Solar energy stocks had a great year in 2020, despite a global pandemic that slowed sales and facilities in the middle of the year. Actions of Sun power (NASDAQ: SPWR), Sunrun (NASDAQ: RUN), Enphase Energy (NASDAQ: ENPH), SolarEdge Technologies (NASDAQ: SEDG), and Canadian Solar (NASDAQ: CSIQ) are just some of the stocks that more than doubled this year.
What is surprising about the industry’s position today is that 2020 was not so good for solar operations. The pandemic has made sales and facilities more difficult, and very few companies will actually grow this year. But there are reasons to think that operations will increase rapidly in 2021 and that could keep solar energy stocks moving in the new year.
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Interest rates are expected to remain low
Most renewable energy projects rely on low interest rates to be financially viable. A wind or solar project, for example, requires a large initial investment and then generates revenue from selling electricity over decades. Lower interest rates mean that less revenue is swallowed up by interest payments and therefore each project is more valuable. The good news is that rates have been dropping for the past year.
10-year cash flow data by YCharts
In 2021, the Federal Reserve indicated that it will keep interest rates extremely low for the foreseeable future due to high unemployment and low inflation. So I don’t see the trend for low rates changing this year. This does not mean that rates will not go up slightly, but as long as the 30-year Treasury rate stays below 3%, I think it will be a favorable wind for solar energy projects and therefore solar energy stocks.
Corporate solar energy is growing
Corporate America has been one of the biggest drivers of solar power installations in the past decade, and it’s not just public relations that drives investment. Companies see solar energy on commercial roofs or agreements to buy energy from utility-scale projects as a way to cut costs and have a more predictable long-term electricity cost.
According to SEIA, corporate investment in solar energy has grown 20 times in the last decade to 8,300 MW in 2019. Leaders in solar energy deployments are giants like Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and Walmart (NYSE: WMT)Me. In the past, this was because they had the ability to finance projects with ease. Today, however, smaller companies can play a big role in the growth of the sector, even if only by adding solar energy to the roof of a commercial building. Companies like SunPower are focused on commercial solar deployments and making them easier to build and finance. I think the growing demand for commercial solar energy will help keep everyone, from installers to manufacturers, busy for years to come.
The storage is finally here
Along with solar energy, energy storage is finally financially viable for homeowners, commercial developers and solar projects on a utility scale. Energy storage assets can add value on their own by bidding on grid charging or discharge services, or they can add value by moving solar electricity from peak production times to peak demand times. Utilities and regulators have shown that this adjustment will increase what they will pay for energy from solar development plus storage.
At home, solar energy finally begins to develop a business model. Companies like Tesla (NASDAQ: TSLA), Sunrun and SunPower are aggregating hundreds of home energy storage systems in what they call virtual power plants and bidding on the electricity markets. These bids in markets like any other power plant, but are located in homes and can be hundreds of points of contact with the network, instead of a single power plant. The best part is that it generates revenue for the owner of the energy storage asset.
As business models improve and the cost of energy storage assets drops, solar energy plus storage facilities are expected to help the industry grow. As a data point, SunPower said it is attaching energy storage to about 30% of commercial solar installations at the moment. And its residential energy storage solution is already being installed in 20 new communities. Sunrun said his energy storage attachment rate is 100% in Hawaii and 30% in California, which are pioneers in the storage market.
Finances are improving
To make matters worse, the solar industry appears to be settling into a more stable and profitable state than it has in the past decade. In the past, companies tried to integrate vertically, only to be interrupted at one point in the business model, causing losses and poor performance for solar stocks.
In recent years, most companies have switched to specialization, which has had the effect of improving the margins of many companies and even providing opportunities for growth. I would expect SunPower, Enphase, SolarEdge and Canadian Solar to see better margins and therefore profitability in 2021. If that happens, it could boost solar energy stocks once again.