Let’s Talk Solar

Flat World Partners
6 min readFeb 1, 2024

About | Mission | Blog

Clean energy stocks are going through a correction. Despite the positive implications of the IRA for the sector, the Wilderhill Clean Energy Index has declined by 69% over the past year while the S&P 500 is up 10% and the NASDAQ has risen 17% over the same period. Rising solar costs have been a significant contributor to this and are negatively impacting demand. The unsubsidized levelized cost of energy (LCOE) for utility scale solar is estimated to have increased from an all-time low of $38/MW hour in 2021 to $60/MW hour, or 67%, in 2023.[i]

Several factors have contributed to the underperformance:

  • Supply chain constraints coming out of the pandemic created a supply/demand imbalance for solar providers, which pushed up equipment pricing. Manufacturers then increased their capacity to meet this need. As supply chains began to normalize, solar firms have found themselves with excess inventory vs. the level of actual demand.
  • Inflation also pushed up other input costs, including freight and labor.
  • As interest rates rose to combat inflation, it made project financing for solar projects more costly. A 350 basis point increase in the weighted average cost of capital is estimated to have increased the LCOE for utility scale solar by 33%.[ii]
  • The higher interest rates also meant that the cash flows associated with the projects were being discounted at a higher rate, which decreased the present value of the projects overall.
  • Finally, there was an asset/liability mismatch with some utility scale solar projects, which have a lifespan of roughly 30 years and are contracted for the first 10–15, but are often financed by shorter duration debt, with an average maturity of 7 years. This made previously developed projects financed in low interest rate environments uneconomic investments in today’s higher rate market.[iii]

As a result of these factors, some solar investments have become less attractive for investors relative to other sectors that are performing better, including traditional energy names; the average upstream oil and gas producer returned 14% in Q3 2023, while the broader energy sector rose 12% for the same period.[iv]

The trends noted have had a significant impact on rooftop solar firms. Rooftop solar remains the most sensitive form of energy to fuel prices, followed by community scale projects and then utility scale.[v] This is partly because the residential solar market is largely funded by loan programs similar to other consumer financing plays, which are less popular in a higher interest rate environment. The cost of many rooftop solar installations has doubled recently due to the rise in interest rates and higher dealer fees. A typical installation that would have previously cost $25,000 is now likely to cost $50,000, which is uneconomical for many homeowners.

But what about community solar? The community solar model involves businesses and residences paying a monthly subscription charge to a community solar provider to receive their electricity. The local utility pays the community solar provider for the electricity supplied to the grid, which translates to credits on subscribers’ electricity bills. It allows people that are unable to participate in the typical rooftop solar model due to not owning their residences or being located in a suboptimal site for solar panels access to clean energy, including low-income households. In fact, the State of California mandated that at least 51% of all subscribers in each community solar program qualify as low income.[vi] The solar projects also offer the benefit of creating local construction jobs when they are being built.

Despite the current market environment, FWP thinks community solar is an attractive alternative when compared to rooftop solar. This is partly because of community solar being a subscription-based model rather than involving monthly financing for expensive rooftop arrays, which can be more sensitive to rising financing costs. The addressable market size for community solar is also larger than that for rooftop, given that subscribers do not need to own their residence to access it. The costs related to a community solar project are distributed over a wider user base than for rooftop solar, where these are often concentrated at each individual property.

Finally, there are provisions in the IRA to encourage community solar, including a 40–50% tax credit to reduce the cost of community solar projects that directly benefit residents of low income affordable housing, along with those making it directly available to non-profit housing authorities, as well as non-taxable entities such as cities. Community solar interconnection costs are now also included in the investment tax credit.[vii] These projects also offer a significant tax equity component to encourage development, which helps make them more economical. Time will tell whether community solar becomes popular with consumers looking for clean energy at a lower cost, but FWP is encouraged by the prospects it has seen thus far.

[i] PowerPoint Presentation (lazard.com)

[ii] PowerPoint Presentation (lazard.com)

[iii] www.CTVC.com

[iv] The Best Performing Energy Stocks Of Q3 2023 (forbes.com)

[v] PowerPoint Presentation (lazard.com)

[vi] California is finally unlocking community solar for the masses (energynews.us)

[vii] Blueprint 3B: Community Solar | Department of Energy

Jennifer Leonard, Managing Director — Investments

The US Department of Energy has put together a site devoted to information on community solar. It can be found at: Education and Outreach | Department of Energy.

Specific states have also assembled information on how to access community solar. While these are state-specific, some of the sites are listed below:

This newsletter is intended solely for informational purposes, and should not be construed as investment/trading advice and are not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned. Any reproduction or distribution of this document, in whole or in part, or the disclosure of its contents, without the prior written consent of Flat World Partners is prohibited

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