Sunrun and solar energy have promise and pitfalls

Sunrun operates as a leader within an eco-friendly industry that generated $50bn (£36.91bn) in revenue in 2019 and could represent more than $200bn by 2026.

It also turns in a quarter with growth across the board (up 109% year-over-year), subscriber additions and escellent all-around performance a year after purchasing its chief rival.

Does this sound like an enterprise with stock trading near a 52-week low, that has lost over 60% of its value in the past year and had its CEO and COO step down?

Such is the case for solar energy leviathan Sunrun (RUN) that has a strong market position in a sector brimming with potential.

Dampening factors

Risks from the company’s bottom line to the top level of the US government have contributed to the uncertainty surrounding the company and the solar energy industry as a whole. 

Sunrun is hardly alone in its struggles, as Sunnova International Energy Inc (NOVA) has dropped more than 50% this year, with both companies losing considerable ground since 13 December.

Sunrun estimates that 3.5% of addressable US homes have solar power – and they manufacture, install and maintain the systems, representing their full service cycle – and the industrialised world has become increasingly focused on decreasing its carbon footprint. All these signs would point to expansion and investor interest, yet share performance has been poor.

Sunrun did not respond to an inquiry requesting comment.

Sunrun has around $6.6bn in debt, $5.8bn of which is long-term. Sunrun’s costs are high and continue rising due to material cost increases, supply chain issues and other factors. The company is not yet approaching profitability.

That also creates a reliance on external financing and a level of vulnerability surrounding credit rating and perception of the business to lenders amid looming interest rate hikes and inflationary pressures. These and other factors have made the stock somewhat volatile, with analysts ranging from bullish to bearish in projecting the upside and downside of shares.

The federal government

The solar industry is at an impasse with one federal program, the solar investment tax credit set to expire in 2024 and another, the stalled Build Back Better infrastructure initiative, potentially creating even greater incentive by extending the ITC another 10 years and likely raising its federal subsidy level.

Eager to bridge political divides and add signature legislation that could turn around tepid approval ratings, the Biden Administration has encountered resistance from Republicans and a member of its own party. Some form of the BBB seems likely to pass, but the specific details remain nebulous at this point.

The impact of the ITC expiring would be substantial for the solar industry. The Solar Energy Industries Association and its market research partner projected that solar installation would peak in 2023 and, with the repeal of the ITC, would decline in 2024 and not return to 2023 levels until 2027. 

State-level legislative issues

Sunrun operates primarily in the Southern United States and Hawaii, and the solar industry has recently encountered setbacks in some key regions.

In Arizona, net metering, which allows solar consumers to offset costs by giving them compensation for surplus energy that they return to the larger grid, has been phased out causing a decline of about 20% in solar installations. While its state population isn’t the size of California, Florida or Texas, Arizona is the fifth-ranked consumer of solar energy systems in the US.

In Hawaii, similar tapering of net metering has halved solar installations. The state is considering revisionary measures and implementing new solar initiatives, in large part because it has been the state with the broadest gap between the cost of electric and solar power, with an estimated 238% price disparity. Consumers can store excess energy in batteries, which Sunrun also manufactures, but without net metering, tax credits and other active incentives, usage growth could stagnate.

The California problem

An even more significant issue for the industry is legislation being considered in California, the US’s most populous state, and by far the greatest consumer of solar energy. An effort to reduce costs for non-solar energy consumers could have the opposite effect on solar consumers in a state where Sunrun makes more than 40% of its sales and Sunnova representatives make around 25% of theirs.

Known as NEM 3.0, the proposed changes include a drastic reduction in rates paid to most consumers selling their surplus energy back to the grid and a monthly fee to many solar consumers. 

The lack of incentives, decrease in investment return and longer payback period for associated costs could hinder industry growth, though there are provisions to ease transitions including promoting the use of solar batteries to store and utilise excess energy and softening the blow for low-income and high-pollution communities. Still, it seems difficult to overlook the potential negative effects the legislation could have on the expansion of solar power and conservation of current solar resources.

The proposed legislation in a state the size of California and its importance to the industry has already fettered stock performance, with both Sunrun and Sunnova tumbling since the proposal was introduced on 13 December.