Cheap Solar, Hawaii, And Sunrun – Seeking Alpha

Solar – even without subsidies – is now the cheapest and fastest growing source of energy for generating electricity. Electricity can be used for just about anything; look at how EVs are replacing gasoline and diesel for transportation. Since, the sun falls on everywhere, solar energy is almost universally available. Thus, it’s not surprising that both utility-scale and distributed solar are growing so quickly.

Markets have noticed. The once much maligned Invesco Solar Portfolio ETF (TAN) performed better than any other equity ETF in 2019. This outperformance has continued into 2020 – even with the fast-developing COVID-19 disaster. Solar accounted for 40% of all new U.S. electricity generation in 2019.

You’ve probably noticed the growing proliferation of solar panels on rooftops, along highways, at construction sites, etc. A couple weeks ago, while watching the news, I saw a drone view of a Syrian refugee camp and (surprise) almost every third structure had a solar panel atop it. Many in developed countries are obsessed with solar providing all they need, AC, big fridges, etc. they overlook the fact that small solar systems, say 200 watt, can supply the basics: lights, smartphone charging, some cooking, and more.

Solar’s falling costs and universality have made it the go-to source for new energy. You can’t put a fossil fuel, hydroelectric, biomass, or (not easily anyway) wind turbine in your backyard. You can, however, readily purchase solar power plants from $1 (a small landscape light) up to whole building systems costing $15,000 or more on most properties and costs continue to fall.

Why distributed solar will be a big part of our future

It’s a common myth that solar is not up to the job to take care of “real” needs. Nothing could be further from the truth. Property owners, almost everywhere, have more than enough sun falling on their roof or land to generate enough electricity to power their structures – and an EV or two.

Here’s the numbers for the U.S.:

First find out how much electricity, in kWh, you used last year for your home. In the U.S., currently the average number is 11,000 kWh and the average installed cost of a residential solar system is $12,800 after credits are applied.

What about charging an EV? Well, Tesla’s (TSLA) 2018 Model 3, rated at 26 kWh/100 miles, needs 7.8 kWh a day to charge it enough to go 30 miles. A year’s worth of charging a Model 3 at 7.8 kWh/day is 2,847 kWh.

Now add the 2,847 kWh EV load to the 11,000 kWh residence load and you get 13,847 kWh needed over a year to offset the costs of a residence and a Tesla Model 3. That system will cost you roughly $16,000 after credits and take up about 500 square feet on your roof.

True, no one is average. But averages give us a way of getting an handle on this complex issue.

Now consider the benefits: Your $16,000 solar system supplies all the electricity your home and EV need for a year and you are helping the entire world by drastically reducing greenhouse gas emissions.

Solar investors should watch Hawaii, Sunrun, and virtual power plants

Everyone loves Hawaii! And what’s not to love? A mild climate, beautiful beaches, scenic mountains, abundant sunshine, tropical ambiance, and wonderful food. (Okay I’ll admit it. I’m a pineapple and seafood aficionado.)

As Hawaii Aims for 100% Renewable Energy, Other States Watching Closely

Poipu, Hawaii, Kauai island. Credit: Getty Images

In 2015, the governor of Hawaii directed the state’s utilities to get 100% of their energy from renewables by 2045. Interim targets are 30 percent renewables by 2020, 40 percent by 2030, and 70 percent by 2040; Hawaii is running ahead of schedule.

In many ways, Hawaii is a microcosm of the U.S. The state has traffic jams, fast food joints, upscale (and not so upscale) resorts, tourist traps, drug issues, etc. One thing that’s different, however, is the price of electricity and gasoline.

With no fossil fuel resources, Hawaii has traditionally relied on burning imported oil to generate electricity. That’s expensive and Hawaii’s electric rates are twice the U.S. average. Hawaiians currently pay around 26 cents per kilowatt hour for their electricity.

The high rates have long motivated Hawaiians to look at solar for generating electricity. Rooftop installations were strong until 2015 when the state phased out net metering. However, with solar’s falling costs, installations jumped 21% in 2019 as several grid scale and thousands of residential projects went online.

In June of 2019, Hawaiian Electric (HE) announced no less than 7 new solar+storage contracts, These could add an additional 262 megawatts of solar and 1,048 megawatt-hours of storage – one of the largest storage projects in the U.S. Six of the projects have contracts to supply power at under 10 cents per kilowatt-hour – half the traditional cost of fossil fuel and a record for the state.

Sunrun (RUN) is a leading U.S. residential installer. What is not as well known is that the company is also a leader in virtual power plants (VPPs). This can be a win-win situation for both utilities and customers. Utilities save by not having to build infrastructure such as large power plants, transmission and distribution lines. The customers get a solar installation with reduced bills and reliable service – even if the grid goes down. Everyone in the world benefits as greenhouse gas emissions are reduced as solar displaces fossil fuel.

In Oahu, Hawaii’s most populous island, Sunrun is partnering with Hawaiian Electric to set up a VPP. Sunrun installs the panels along with its Brightbox batteries at customers’ residences and businesses. Hawaiian Electric can then draw on these batteries during peak demand time. The batteries charge during sunny days when demand is low.

Will VPPs, with their intelligent computer-based decision making, become common? It’s too early to tell, but it’s a win-win-win situation for utilities, their customers, and the environment.

In addition to Hawaii, Sunrun is in various stages of developing VPPs in California, New England, and Puerto Rico.

Sunrun may be the leader in VPPs, but it’s not at all certain at this point if the company can profit with them. As with any new venture, it’s difficult to predict outcomes, especially profitable ones. Solar “tool makers” SolarEdge (NASDAQ:SEDG) and Enphase (NASDAQ:ENPH) have done much better so far than solar panel makers and installers.

How the COVID-19 crash may affect solar and Sunrun

The COVID-19 crisis has dragged Sunrun, as most other equities, way down. After trading at over $23 in early February, RUN traded as low as $9 Monday, March 24 but closed up over 23% on Tuesday.

ChartData by YCharts

Sunrun was doing quite well relative to the S&P 500 until the COVID-19 crisis came along. Since then, the company has underperformed SPY, but if you believe this is a viable company now may be a good time to buy on dips.

Bullish arguments for Sunrun include: The company is, arguably, the best, most experienced, installer of residential/commercial solar in the U.S. The company, though near 52-week lows, is profitable; the trailing P/E is 45 and forward P/E is 16. The company is carving out a leading niche in the emerging VPP market (although we don’t know how profitable that will be). The company is now also offering storage for its solar systems with its Brightbox batteries. The Fed, combating the COVID-19 virus, has taken interest rates close to zero, helping all companies with debt, such as Sunrun.

Bearish arguments for Sunrun include a high debt to equity ratio is 2.71 , a history of underperforming revenue and profit targets and estimates, and new competition from Tesla’s resurgent solar business.

OPEC is flooding the market with oil right now. That, combined with the coronavirus, has driven WTI oil down to a recent low of $22/barrel. How does this affect renewables and solar energy? In the long run, I don’t think it matters. Fossil fuel volatility scares investors while solar is as predictable as the sun coming up. I see any weakness in solar stocks due to the current low fossil fuel prices as a short-term phenomena.

One can even make the argument that the coronavirus is bullish for solar and EV stocks. Solar home and EV charging give owners more freedom of choice over their energy supply – they aren’t at the mercy of the Middle East events and politics. Having your own solar system enables self-isolating.

These are turbulent times and the solar sector is volatile by itself. Predictions are difficult.

Disclosure: Investors should do their own research and exercise due diligence before investing in Sunrun or any solar company. Renewables are new and stock prices can be extremely volatile.

Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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