From "sea to shining sea," America has become a land of solar opportunity: That was one of the key takeaways from the 2014 State of the Union address, delivered by U.S. President Barack Obama on January 29.
During the 65-minute speech — viewed by a TV audience of 33.3 million people — Obama gave a special "shout-out" to the solar industry for its contribution to the domestic economy, noting that, "Every four minutes, another American home or business goes solar; every panel pounded into place by a worker whose job cant be outsourced."
In doing so, the president confirmed what most equity analysts already know: The U.S. solar industry has stepped up to some formidable challenges during the past year — demonstrating its resilience in a flagging economy, generating jobs on Americas shores, and expanding overseas.
Both the upstream and the downstream sectors of the industry are thriving. Many manufacturers have transitioned successfully into enterprise-scale solar project management and, in doing so, have developed markets for their own modules as well as ancillary revenue sources. On the installation end, the demand for distributed rooftop systems, along with battery backup, will continue to grow during a time of extreme weather events.
What's more — led by the innovative and well-connected installer SolarCity (NASDAQ:SCTY) — players throughout the industry are driving business and expansion by offering new financing schemes, from bond issues to yieldcos, for both home and commercial solar systems.
These factors are moving the needle. Solar equities listed on the U.S. markets came on strong during 2013 and show promise of continuing to appreciate in value over the course of this calendar year. In the vanguard will be such U.S. companies as SolarCity, SunPower (NASDAQ: SPWR), and SunEdison (NYSE:SUNE.N); as well as Chinas Canadian Solar (NASDAQ: CSIQ) and Trina Solar (NYSE:TSL).
Securing a legacy
One company that continues to generate headlines and cash is SolarCity, which has seen its shares gain more than 400% in value since the companys initial public offering (IPO) on December 13, 2012. However, SolarCity hasnt stopped there; it continues to invent new ways to secure (and securitize) its legacy.
In November, SolarCity announced that it would offer institutional investors the opportunity to purchase bonds secured by its consumer and commercial power contracts. The offering — intended to raise US$54 million (40 million) to finance the continuing development of SolarCity — was the first securitization of its kind.
Then, in mid-January, the company said it would establish a web-based investment platform for individuals and institutions of all sizes, facilitated by its acquisition of the peer-to-peer financial technology firm Common Assets LLC, based in Santa Monica, California. The new Internet platform undoubtedly will be an industry game-changer, enabling retail investors and small companies to provide debt-based financing for solar projects.
"Previously, only institutional investors could participate in the financing of most solar assets. With our investment platform, were hoping to allow far more individuals and smaller organizations to participate in the transformation to a cleaner, more distributed infrastructure," commented SolarCity CEO Lyndon Rive.
Following the announcement of the purchase, analysts at Frankfurt-based Deutsche Bank set a US$90/share (66.67/share) target price for the stock, which was trading at US$75.15/share (55.67/share) as we went to press — and said it could rise as high as US$150/share (111.11) over the next two years in bull market conditions.
On the U.S. side of the pond, analysts also were agog. "The Common Assets announcement is a creative approach to raising capital," Pavel Molchanov, research analyst with Houston-based Raymond James Associates, told pv magazine. "It may well have the intended effect of helping reduce SolarCitys cost of capital in the long term."
However, Molchanov also could see a downside. "This approach involves more regulatory hurdles than other types of financing," he said. "When SolarCity sells bonds to institutional and high-net-worth investors, it's not that highly regulated by the Securities & Exchange Commission. But when proverbial widows and orphans are putting their money into SolarCity, you can make the argument that the investors dont know what they are doing. Thats the risk of this sort of strategy. This is not easy at all. We need to see exactly what this is going to look like."
Angelo Zino, research analyst at S&P Capital IQ in New York City, was more upbeat. "This really has the potential to be a huge deal for the industry, he told pv magazine. "Its going to be the first to create an online platform that will enable anybody to invest in solar."
Zino predicted, "Youll see a lot of investors look positively on this and invest with SolarCity, because it will attract a higher yield," noting that there also would be "a higher risk attached." Most importantly, he agreed with Molchanov, "SolarCity is reducing the cost of financing longer-term."
The analysts said they expect this platform to launch during the first half of the year.
Power to the people
It was back in 2008 that SolarCity first pioneered a rooftop leasing program for residential solar — enabling homeowners to install panels and enjoy the advantages of alternative energy at little to no upfront cost. Since then, consumers have demanded similar funding from other installers and manufacturers — and the industry has come through. Boston-based GTM Research estimated last year that US$5.7 billion ( 4.2 billion) in financing will be available for U.S. residential projects by 2016, up from US$1.2 billion (889 million) in 2012.
The latest funding program, launched on January 28, comes from PV panel manufacturer SunPower. The San Mateo-based company is partnering with Bank of America Merrill Lynch to provide financing that will support approximately US$220 million (163 million) of residential solar lease projects. The program will enable thousands of homeowners to afford their own solar power systems, joining the approximately 20,000 Americans enrolled by SunPower to date.
Similarly, on December 3, Belmont, California-based SunEdison, a provider of both semiconductor and solar technology, announced that De Lage Landen Financial Services — a global provider of asset-based financing solutions based in Eindhoven, Netherlands — had increased its investment to over US$100 million (74 million) in a sale-leaseback fund. The SunEdison sale-leaseback fund, which was launched in December 2012, delivers financing to distributed generation solar PV projects developed by SunEdison within the United States.
"Distributed generation is one of the fastest growing solar segments in the United States," said Attila Toth, general manager, Distributed Generation, at SunEdison. "This relationship with DLL is one of the many ways we are working to help new customers enter the market, and grow[ing] our business."
According to S&P Capital IQ's Angelo Zino, "Within the United States, we are seeing the solar industry really starting to mature. Investors are beginning to realize that there is significant return cash-flow potential to these projects, and that solar is a fairly stable business. Since Warren Buffet's MidAmerican Energy business has become involved in solar energy generation over the past few years; more investors are catching on and investing more confidently. This is a year when you are going to see even more financing vehicles take off."
Great expectations
As pv magazine has reported, SunEdison, which saw its stock appreciate by about 275% last year, also is in the process of divesting itself of its semiconductor unit. In September, SunEdison filed plans for an initial public offering in early 2014, geared to enable the company to concentrate more on solar growth.
But thats not all thats planned, according to Zino, who has put a strong buy on SunEdison. Zino notes that, prior to SolarCitys bond issue, SunEdison had bruited plans to fund new solar projects by spinning off some properties into a new publicly listed yieldco in the United States next year. "Basically, [the yieldco would be] a public vehicle that would be spun out to generate about US$40-US$50 million (29-37 million) in [distributable] cash flow. It's just a way for them to maximize return potential for shareholders," Zino remarked.
However, neither transaction has materialized to date.
The same is true of Advanced Energy Industries.(NASDAQ:AEIS) previously stated intentions to spin off its thin-film division, but Raymond James Pavel Molchanov continues to recommend the Fort Collins, Colorado-based company — (now selling at US$27.30/20.24, and up 26.9% month-over-month — as a "strong buy."
"I still like it," Molchanov told pv magazine. The United States is the companys main market, but it also has emerging markets in Japan, India, and the Persian Gulf, as well as some European presence. The stock is still trading at a reasonable multiple and its a profitable business."
"I would expect to get more clarification on these deals when the companies report on earnings in February, commented Zino.
No red ink
Finally, January also was a very good month for some of Chinas players, including Canadian Solar and Trina Solar.
Canadian Solar achieved a 14.45% spike during the first month of 2014, with a price of US$38.90 (28.86) at the closing bell on January 31 . The Guelph, Ontario-based manufacturer announced on January 30 that it had shipped a record of 508 MW of solar PV modules under its own Canadian Solar label to Japan — thus becoming the largest foreign PV module brand in the Japanese market, with an estimated 7% market share in 2013.
"Japan has been a key market for us since 2009, when we initiated our market dive Shawn Qu, chairman and CEO of Canadian Solar.
Trina Solar closed the month down 0.87%, at US$14.85 (11.02), after seeing a number of higher pricing fluctuations. Right before the New Year, the Changzhou-based company — Chinas second-largest panel manufacturer — announced that it planned to build a one-gigawatt power plant in the western Xinjiang region of the nation. However, since then, uncertainty about government funding has held the share price down.
"The real reason this thing has kind of moved the way it has — up and down — is that, late last month, the company announced a [huge] project in China; but then, the stock took a nose-dive over the past week over concerns about whether China is cutting its funding target explained Zino, who has long favored Trina with a "buy" rating.
"Those concerns are only false speculation," Zino clarified to pv magazine. "Trina took a hit in the last few days of January, but I predict that it will bounce back nicely. People are a little too concerned about what the actual China target is going to be and thats not really the story when it comes to Trina Solar."
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