In textbook economics, markets rapidly balance and establish prices at a point where supply equals demand and then remain in equilibrium absent any external shocks after that point. In practice, markets rarely work as smoothly as economists’ models predict. For evidence, witness the early stages of market confusion that are starting to play out in the solar market. Solar markets are in hyper growth mode right now, rushing to take advantage of federal tax credits that are set to expire in 2016.
With Congress bitterly divided on nearly every issue and the 2016 election promising to be contentious, there is a strong possibility that solar credits will not be extended. If that happens, then it would completely change the dynamics of the solar market, and many firms that have relied on generous rebates would have their business models thrown into substantial doubt. Even absent the expiration of solar credits though, it is hard to see how the solar market can continue to grow at its current pace. Solar growth has been explosive in recent quarters, and the infrastructure being built to support the growth in the market requires that more and more businesses and individuals continue to sign up for solar each year. Related: LNG Glut Set To Worsen Considerably Over Next 3 Years
Unfortunately, the industry is probably overestimating the sustainable growth rate for new installations. That reality is reflected in the divergent opinions of publicly traded solar companies. First Solar, for instance, sees an on-going boom in solar market growth, while Solar City is already preparing for hard times in the industry and is rebalancing its business accordingly. If the dry bulk tanker market, the mining industry, the offshore oil drilling market, and the oil market overall are any indication, then Solar City may be making the right choice.
The one commonality between all of these industries is that each group overbuilt their infrastructure when times were good and growth was heady under the assumption that the world was “different” and that growth would continue. It’s an old story really; company executives cannot (and have little incentive to) resist taking on risky levels of capacity expansion that end up oversupplying the market creating a dramatic boom and bust cycle. Now this same story appears to be playing out in the solar market. Related: How To Play A Potential Collapse In The HAL/BHI Merger
Solar advocates would argue that the solar market is fundamentally different today because prices are falling and the country is finally realizing the necessity of going green. And there is little doubt that input costs are falling rapidly. But that falling set of prices is precisely why so many people and businesses are interested in solar at present. As prices fall, the quantity demanded of a product increases. At some point though, most of the best and most economical areas for solar installation will hit their saturation point and when that occurs, many assets built for solar panel installation will be worth considerably less. One could argue that point is probably fast approaching. This is exactly analogous to the fracking boom.
Moreover the expiration of Federal tax credits in 2016 is not going to help. That expiration is probably already pulling 2017 demand forward in the same way the “cash for clunkers” program pulled car demand forward. In light of this, 2017 and 2018 are likely to be very lean years for solar installation. In 2020, new incentive programs will come online, but the multi-year incentive hiatus will have radically reshaped the solar supply chain by then. With that in mind, investors should be very careful about extrapolating solar company earnings from 2015 and 2016 into the future.
By Michael McDonald of Oilprice.com
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