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Why Solar Stocks Were Down Sharply Monday

CSIQ, FSLR, JKS | March 7, 2017

India’s Central Electricity Regulatory Commission proposed a 70-percent cut Monday in the cost of renewable energy certificates from $0.05 per kilowatt-hour to $0.015 per kilowatt-hour — and Axiom Capital’s Gordon Johnson said it’s not necessarily good news.

“Given record-low PV price agreements, with prices of $0.0494/kWh reported in the state of Madhya Pradesh, with continued declines in panel manufacturing costs abound, we believe there is a high probability of these proposals actually being enacted — and if so, we contend PV developers targeting the Indian market may be a bit more apprehensive,” Johnson wrote in a Monday afternoon note.

He added that the news may have prompted shareholders to sell off solar stocks.

Movements Mid-Afternoon Monday

First Solar, Inc (NASDAQ: FSLR) was trading down 3.7 percent Monday, while JA Solar Holdings Co., Ltd. (ADR) (NASDAQ: JASO) was down 0.8 percent, SunPower Corporation (NASDAQ: SPWR) 4.4 percent, Canadian Solar Inc. (NASDAQ: CSIQ) 5.2 percent and JinkoSolar Holding Co., Ltd. (NYSE: JKS) 4.4 percent.

“[We] recommend investors take note of those vendors with outsized exposure to the Indian market,” Johnson said.

Impending Effects

SRECs are available to purchase from PV plant operators when utilities fail to meet government-mandated obligations on renewable energy production. The certificates thus generate significant revenue for PC plant operators.

As PV projects generate average prices of $0.0696 per kilowatt-hour — as low as $0.0494 per kilowatt-hour — current SREC prices of $0.05 per kilowatt-hour represent up to 42 percent of potential revenue. A drop in cost “could represent a sizeable hit to PV plant operators’ potential revenue/profit.”

What The Math Says

Johnson estimated that a PV plant of 50 megawatts — averaging 1,450 hours of insolation per year and maintaining a project of $0.0696 per kilowatt-hour, with O-and-M costs of $0.05 per watt — would experience 11.9 percent reduction in EBITDA. After factoring in depreciation, the profit margin could fall 20.7 percentage points.

“At risk of stating the obvious, this would represent a considerable reduction in profit to owners, and hence project developers, of PV plants across India — the world’s next burgeoning solar market,” Johnson wrote.

The firm has a Sell rating on First Solar, JA Solar Holdings and Trina Solar Limited (ADR) (NYSE: TSL). It maintains a NC rating on SunPower Corporation, Canadian Solar and JinkoSolar Holding.