Barron's Streetwise - Republicans Like Solar, Too

Episode Date: June 11, 2021

Demand is soaring, and it's not just tree huggers. Sunrun's co-founder talks about Tesla, Ford's F-150 Lightning pickup, and a 50-year growth opportunity. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe. And the voice you just heard, that's Ed Fenster. He's co-founder and executive chairman of Sunrun, the biggest U.S. installer of home solar power. Growth in solar is ferocious right now, and Ed says the sales pitch no longer starts with hugging trees. It's about hugging dollars. Shares of solar companies rocketed higher last year but have sold off in recent months. Is that a buying opportunity? Coming up, we'll hear from Ed and from a company that handles large-scale solar projects,

and we'll talk with a Wall Street analyst. large-scale solar projects, and we'll talk with a Wall Street analyst. And we'll probably say a little bit about Ford's new electric pickup truck, but I'm not going to do any home improvement oversharing. I've been doing way too much of that lately. All right, I'm going to do a little. I guess I'm in the market for installing solar panels. It kind of snuck up on me. My wife and I decided to convert our home heating and cooling later this year to what's commonly called a geothermal system. The technology sounds to me as complicated as the web of financial rewards and hidden punishments that will come with it. For example, our upfront costs will be preposterously high. That's a kick in the shin. But our power company will give us a rebate. That's a pat on the back.

But it's only doing that because it knows that a geothermal system will replace the fossil fuel that we burn for heating now with higher electricity usage going forward. So it's really a second kick in the shin disguised as a pat on the back. Now, the IRS will give me a tax credit equal to 26% of the cost of the job. That's a big deal. But my town's tax assessor says he might have to consider a geothermal conversion, a home improvement, and raise my property taxes. Basically, one tax collector will reach out for a warm handshake while another sneaks up behind for a wedgie. It's like middle school all over, only the best wedgie defense now is an appeal to the tax commission.

Financially speaking, I've lost track of whether geothermal will be a good deal. We're doing it because the numbers are close enough and it seems like a good thing for the environment. It creates important do-gooder carry-forwards. Like when my vegetarian friends this summer tell me I should switch to hot dogs made from beets, I can say that sounds terrible. And by the way, let me tell you about my geothermal. Now I mentioned geothermal because once you decide on something like that, adding solar to offset the extra power usage is a slam dunk. The quotes I got on adding solar panels were much lower than I expected, and the same federal tax credit I can get for the

geothermal job applies to solar too. I'm not sure whether geothermal heating and cooling will ever become commonplace, but electric vehicles will, and fairly soon. And they bring the same dynamic. They eliminate the need for gasoline, but they draw more power from homes. Here's someone who sees that as an opportunity. Electrification, broadly speaking, which I would define to include electric vehicles, heat pumps, electric heating, stovetops is a huge growth engine for us. And as an industry, we're uniquely well positioned to accommodate it. That's Ed Fenster, co-founder and executive chairman of Sunrun, the biggest U.S. solar installer.

He's especially excited about a deal his company has with Ford for the new F-150 Lightning pickup truck. It has a massive battery that can power a typical home for three days, but it can also increase a home's power usage by half. Here's Ed. Most everyone who purchases an electric vehicle is going to want a charger at home. And so Ford is planning to refer new customers to us to install those chargers. And in that process, we will also talk to customers about whether or not they want solar energy in probably eight out of 10 cases based on at least traditionally where electric vehicles get sold. You can power the car more

cheaply with a rooftop solar system than with the grid. A lot of businesses were down last year due to the pandemic, but it was the biggest year ever for residential solar installations in the U.S. 3.2 gigawatts across the industry. That's an 11% increase from 2019. A trade group for solar, the Solar Energy Industries Association, expects more double-digit growth in the years ahead, and it predicts that solar will go from 4% of homes now to 13% by the end of the decade. It's pretty easy to see why. Power from the electric company gets more expensive over time. According to the U.S. Department of Energy,

the price went up 2.2% a year on average between 2005 and 2020. But solar panels have economics similar to those of computer chips. They've gotten cheaper over time per unit of output. In the case of residential solar, 50% cheaper just since 2010. percent cheaper just since 2010. Eventually, you reach a point where solar is cheaper than electricity from the grid in most markets with or without tax breaks. Give me a sense of where we are in the cost of deploying solar. For the cranky non-environmentalist, he's not hugging trees, he's whispering swear words to trees, just purely economics. How competitive is solar with everything, all the other choices out there? That, by the way, is our typical

customer. Swearing at trees? I hope not. Well, I mean, maybe not. That's extreme. I don't think a lot of people do that. But when we survey our customers, we do find more Republicans than Democrats, as one example, which I think is not intuitive to people. We're able to offer solar electricity for less than grid energy to over half of Americans. And even solar energy plus battery backup together cost less than grid energy for most Americans living in coastal areas. Ed says there's another reason people turn to solar that doesn't have to do with money or the environment. They're not crazy about the company giving them power now. I think on an emotional basis, they really don't like their utility. Electric utilities have low

customer satisfaction scores. If you look at the history of disruptive companies nationally, the most successful ones operate in markets with low customer satisfaction, you know, taxi, cable television. And so if you really just treat a customer well and recognize they're a human being and that you appreciate them as a customer in a market where that's not currently sort of the base case emotion, that's a really powerful force and one that we really try to foster. I asked Ed, if solar power has gotten so much cheaper over the past decade, won't it keep getting cheaper? And if it'll keep getting cheaper, why shouldn't I just wait? There are a lot of strong reasons to install today.

The first one is reliability. No one likes to live at home, you know, in the dark with a freezer full of melted food, particularly when they're working from home. The power you save for the period that the system is installed matters, right? So if you wait three years, maybe you'd pay a little bit less for the system then, but you've also foregone three years of savings. And then finally, you know, the government incentives are generally designed to decline over time. To Ed's point, that federal tax break I mentioned started out at 30%. Now it's 26% through the end of next year.

Then it'll drop to 22% for a year, and then it'll disappear. Unless new legislation changes that. Sunrun specializes in solar as a service. It'll buy and own the panels so that customers have little to no upfront costs and instead pay a monthly fee, like they do to the power company. Sunrun has other models too. Customers can buy their equipment upfront and pay nothing each month, or they can finance their equipment. We've talked on this podcast recently about widespread supply chain mayhem.

I asked Ed whether he's facing shortages. He said tax credits encouraged Sunrun to load up on inventory, which was fortunate, but that some items are less available than the company would like. Structurally, there's plenty of demand and supply for solar panels and inverters. We are a little tight on the battery side. We did say on the last earnings call that we'd expect to double the amount of battery installations this year versus next year. But if it weren't for constraints in that market, it could be several times faster than that. Sunrun has plenty of competition, both from local installers and national ones. Back in 2016, Tesla, the carmaker, was the industry leader in solar installations following its acquisition of a company called SolarCity. But demand slowed and debt mounted, and Tesla founder Elon Musk took workers from solar and reassigned them to the company's crucial Model 3 car program.

him to the company's crucial Model 3 car program. Tesla's solar market share collapsed, and by 2018, Sunrun took the lead. Almost exactly a year ago, two key things happened. Sunrun announced it was buying the number two solar installer, Vivint, which ended up increasing its market share from 8% to 14%. Also, Tesla introduced what it called the lowest ever cost to go solar in the United States, a system it said was one-third cheaper than the industry average. Tesla says it got costs this low by changing two things. First, it switched to standard sizes, which it literally called small, medium, large, and extra large. The extra large is 16.3 kilowatts. Second, it skipped the sales force and in-home consultants.

Customers just buy what they want online and installers take it from there. For contrast, if you've shopped at Home Depot, you might have been approached by a solar salesperson working for Sunrun. The two companies have a sales agreement. If you go with a company like Sunrun, a consultant will also customize a solar system for your home instead of you choosing medium or extra large. We'll see whether Tesla's approach causes other industry players to streamline their operations.

For now, Ed at Sunrun, as you might imagine, has thoughts on which business model he prefers. Tesla has an interesting strategy, which is much more of a self-service strategy. So someone who's done it before and is a super expert and doesn't mind doing a lot of the work themselves might find that to be a good approach. It's certainly a sales model that we're watching as well. But it's really that combination, as I mentioned earlier, which is we have this sort of ubiquitous coverage. We're more likely to find a customer at the moment they're considering it and then be able to present them a knowledgeable, well-trained person who can help them through the process.

I asked Ed about the solar industry's volatility, both real and perceived. There's an exchange-traded fund called Invesco Solar ETF. The ticker is TAN. Early last year, before the pandemic, it sold for around $30 a share. When the pandemic first hit, the price fell to $22. That's understandable. The whole market was falling. But then, as the market recovered, solar stocks went nuts. Invesco Solar rose to $120 a share by this past February. More recently, the fund had sold off to below $80. Some media outlets have used the term solar coaster to describe the wild ride for industry stocks.

Ed doesn't love that term. I think it does the industry a disservice because it really implies a lack of agency. You know, sitting on a roller coaster is kind of like the ultimate passenger experience. The reality of working in the solar industry is totally the opposite. You know, sure, you have to make things happen. And probably this industry isn't where to go if you want to work on your golf game. But it's a huge opportunity. And it's like a five-decade, you know, massive sort of opportunity. Solar is a big topic with a lot of players,

companies that produce silicon and panels and components that make panels work. companies that produce silicon and panels and components that make panels work. I can't wait to do a seven-episode series on microinverter system architectures. But for now, let's get another perspective on supply constraints, not for solar panels, but for simpler things like steel. All of the racking that we put on our projects is made of steel. And so steel prices basically up, I think, 60% over the last handful of months. That's Ben Katt, CEO of Pine Gate Renewables in Asheville, North Carolina. We're having a lot of issues with the global supply chain, and we're not able to

secure shipping containers and things like those. We have a good relationship with our vendors. We're managing it pretty effectively right now, but it's a real issue. We import a lot of material to ultimately build these projects, and having global supply chain disruptions is a major issue for us. Ben's a finance guy, and Pine Gates specializes in bringing together big customers who want solar power and big investors who want solar exposure. Some of those investors want the income streams that solar projects produce. Others want the tax benefits. Some customers want solar power because it's cheap and others wanted to improve their environmental standings because that's what their shareholders are saying they want.

Here's Ben. environmental standings, because that's what the shareholders are saying they want. Here's Ben. So there are a lot of instances where we have buyers of our energy who are buying it with no environmental incentives whatsoever, who are strictly saying a solar electron is cheaper than a natural gas electron or anything else. But I would also say that there is still a really strong demand from buyers who are buying renewable energy for the fact that it is green and because they're being pushed by their boards, their investors.

Ben says Pine Gate is staying busy with solar projects and projects for battery storage. Batteries can make up for the shortcomings of solar, like the fact that the sun doesn't shine at night, and they can be useful for improving the efficiency, cost, and resiliency of power systems. James West, who covers the solar industry for Evercore ISI, an investment bank, says that with solar costs now competitive with fossil fuels, battery costs are coming down too, and the regulatory environment could hardly be more supportive. Solar companies now have a power storage opportunity, which almost doubles their opportunity. And the solar needs to be larger. The solar array on your house needs to be larger. And so your incremental margins go up a lot. So you have this holy grail of power storage,

your EVs, and your larger solar array that makes this a very good opportunity both for the customer, but also for, of course, the big companies like the Sunruns and Sonovas, et cetera, that are already selling these solar packages. Here's something interesting about James. He covers oil field services companies in addition to solar companies. It's common to think of one of those groups winning at the expense of the other, but James likes both. As bullish as he is on solar, he thinks oil has many years of growth ahead.

For oil and gas, we've got multiple decades of continued demand growth for oil and probably 50 years of demand growth for natural gas. So we don't think there's a stranded asset issue anytime in the near term, despite the fact that the transition itself is starting to accelerate. Oil permeates every part of our economy.

It is in gasoline, as you say, in your car, but it's also in this table that I'm sitting at. It's in your shirt that you're wearing. It's in your headphones that you have on right now. And so to get oil out of every bit, it's going to take a long, long time. Hang on. Did James just say my shirt's made out of petroleum?

I mean, is it shiny or? It could be the light. Going to have to check my blend. The price of West Texas crude has shot up from $40 a barrel a year ago to around $70 a barrel recently. James says oil companies are about to start drilling again, and that's going to mean upside surprises for companies like Schlumberger, Halliburton, and Baker Hughes, which sell drill

bits and fluids and drilling services. Okay, back to solar. James says Sunrun is his top stock pick. He calls the U.S. solar market massively underpenetrated and says Sunrun enjoys scale advantages as the clear leader. He points out that in addition to signing up new solar customers, Sunrun can upsell and cross-sell existing ones by, for example, expanding solar systems to accommodate electric vehicles, or down the road, retrofitting existing solar systems with battery storage. Sunrun can also contract with its battery customers and their power companies to turn storage into virtual power plants when the power grid is strained. Here's James. We think on a growth multiple, the stock is cheap.

They've got 20, 25-year contracts with their customers. That is cash flows coming in. That's pretty much guaranteed. Momentum investors won't have much trouble deciding whether they like Sunrun stock. They'll say, I like stocks that are going up. Is this one going up? If it is, I like it. Casual investors will find Sunrun a difficult company to size up. They'll say, I like positive and growing earnings, and I like share prices that look low relative to those earnings. But Sunrun won't have positive earnings for many years. It pays up front for solar systems that it plans to use for decades to generate income.

Those up front payments show up as losses and will for years to come. There's a more sophisticated option, but it's mathy. Investors can estimate the future cash flows Sunrun will generate from its installed solar systems and then calculate a price investors should pay today to capture that future stream of cash flow. James says that based on his discounted cash flow analysis, as it's called, the stock is cheap. Most Wall Street analysts seem to agree based on their ratings for the stock. But Sunrun isn't going to appeal to someone looking for, say, a P-E ratio below 20,

because for now, it's all P and no E. For investors who view solar as a promising industry but don't want to try to pick a winner, there's always that Invesco solar ETF. Just remember that, although it might not be a solar coaster, it's been pretty volatile over the past year. James says the stocks have been more volatile than the businesses. There's a lot of big moves for no reason at all because the fundamentals don't really change. Like they do in oil and gas, but they can change pretty quickly. In solar, it's just a growth

business. So I'm a little surprised at the volatility, but it may have to do with smaller market caps, not as many institutional investors involved in that. This past week, First Solar, a big panel maker, said it will double its U.S. production by opening a third plant in Ohio by 2023. It says the new plant will allow U.S. panels to compete more effectively with low-cost ones from China. James says 2020 was, as he puts it, the start of the climate decade, and that this year will bring an acceleration of that with regulatory pushes in the U.S. and Europe. He says that eventually U.S. homeowners will see solar on roofs pretty much everywhere they look.

I think you'll stand out in a neighborhood if you don't have solar. Right now, you have maybe, let's say, 20 houses in a small block. You maybe have two guys that have solar. So I think that will go from the 2 of 20 to the 18 of 20 over time. Thank you, James and Ed and Ben, and thank all of you for listening. Coming up next week, definitely no home improvement. No plumbing, no electrical. I got to get out of the house. Jackson Cantrell is our producer. Subscribe to the podcast on Apple,

Spotify, or wherever you listen to podcasts. And if you listen on Apple, please write us a review. See you next week.