Solar Stocks and America’s Solar Problem
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Researchers at the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) have created the most efficient solar cell recorded yet – a 39.5% efficiency under normal sunlight illumination – which is 0.3% higher than the record they set in 2020. These small incremental gains show how difficult it is to increase efficiency, but it all comes down to the almighty dollar. There’s always a tradeoff between price and efficiency, which is why today’s most efficient solar panels are around 22% efficiency.
Those efficiency numbers continue to slowly trend upwards, and this is the first year that the top-six most efficient solar panels averaged 22% (according to Clean Energy Reviews which created the above chart). This means utility-scale solar projects can now produce energy at a cost that’s cheaper than coal which still accounts for over 20% of America’s electricity generation. With solar accounting for just 2.8% of utility electricity generation in the USA, there’s plenty of room for growth. Unfortunately, that’s now stalled.
America’s Solar Problem
Our tech stock portfolio contains meaningful exposure to renewable energy which is why we’re concerned about what’s currently happening in the United States. Simply put, a domestic solar panel manufacturer put pressure on the current administration to examine the supply of solar panels from abroad that may be skirting tariffs put in place on the import of Chinese solar panels. As a result, an investigation has been initiated, and the supply of solar panels has dried up putting a large number of solar projects on hold.
Over the past ten years – under three different presidential administrations – the United States has imposed tariffs on the import of Chinese solar panels, even though the majority of the U.S. solar industry has never supported them. The Solar Energy Industries Association (SEIA) represents the interests of 1,000 companies operating in the United States solar industry and they’ve dedicated an entire page to explaining how damaging these tariffs have been to the growth of solar in the United States.
The current problem isn’t just about tariffs, it’s about a complaint filed by a tiny Californian solar panel manufacturer, Auxin Solar, that accused China of skirting tariffs by utilizing Southeast Asian countries. Cambodia, Malaysia, Thailand, and Vietnam were responsible for more than 85% of U.S. solar panel imports during the fourth quarter of 2021. An investigation was launched by the U.S. Department of Commerce in late March, and preliminary findings must be announced within 150 days. At that time, the investigation can cease, or it can extend for another 215 days.
In the meantime, U.S. solar expansion projects have frozen. That’s because the investigation could result in new anti-dumping tariffs – ranging from 50 to 250 percent – being imposed on these four countries, perhaps even retroactively. Earlier this month, 25 U.S. senators signed a petition asking President Biden to resolve the issue quickly because it stands to cripple U.S. solar growth. Says the petition, “industry surveys indicate that 83% of U.S. solar companies report being notified of canceled or delayed panel supply.”
We’re having a hard time understanding the logic here. If China’s government wants to subsidize solar panel manufacturing and produce cheap solar panels, let them. China already produces 86% of the world’s photovoltaic panels. Helping a small struggling United States solar manufacturer at the expense of the USA’s entire solar industry seems foolish. Just import cheap panels and produce loads of cheap solar energy.
The Impact of Tariffs on Solar Stocks
If you invested in American solar panel manufacturers, then you probably ought to rethink that bull thesis if they rely on the government to penalize the competition. If you’re an investor in U.S. residential solar, you have much more to worry about than tariffs, because those tax breaks are going away soon. When that happens, residential solar won’t be competitive at all from a cost perspective. On the upper end, it’s actually the most expensive way to generate electricity there is.
When we vetted The 10 Biggest Solar Stocks in the World, we settled on SolarEdge (SEDG) because of their minority exposure to the United States – 40% of 2021 revenues – and their global leadership position in the production of inverters and optimizers, solar hardware that apparently can’t be replaced by cheaper Chinese substitutes. Industry analysts say, “SolarEdge Technologies Inc. may see increased backlogs and delays until panels can be acquired.” All we need to do going forward is monitor the below metric highlighted in yellow.
Note that their reliance on the United States has been gradually decreasing over time, from 47% in 2019 to 40% today. Unfortunately, they don’t provide this geographic breakdown in their 10-Q reports, only in the 10-K, so it will be difficult to monitor their U.S. revenues throughout the year.
The other renewable energy stock in our portfolio is one we’re more concerned about, NextEra Energy (NEE), The Biggest Renewable Energy Company in the World.
The Impact of Tariffs on NextEra Energy
The world’s largest electric-utility company by market capitalization also happens to be the largest renewable energy company in the world. They’re too busy executing to worry about things like putting together legible investor decks, so we’re forced to sift through mounds of documents trying to answer simple questions – like how much solar power does NextEra Energy produce? The company website says 17,000 megawatts of renewable energy are being produced, and the latest earnings deck says 3,600 are coming from utility solar. That may be a small percentage now – just 21% – but the company’s expansion plans are anything but. NextEra’s flagship utility, Florida Power and Light, has the largest solar energy capacity of any utility in the world with plans to nearly triple that output through 2026. Below you can see the companies with the biggest solar expansion plans that are now being put on hold.
In the latest NextEra Energy earnings call remarks, it’s worth reading how articulate a response the company has made as to why this investigation only stands to hinder U.S. solar growth (starts at bottom of page 11). Given U.S. solar manufacturers are sold out of panels through 2024, and only capable of servicing 10 to 20 percent of U.S. domestic demand, the government investigation serves little purpose in protecting solar manufacturers. They go on to say:
It should also be noted that nearly all of the large domestic solar panel assemblers in the U.S. do not support the efforts behind the circumvention claim or the Commerce Department’s decision to investigate, as they also primarily rely on imported cells from Southeast Asia to produce their panels in the United States.
Credit: NextEra Energy Earnings Call Remarks
NextEra believes it will be unlikely that the Commerce Department will impose new tariffs as it goes against historical precedence. As for the impact to the company, here’s what they said:
Based on what we know today, we believe that approximately 2.1 to 2.8 gigawatts of our expected 2022 solar and storage build may shift from 2022 to 2023.
Credit: NextEra Energy Earnings Call Remarks
Our Two Cents
The expansion of solar to become the dominant form of electricity generation will only happen for economic reasons. America’s choice to impede growth by imposing tariffs on solar panels will prevent optimal growth from happening, but it won’t impede the progress of solar in other places around the globe. NextEra Energy’s future growth prospects are looking dimmer now, but things could get a whole lot worse based on the outcome of the investigation. This is where the management team will need to make some smart decisions about what steps to take following the outcome. We’re less concerned with how this might impact SolarEdge given their international exposure.
We believe that many proponents of green energy don’t actually care about saving the planet. They’re more interested in trying to exert control over other people because they can’t achieve positions of authority through competency. Common sense and a shared desire to produce more clean energy are being pushed aside because – well, that’s what we can’t figure out, but you can bet it has something to do with America’s favorite obsession – political bickering. No wonder the Chinese are dominating solar panel production.
Conclusion
When the conversation shifts to blaming the current administration, just remember that this tariff problem has existed through three administrations, so it has nothing to do with donkeys and elephants. All lawmakers are responsible for the damage it’s had on the U.S. solar industry. But the Biden administration is currently holding the ball and needs to act decisively, and in the best interests of the majority, or solar energy will never become the dominant energy source in the United States.
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So much of the commentary on the Commerce Department investigation has been misdirection, rather than analysis. Commerce’s action is not policy, it is simply enforcing existing laws. The size of the petitioner is immaterial, it is the credibility of the petitioner’s claims about potential circumvention of existing tariffs. Any close observer of the solar industry knows that there is credibility to these claims (see BofA Securities analysts take on this). And it is not “fine” if China wants to compete unfairly – that is what a rules based trading regime is all about. And the Chinese solar supply chain is rife with high carbon emissions and forced labor, and is increasingly unreliable. We are whistling past the graveyard if we believe that continuing to double down on this supply chain is the answer vs. developing a more distributed, resilient and sustainable solar supply chain capable of meeting our future solar needs.
As we said, it’s time to start using common sense and doing what’s in the best interests of the vast majority. Maybe listen to what the solar industry has to say? Domestic solar panel manufacturers are sold out through 2024 and can only product 10-20% of what the USA needs to grow solar. China produces 86% of the world’s solar panels. What’s the solution here? Freeze all projects for a year and then impose hefty tariffs? Doesn’t sound like the answer.
Giving some thoughts to your response Michael and lots of people feel a similar way. It’s definitely a contentious topic to debate. Would be great to hear any thoughts you might have on what the nest way forward would be? The forced labor issue is tricky as Xinjiang produces about 45% of the world’s supply of the key component, polysilicon (says the BBC). China is apparently dominating in the production of this key component, so maybe that’s also helping drive down prices? Sure gets tricky because things get political so quickly and it’s tough to maintain objectivity in discussions.
Gentlemen,
There are many points I could make to repudiate your comments on buying Chinese solar panels, (slave labor, transfer of jobs from Americans to China – our enemy, utilizes massively polluting coal fueled electricity to produce, the destruction of the US middle class, the increase in wealth concentration in the 1% including the authors of Nanalyze, and the list goes on an on. But I am only going to point out a simple mistake in your premiss. The greatest lie about renewables – solar and wind, is that they are cheap and cheaper than coal fueled electric generation. Electricity delivered to your house has two components. The actual “energy,” and the ability to have it there when you want it, the “capacity.” Solar and wind only provide “Energy.” They do not produce Capacity. A coal plant produces both. The “energy” produced from a coal plant today is lower cost than the energy from renewables using an apples to apples comparison. Every solar and wind plant has to have a fossil fueled power plant sitting on hot standby to provide the Capacity and the Energy that solar and wind cannot when the sun does not shine and the wind does not blow. If you want electricity for those times then you have to purchase capacity from a fossil fueled power plant whenever you purchase solar or wind generated electricity and add that to their cost. Renewables are always the highest cost electricity in the generation stack if you want to be honest with yourself and not politically correct.
You probably shouldn’t start assuming things about the author when you have zero information about who wrote the piece. Your main point of contention is Lazard. Fair enough. We happen to use that as a basis to make investment decisions, so if you have some collateral you’d like to share in place of the Lazard LCOE, please go right ahead. Lazard is either correct or they’re not painting the entire picture. You’re saying the latter. Great. Provide a chart from a third party then as a substitute so we can see how expensive renewables are compared to coal. We need real data. If you read us for any period of time, you would know we give two shits about being politically correct, and could give two shits about ESG. We want to make money.
I’m all for the free market and generally despise tariffs. But you can’t just glide over the larger issues here even if you think solar industry growth is the chief moral and economic good (maybe it is, but it seems unlikely). China breaks the rules in so many ways and that needs to stop, even if it is unpopular or inconvenient in the short term. The CCP wants to get strangleholds on as many critical high tech industries as it can, by any means necessary (dumping or otherwise), for both economic and military reasons. We should at least consider not helping them, even if it means pushing back our green dreams a little bit. Citing the solar industry’s wishes is a helpful data point, but they have an obvious conflict of interest, so I don’t think they should just have the final word and that’s all there is to it.
Thank you for the comment Peter. Good to hear your thoughts. If the Chinese government wants to spend their own money subsidizing solar panels, is that a bad thing? Just asking the question because we’re not sure the answer. Is there another industry situation we can compare this to as precedent? Quite a number of people share your sentiment that it shouldn’t be dismissed, so it’s worth understanding more about the root problem. One thing we can’t understand is why this isn’t being discussed in the mainstream media? We haven’t seen this talked about much. Going back to the subsidization, we’ve always believed that green technologies should never be subsidized or they won’t scale. So that’s a pretty good point to make about China artificially making solar energy cheaper than it actually is. This is a more complicated topic than we initially understood it to be. What’s the optimal steps to take from here for America? Thank you for the thoughtful comment.
Of course, love your site!
Yeah this whole area is super subtle and interesting. I don’t mind China spending its money for the general betterment of humanity, but I do have an issue with them spending money to target and destroy Western businesses and/or improve their ability to wage economic, political and military warfare. They seem more focused on the latter than the former.
The mainstream media doesn’t talk about this because it doesn’t fit their narrative agenda. For them, environmentalism is a religion designed to increase and maintain ideological power and when you are running and managing a religion and trying to maximize followers, in terms of number, receptivity to control and agency on your behalf, you often aren’t as interested in enlightening as you are in blinding.
In my mind, this is why there is little talk (or even contemplation) about what I see as the coming energy crisis. Wind and solar (the most virtuous of energy sources) can in no way currently replace fossil fuels and/or nuclear for our energy needs, and yet we continue to eliminate and constrain the latter, while population grows and energy needs in general grow as computation and cloud-enabled services and devices proliferate. The collision of these two trends is going to become extremely unpleasant at some point, and I suspect gas prices right now are reality giving us a warning shot. I am old enough, however, to remember the Cold War, when evidence that Communism was monstrous was everywhere (mass slaughter, subjugation and torture, oceans of human misery), and all the cool, beautiful, “enlightened” people in the West nevertheless still thought it was a great idea that would inevitably inherit the world and elevate us all. In light of that extreme intellectual obstinance, one wonders what kind of chaos will need to ensue before irrationality in energy policy can ever be successfully countered.
Using subsidies is such a double-edged sword. In general I think you need real world constraints/requirements to guide them. Like how the military spends money through the acquisition process — if their money doesn’t create success, enemies can win and people can die. (Not that the military acquisition process is anywhere NEAR ideal, lol.) OTOH, government throwing seed money around often doesn’t work, b/c politicians are often more interested in their own appearance/optics than in project success, and seed money landing at the right time, on the right team with the right tech atop a sustainable concept and business model… well, that is a fraught, challenging thing, even to very bright people intimately connected to the problem space. (Presumably, albeit tangentially, why China has entire cities with no one inside them — central planning misjudging the circumstances…)
Hey Peter. Thank you very much for sharing your thoughts on this. Would have to agree with your second paragraph to a large extent. There are many ideological agendas being pushed all around us that have no altruistic drivers whatsoever. They largely appear to be ways for inept people to gain power over others since they lack the ability to do so in today’s societal structures that reward competency. These individuals like to believe that whoever amassed wealth did so through luck, not hard work. A bit off topic, but we need to start calling this stuff out more.
Regarding the third paragraph, most of the planet’s people rely on oil and gas heavily, so constraining these resources punishes the poor. The bullwhip effect combined with the high energy prices we see now are a recipe for disaster no doubt. Those who believe Communism is the answer to the world’s problems ought to pick up some books. Maybe start with “Wild Swans: Three Daughters of China” and then end with “The Gulag Archipelago.” Go visit third world countries and immerse yourself in poverty for a while, not as a bystander akin to visiting a zoo, but as an active participant. Sitting in a developed market tower and throwing up our hands while blaming it all on evil Russia isn’t truly understanding the problems mankind faces when an energy crisis happens.
And your last paragraph summarizes the real problem here. It’s largely all political. Those who are incapable of casting a critical eye on their ow political party are firmly convincing the rest of us that these problems won’t get resolved anytime soon.