Sunnova Energy – A Residential Solar Stock
When the world’s largest producer of renewable energy is also the world’s largest electric utility company, you know that renewable energy is now economically viable. In places where electricity is expensive to produce, moving to renewable energy is a no-brainer. During our recent trip to some Pacific Island countries, we talked to a New Zealand solar installer that’s literally turning off the diesel generators after completing large-scale solar installations in Pacific Island countries like Micronesia. According to Lazard, wind energy is now one of the cheapest ways to generate electricity.
In these examples, investing in “sustainability” makes sense because it generates profits. In order to change the system, you have to beat it. Subsidizing the world’s problems is certainly not sustainable, but solving them and making a profit, that’s sustainable. However, not all renewable energy investments have fared well over time. If you invested in the largest solar ETF, Invesco Solar ETF (TAN), exactly five years ago before all the growth in solar, then you made a very poor decision. That’s because TAN lost –32% when compared to broad-market Nasdaq ETF QQQ which gained +97% over the same time frame.
Things might be turning around though for solar. Since the beginning of this year, TAN has returned almost +50% squarely beating the +20% return of Nasdaq Tracker ETF (QQQ) over the same time frame. Is now the time for solar investments to shine?
Sunnova Energy – A Residential Solar Stock
In another vote of confidence for solar, a firm called Sunnova Energy has recently filed for an IPO after topping the CB Insights list of the ten most-funded solar companies back in December of 2017 with $1.64 billion in funding. Since then, they’ve managed to raise a total of $2.3 billion which is being used to accelerate the adoption of residential solar across the United States. Let’s talk about what specifically that funding is being used for.
When looking at “investing in the growth of solar,” there are any number of ways to approach it. For example, you might invest in companies that:
- Build solar panels
- Install solar panels
- Service solar panels
- Finance solar panels
It’s those last two bullet points that apply to Sunnova Energy which serves more than 63,000 residential solar customers in more than 20 U.S. states and territories. (As of March 31, 2019, approximately 29%, 26% and 14% of their solar energy systems were located in New Jersey, California, and Puerto Rico.) They work with more than 75 dealers to provide the financing needed for customers to “achieve energy independence” by offering “savings to our solar-only customers compared to utility-based retail rates with little to no up-front expense to the customer.” In other words, if you’re willing to install solar panels on your roof, then Sunnova Energy will provide the up-front financing and you’ll save money by paying less for electricity. That’s a pretty straightforward business model assuming that the customer makes the payments over the 25-year lifetime of the solar installation. The financing can take various forms as seen below:
As of March 31, 2019, approximately 35% of Sunnova customers had lease agreements, approximately 54% had Purchase Power Agreements (PPAs), and approximately 11% had loan agreements. Less than 1% of their customers have the recently introduced Sunnova SunSafe and Sunnova Protect Agreements, however, servicing is expected to be a future area of growth given that of the 2.2 million homes that utilize solar energy systems, approximately 900,000 are not covered by a service plan.
Credit Scores and Tax Breaks
A key metric for Sunnova Energy is consumer credit scores with their average customer having a FICO score of 737. (As of March 31, 2019, approximately 1.0% of their customers were in default under their solar service agreements.) At the end of the initial term (typically 25 years) of the solar lease or power purchase agreement, customers may choose to purchase their solar energy systems, ask Sunnova Energy to remove the system at their cost, or renew their solar lease or power purchase agreement. As long as customers make their payments on time and there are no major problems with the equipment over its lifetime, the business is expected to eventually turn a profit. The rapid growth in customers shows that adopting residential solar makes a lot of sense for a lot of people.
One thing to consider when looking at this growth are the tax breaks which Sean Hollister over at The Verge wrote about in his recent article titled I just installed solar panels because now’s the time. It certainly is the time. Taxpayers are allowed to claim an investment tax credit equal to 30% of the qualified expenditures for certain commercially owned solar energy systems that begin construction before 2020. That percentage is scheduled to decrease to 26% for solar energy systems that begin construction during 2020, 22% for 2021, and 10% if construction begins after 2021 or if the solar energy system is placed into service after 2023. It seems highly likely that these decreasing tax breaks will have a negative impact on the growth of residential solar.
Picks and Shovels
Today, less than 3% of the 84 million single-family homes in the United States have rooftop solar. In the Sunnova Energy IPO filing, there was some interesting information about which suppliers of the “picks and shovels” are benefiting from the residential solar boom (our emphasis in bold):
For the three months ended March 31, 2019, Hanwha Q-Cells supplied approximately 72% of our solar photovoltaic panels installed and no other supplier represented more than 10% of our solar photovoltaic panels installed. For the three months ended March 31, 2019 and for the year ended December 31, 2018, Enphase Energy, Inc. and SolarEdge accounted for more than 80% of our inverter purchases, and LG Chem Ltd. and Tesla, Inc. accounted for substantially all our battery purchases.
All of the companies listed above in bold are publicly traded firms that stand to benefit from the growth in residential solar – provided of course that the growth continues. We also need to consider that technology becomes antiquated very quickly. What’s the likelihood that in 25 years it will prove economically viable to continue using these installations as opposed to scrapping them entirely for technology that’s light years ahead? Supposedly we’ve reached some sort of physical limitation when it comes to solar efficiency (the Shockley–Queisser limit), but recently, that’s being challenged by researchers in a recent paper on the Sensitization of silicon by singlet exciton fission in tetracene. We have no idea what that means either but it sounds promising.
If putting a mini-power-station on your rooftop sounds a bit risky, it sure can be if you use shoddy hardware. Should the maintenance costs for all these installations exceed expectations, that’s a risk. If the customers default on their installations, that’s a risk. If the growth of residential solar stalls, that’s a risk. If companies like Next Era Energy decide to offer much cheaper electricity in the future because wind has become so economically viable, that’s a risk. Sunnova Energy is far from profitable and any of these risks could decrease the likelihood they’ll move out of the red anytime soon. If the IPO proceeds as planned, Sunnova Energy will trade under the stock ticker NOVA.