SunPower Corporation (SPWR), First Solar, Inc. (FSLR): Solar Companies See a Bright Future in the U.S.

On June 25, President Obama gave orders to issue permits for 10 gigawatts of renewable energy on public land, with the focus on a 200% increase in renewable energy generation by the year 2020. The Defense Department, the largest U.S. energy consumer, also plans to install three gigawatts of renewable energy by 2025, sufficient to supply power to 2.4 million households.

This focus towards installing power plants resulted from Obama’s administration facing the problem of being one of the largest contributors to greenhouse gas emissions. 40% of U.S. carbon-dioxide emissions and one-third of all greenhouse gases arise from electric power plants, according to the data released by U.S. Energy Information Administration.

My report focuses on analyzing the impact of these regulatory changes on the solar companies operating in the U.S.

Solar industry background

Solar power is a basic electricity generating resource, without any repercussions of noise pollution, vibration, habitat impact or waste production. As time has passed, speedy rise in population growth, increasing pollution and exhaustion of non-renewable traditional resources i.e. oil, has diverted the attention to shifting the global focus towards renewable projects for the generation of electricity.

Additionally, solar energy usage does not carry the risks of price volatility or delivery risk, compared to fossil and nuclear fuels. Although solar energy generation depends on the amount and timing of sunlight in daytime, a properly constructed and organized system can be devised to make sure a consistent supply of electricity in the long term at a pre-determined rate.

The rooftop solar energy systems can provide a ground-breaking plan for the solar companies. The solar companies can build their strength by offering a lower price than the grid price to the U.S. residential and commercial markets and focus on generating higher profits through volume.

Solar power generation units are usually positioned at the customer’s place as the sunlight is available universally, unlike hydroelectricity and wind power. Therefore, solar power confines the expenses incurred and costs passed on to the end users.

For most residential consumers looking for socially and environment friendly power source, solar power is at present the only practically feasible option.

Company analysis

These solar energy companies are anticipated to advantage immensely from this new legislation in the U.S. requiring installation of renewable sources of electricity generation as commanded by Renewable Energy Standards (RES). Currently, thirty states and the District of Columbia in the U.S. have enforced the RES legislation whilst another seven states look forward to the implementation of renewable energy sources.

Congress has also widened the 30% federal investment tax credit to residential and commercial solar installations up till 2016. As per the American Reinvestment and Recovery Act (ARRA), the U.S. Treasury Department had also adopted a program to give cash grants to make up for investment tax credit for renewable energy projects.
This will resultantly increase the demand for solar projects in the near future as people take action to take advantage of the tax credit.

Source: Yahoo Finance

The announcement of this decision to switch energy generation source to solar power has been reflected in the forward P/E of the two largest makers of power-plants, First Solar, Inc. (NASDAQ:FSLR), and SunPower Corporation (NASDAQ:SPWR). The other two companies, Sempra Energy (NYSE:SRE) and Duke Energy Corp (NYSE:DUK), did not see a major shift in its forward P/E as their operations are focused on gas and electric utilities whilst First Solar, Inc. (NASDAQ:FSLR) and SunPower Corporation (NASDAQ:SPWR) have their prime business operations centered in solar energy solutions and thus, have shown a major impact in their forward P/Es.