lower costs late in the year.
But there was a surge in utility-scale solar project signings as costs dropped, and that will drive growth for years to come. According to the report, 13,200 MW of new power-purchase agreements were signed in 2018, and the pipeline of projects peaked at 25,300 MW in Q3 2018, the most in history.
That bodes well for large developers , including First Solar (NASDAQ: FSLR) and SunPower, which provides U.S.-made solar panels to the utility-scale market.
The forgotten market
Commercial solar struggled mightily in 2018, falling 8% to 2,100 MW. This included systems built on commercial rooftops and community solar projects now going up across the country.
Analysts with Wood Mackenzie expect 2019 to be another down year as incentives decline and community solar projects aren't yet ready to pick up the slack. Commercial solar continues to be a high potential market, but it can't seem to gain the traction investors have seen in residential and utility solar markets.
What to expect in 2019
Wood Mackenzie expects solar installations to grow another 14% in 2019 to over 12,000 GW, with continued growth to 15,800 GW in 2021. That's great news for developers and solar industry suppliers, which are going to welcome some growth back to the market. With the worst of the political upheaval -- including tariffs -- behind it, solar could be a place to find values in the energy industry again.
I think the residential solar industry will be one of the biggest beneficiaries and Sunrun and Vivint Solar have emerged as clear leaders there. They'll be able to ride more states getting into solar to increase their asset base.
For utility-scale solar, SunPower and First Solar have a big opportunity as the two biggest solar manufacturers in the U.S. They have a lot of competition from Asian suppliers, but if the increase in contracted projects continue these stocks may be able to get out of their funk on the back of growth in the utility solar sector.
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