Solar Energy Production Hit a Record High in 2016, So What's Wrong With Solar Stocks?

By Travis Hoium Markets Fool.com

2016 was an amazing year for the solar industry overall, even if it wasn't great for solar stocks. GTM Research recently reported that its upcoming U.S. Solar Market Insight Report done with the Solar Energy Industries Association will reveal a 95% jump in installations last year to 14.6 GW.

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To put that number into perspective, that's enough solar to power 2.4 million homes in the U.S. On top of the huge installation numbers, solar accounted for 39% of all new electricity installed in 2016, a record for the industry. And with costs coming down every year, the future looks bright for the industry.

Image source: Getty Images.

The solar industry's great year

The chart below shows the solar industry's incredible growth over the past six years. Every segment of the market has grown, led by the utility-scale solar market.

Data source: GTM Research / SEIA U.S. Solar Market Insight Report.

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This surge versus 2015 was driven by falling costs for solar installations and contracts signed to be completed in 2016 before the solar investment tax credit (ITC) was extended. It really wasthe ITC that led to a massive boom in solar last year, but it's also the reason solar stocks had a terrible 2016.

What went wrong with solar stocks

Across the board, solar stocks had a rough year in 2016, despite the installation boom. SunPower (NASDAQ: SPWR), First Solar (NASDAQ: FSLR), Vivint Solar (NYSE: VSLR), and Sunrun (NASDAQ: RUN) are all down significantly since the start of 2016. And SolarCity would be in the same boat if it weren't for its buyout by Tesla (NASDAQ: TSLA).

SPWR data by YCharts.

The reason stocks are down is because the ITC extension meant there were very few new contracts signed in 2016. The activity that led to last year's boom in installations was a result of contracts signed in 2014 and 2015, before the ITC extension was signed. So, what investors were concerned about was the lack of new contracts in the market.

Even the residential market went through something of a slowdown. Final numbers aren't out yet, but growth is likely in the single or low double digits, driven by the lack of urgency to install solar. Residential projects have a much shorter lead time than utility projects, so the ITC extension hit the market as early as the first quarter of 2016, whereas the impact of the ITC won't be a drag on utility installations until 2017.

What solar investors can expect in the future

We've known for a few quarters now that 2017 will be bad for the solar industry. Utility-scale projects will be hard to come by domestically and even projects signed this year won't likely begin construction until 2018 or beyond. And the 14.6 GW of solar installed in 2016 will likely be the industry's peak until at least 2018.

But the good news is that solar energy is cheaper than everand it's now competing with fossil fuels on a cost basis. Long term, that will lead to a tremendous amount of growth, and companies like First Solar, SunPower, Vivint, Sunrun, and Tesla should lead the way. It's going to be a bumpy ride, though, to get to that growth on the horizon.

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Travis Hoium owns shares of First Solar and SunPower. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.