Donald Trump’s surprise victory and a weak pricing environment will challenge the American solar energy industry.
By Naman Patel
The past month has been quite eventful, and dizzying, for solar energy companies. The International Energy Agency (IEA) recently increased its five-year growth forecast for renewable energy; over the past few weeks numerous industry players reported discouraging earnings numbers; and on November 9th Donald Trump became president-elect. The equity markets have responded quite forcefully to these events, with many solar energy players seeing large swings in their share prices. In the short-term, the industry will continue to see many headwinds, largely as a result of consistently lower revenue and a less-friendly federal government. If the federal government, under Trump’s leadership, pursues an extremist policy against solar energy and global capacity does not increase at the rate predicted by the IEA, the long-term trajectory too will be weak.
In 2011, a glut of solar energy products in the market triggered a collapse in prices across the solar value chain, and a subsequent decline in U.S. solar energy stocks. To this day, the market remains saturated and prices have failed to fully recover. Numerous companies have slashed guidance as margins continue to feel pressure. SunPower, in its 3Q2016 earnings report, told investors it would be cutting its 2016 sales guidance by 13% and could not offer updated guidance for 2017 until December of this year. First Solar lowered its 2016 guidance by 50% after sales fell by 46% on a year-over-year basis in the third quarter. Both companies indicated that margins will continue to be constrained due to the 30% decline in solar module pricing year-to-date.
Donald Trump’s surprise victory only escalates the problems facing solar companies. Under the Obama administration, large plots of federal land were designated to be used for solar energy generation, the Paris Agreement on climate change was signed via executive order, the solar energy Investment Tax Credit (ITC) and Production Tax Credit (PTC) were extended, and the Clean Power Plan was passed. The president-elect, however, has on numerous occasions expressed disdain for President Obama’s solar energy policy. A staunch supporter of the fossil fuels industry (the coal industry in particular), Donald Trump has publicly described climate change as a hoax, going as far as claiming it to be a Chinese-devised deception.
Trump has indicated he will nullify the Clean Power Plan and is looking for ways to exit the Paris Agreement. Moreover, he has claimed he will eliminate funding for solar energy research and development. If Trump acts on this rhetoric, solar companies will surely suffer. For one, doing so would reduce demand for solar energy by bolstering the competitive ability of fossil fuel companies. Moreover, funding for R&D is critical to decreasing costs in an industry that faces significant margin pressure. Lastly, by withdrawing from or refusing to enforce the Paris Agreement, Trump could lead to an exit by China and India–both of whom would not have signed the agreement without the U.S.’s lead. Regardless of whether Trump follows through on his rhetoric, the uncertainty regarding the federal government’s future policies will lead to some solar energy projects being put on hold.
Of course, there are limitations on Trump’s capacity to alter existing policy. The ITC and PTC, both of which are major benefactors of the industry, are not likely to be repealed because they were extended with both Democratic and Republican support. Moreover, the solar energy industry is a major source of employment and has a larger workforce than the oil and gas industry. This could make an extremist anti-solar energy policy unpopular even among members of Trump’s own party. Lastly, the impact of hostile actions from the side of the federal government could be mitigated by solar energy-friendly initiatives taken by state governments. In many western states, such as California and Oregon, solar energy is thriving due to a strong willingness by state legislatures to provide incentives for solar energy development. These state-level incentives will continue–and likely grow–regardless of who controls the White House.
The IEA’s recent announcement also leads to many questions and uncertainties. On October 25th, the IEA increased its five-year projection for growth in global renewable energy capacity by 13%. The organization now believes that capacity will increase by 42%, or 825 gigawatts, from 2015 to 2021. The revision was, in part, spurred by unforeseen levels of onshore wind and solar PV capacity additions in 2015. Much of this growth in capacity was due to lower long-term remuneration prices for both wind and solar energy. The expected 25% decline in costs by 2021 for utility-scale solar power generation may lead to further declines in long-term remuneration prices. Lower costs come as a boon to American companies across the solar value chain, who have had to compete with cheap fossil fuel producers amid the prolonged downturn in energy-related commodity prices.
Yet, it now seems as though the IEA would have been prudent to wait after the U.S. election before releasing its revision. Capacity growth still hinges largely on favorable government policy in the U.S. In fact, the primary reason for the revision by the IEA was the U.S.’s continued commitment towards solar energy. As mentioned, under a Donald Trump presidency, favorable policy towards this industry may quite possibly discontinue. However, solar energy companies that diversify geographically by pursuing opportunities abroad will be less affected by unfavorable U.S. policies. For example, governments in China and India have set high targets for solar energy capacity, and opportunities in these emerging markets represent a significant source of demand for solar energy products, in the long-term.
There are currently no market forces that could significantly reduce the oversupply of solar energy products, and demand will be hampered, not bolstered, by Trump’s policies. The low price environment will continue unabated and margins will be squeezed, decreasing revenue and the ability to pursue R&D. Nevertheless, global capacity will increase due to expected cost declines and government policies in the developing world. Both factors will help solar companies cope with lackluster prices, but American solar companies will likely continue to produce weak earnings numbers over the next few quarters and beyond.