U.S. Solar Industry Sets Record in Q1 2016 but Questions Remain

By Markets Fool.com

Image source: Getty Images.

Continue Reading Below

The latest U.S. Solar Market Insight report from GTM Research and the Solar Energy Industries Association is out and the U.S. market continues to roll. In the first quarter of 2016, 1.67 GW of solar was installed, up 24% from a year ago, and for the full year 14.5 GW of solar, enough to power 2.4 million homes. Based on the latest projections, 2.8% of U.S. operational electric-generating capacity could come from the sun.

The headline numbers are huge, but investors should focus instead on what's behind them.

Why utility-scale solar could crash in 2017

It's underappreciated by most casual solar observers, but utility-scale solar is, by a wide margin, the largest driver of solar installations. In 2016, that will continue, with 10 GW of projects expected to be completed and another 4.5 GW finishing construction and officially sending electricity to the grid in early 2017. But that's where the good news stops.

Image source: GTM Research U.S. Solar Market Insight.

Continue Reading Below

One of the reasons stocks like First Solar and SunPower have struggled this year is because their bread-and-butter utility-scale solar projects face an uncertain future in 2017. A lot of projects were due to be completed in 2016, which was when the solar investment tax credit was originally set to expire before being extended and that left little demand in 2017. While some projects have spilled into 2017, the majority of utilities have more than enough projects to meet their renewable energy targets for the next few years and there's little upside to adding more projects now.

On the upside, states in the southeastern U.S. have only now started to see the cost benefits of solar and are going to out grow states like California over the next few years, albeit from a much smaller base. In other words, 2017 may be a rough year for the utility-scale market but it will also see geographic diversity increase as solar costs come down. There's also good news in the commercial market.

Commercial solar could be big business

The segment the U.S. Solar Market Insight report calls non-residential solar, or commercial solar, is perhaps showing the most signs of life in 2016. Commercial customers are starting to consider buying electricity from third-party plants or even leaving the utility altogether. This is expected to be a big growth market for the solar industry going forward, and after years of trying to figure out how to make the economics work, these customers may finally have the key.

Community solar is another segment that has long been high potential but very underpenetrated. 2016 should be a turning point for the community solar business with First Solar, SunPower, SolarCity , and many others playing a role.

Given the strong economics of solar today, it's easy to see why an increasing number of commercial customers would want to go solar. And while commercial solar grows, residential solar faces a lot of questions.

Image source: SunPower.

Residential solar's uncertain future

The residential solar market was supposed to be bulletproof in 2016. Falling costs combined with growing awareness and the pending ITC reduction were supposed to create the perfect formula for growth. But that's not how things have turned out.

First-quarter 2016 residential solar installations were up just 1% sequentially and 34% year over year. By comparison, sequential growth had averaged 11% over the previous four quarters, so this is a notable slowdown.

The loss of Nevada in late 2015, due to a negative ruling on net metering, certainly hurt the industry and so did the loss of urgency after the ITC extension. The rate structure battle across the country will continue and I don't see net metering in its current form lasting for long.

Then there's the transition from leases to loans to think about. According to report co-author Cory Honeyman, loans will likely become a bigger piece of the pie and that could slow growth in residential solar. Part of the big driver of growth at SolarCity and Vivint Solar over the last few years was their move into new states and the spread of leases like wildfire as they did. But we're seeing loans emerge as a better financing option, which could lead smaller installers to take market share, which could slow the pace of growth for the industry.

There's a lot of debate about how the residential solar industry will shake out, but at this point, we know that growth is slowing in 2016 for residential solar. That may not be good for players like SolarCity and Vivint Solar that need growth to keep their businesses going.

2016 will be good, but questions remain about 2017

I'd expect a solid, if not bumpy, year for the solar industry in 2016. But the questions about 2017 will remain until the pace of contract signings picks up from utilities. Right now, it doesn't look like it's going to be the case, which could lead to a challenging year ahead for solar investors as they struggle to decipher what the next year or two will be like for the industry.

The article U.S. Solar Industry Sets Record in Q1 2016 but Questions Remain originally appeared on Fool.com.

Travis Hoium owns shares of First Solar and SunPower. The Motley Fool owns shares of and recommends SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.