It was another forgettable year for solar exchange-traded funds. After shedding value every year since they were launched in 2008 (with the notable exception of 2013), the VanEck Vectors Solar Energy ETF (KWT) and the Guggenheim Solar ETF (TAN) stumbled badly again in 2016, both losing more than 40 percent of their value.
A whole host of headwinds account for the nearly decade-long slump. First, capital markets flooded this industry with cash during the era when these funds were launched. This capital fueled an expansion in production capacity that has always been one step ahead of demand, and the resulting fall in prices led to losses for many producers, some of which ended up in bankruptcy.
Investors also remained wary of an eventual loss in government subsidies that had helped fuel aggressive rates of solar adoption. At this point, it is unclear how the Trump administration will view industry tax credit programs, but it’s wise to assume they won’t have open-ended support.
At the end of 2015, Congress approved a multi-year extension of solar and wind tax credits, which theoretically should be helpful to the solar cause. At the state level, the investment tax credits will remain available until they expire in three to five years depending on current state programs, according to Ron Pernick, co-founder of Clean Edge.
As a final blow, the incoming presidential administration appears inclined to show greater support for fossil fuels at the expense of clean energy, which means that solar technology will need to go head-to-head with oil, coal and natural gas for electric power production. In an e-mail interview, Pernick wrote that “eventually, the nation could decide to get rid of all subsidies (and I mean for nuclear, coal, oil, and natural gas as well). If that were to happen, renewable sources would do very well against their fossil fuel brethren.”
Subsidies? Who Needs Ya?
Tax policy may not even factor into the clean energy equation in coming years. Pernick notes that 2016 saw record breaking low prices for solar power, with solar and wind power now cheaper than coal in dozens of locations around the world.
That’s also the recent conclusion drawn by the World Economic Forum, which predicts that by 2020 “solar photovoltaic is projected to have a lower LCOE (levelized cost of electricity) than coal or natural gas-fired generation throughout the world.”
Despite the industry’s dismal stock price charts, solar demand is clearly responding to that falling LCOE. U.S. power producers, for example, added roughly 9.5 gigawatts of solar capacity to their grids in 2016, the first time that solar has led the field in annual installation capacity. Roughly 125 new solar panels came on line each minute in 2016, according to the U.S. Energy Information Administration, twice the installation pace seen in 2015.
Still, high-profile firms in this industry have had erratic levels of profitability, which is impeding share price performance. First Solar, for example, realized it must move even faster down the cost curve and will skip a planned upgrade to its Series 5 products in 2017. Instead, it will produce more advanced solar panels in its Series 6 line in 2018. That will lead profits to fall sharply in 2017 before an expected rebound in 2018.