Despite the pressure on recent solar yieldco stocks, Deutsche Bank analyst Vishal Shah believes the concerns are "overdone," meaning solar companies and yieldcos alike should have plenty of growth opportunities at "sufficiently high cash-on-cash yields."
According to the report, the "underlying demand fundamentals remain strong." SolarCity has recorded bookings amounting to 395 MW in Q2, accounting for an increase of 67% sequentially and 82% YoY (year-on-year). SunPower has seen its pipeline double from 2012 and has a capacity of around 12 GW. Deutsche Bank states the forecast MW deployment is now projected to grow at a 30% CAGR (Compound Annual Growth Rate) through 2019. SunPower is expecting demand to grow continuously into 2017 and all its factories are in full operation mode.
The U.S. continues to drive the global demand forecast, which has an upside of about 55 GW, according to the bank. This implies about 30% YoY growth with the U.S. having about 70% YoY growth, China accounting for 30% and India with 100% YoY growth at approximately 2 GW. Other markets in central and south America are also contributors.
Deutsche Bank writes, "Recent sell-off in the yieldco space creates a temporary set-back to some of the EM yieldco stories, but project economics in international markets are attractive enough to support the longer term growth requirements of this sector, in our view." The yields, though higher than initially predicted, will probably not be much of a headwind for future growth and they are also forecast to decrease once markets start to normalize. Pricing of fully developed projects that go on sale are expected to drop. Less competition is expected from smaller yieldcos.
Residential market most attractive
TerraForm's acquisition of Vivint Solar's portfolio has raised some concern amongst investors, says Shah, but the U.S. residential solar market remains the most attractive segment in solar. Residential solar system costs are expected to decline the most amongst other solar application segments. The potential is at around 40% from the current US$2.50-3/W. Residential PPAs are among the "most attractive in the solar value chain and have on average about 2.5-3% annual escalators," writes Shah.
Commercial and utility projects are already low, says the report, and hence further price reductions are not expected.
Chinese demand strong
Tier 1 Chinese companies are said to be completely sold out and tier 2 are consistently getting orders. The Chinese demand environment is thus strong. The interest rate is stable at 6% for five to eight years and the total system costs too show stability around $1.20/W. Unlevered IRRs of 10-12% look possible in regions with high solar irradiation. The FIT payment timing remains a challenge, but the government is making inroads to streamline the approval process by making the grid operator handle the payments instead of the treasury.
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