In August 2022, the Inflation Reduction Act passed, providing various clean-energy incentives and boosting the savings for those interested in adopting solar power in the U.S. However, recent market sentiment suggests a downturn in the solar industry, particularly within the residential sector.
Earnings reports from major U.S. solar companies have been disappointing, leading to a decline in investor confidence. Despite the positive impact of the Inflation Reduction Act, the Invesco Solar ETF (TAN) has dropped nearly 40% this year, while the S&P 500 index (SPX) has seen gains of around 14%.
One example of this decline is Enphase Energy Inc. (ENPH), a prominent supplier of microinverters used in solar-power systems. Its stock has plummeted over 70% in the past year, in stark contrast to its triple-digit gains in 2020 and 45% increase last year.
Analysts attribute this negative sentiment to ongoing industry issues and market uncertainties, as well as poor recent stock performance. The consensus among experts suggests that solar companies should expect annual growth rates of around 15% moving forward. Stronger, publicly traded companies with ample liquidity are likely to drive this growth.
However, the current market sell-off presents opportunities for potential investors. Valuations for solar companies are at multi-year lows, offering attractive entry points for those willing to buy during this downturn. According to Evercore, top residential solar companies to consider include SunRun Inc. (RUN), Sunnova Energy International Inc. (NOVA), Enphase, and SunPower Corp. (SPWR).
Despite these opportunities, the industry still faces certain challenges. The persistence of “higher for longer” interest rates has reduced the demand for residential solar installations. Additionally, the cost of going solar remains relatively high, even with the incentives provided by the Inflation Reduction Act. Most homeowners do not have the necessary funds to invest in a solar system, which can cost upwards of $20,000.
Furthermore, distributors are currently grappling with high levels of inventory purchased at higher prices than the current market rates.
In conclusion, while the U.S. solar-power industry initially benefitted from recent incentives, it is currently facing challenges that have negatively impacted investor sentiment. However, those willing to invest in the market downturn may find attractive opportunities among top residential solar companies. Nonetheless, ongoing concerns such as interest rates and affordability issues still pose obstacles to widespread adoption of solar energy.
Solar Industry Facing Challenges
SolarEdge Technologies Inc. recently issued a warning regarding unexpected cancellations and delays in its European distributor backlog. The dip in sales was not due to the Israel-Hamas war, but rather attributed to higher-than-expected inventory levels and slower installation rates.
California, which has traditionally been a leader in solar capacity, implemented a new policy last year that significantly reduces the rate at which homeowners are compensated for excess solar power sent back to the grid. As a result, paybacks for residential solar installations have become much longer. This change has also led to a shift in the market, with many individuals considering stationary storage as a more viable option for their excess power.
Europe, another major player in the solar industry, is also experiencing a slowdown due to macroeconomic concerns.
Despite these challenges, some analysts remain optimistic about the long-term prospects of residential solar. SunRun, for example, lowered its growth outlook for customers in 2023, but much of this reduction can be attributed to weakness in the California market. Analyst Philip Shen predicts that SunRun will still outperform in California in the coming quarters as it adapts to the changing landscape and focuses on storage solutions.
According to BloombergNEF, the solar industry is projected to experience brighter times in the future. The growth will primarily come from home solar installations, as long-term cost declines help overcome financing constraints.
In summary, while the solar industry currently faces various hurdles, there is still potential for growth and innovation. Stakeholders must navigate through these challenges and explore new opportunities in order to thrive in an evolving market.