April proved to be a challenging month for renewable energy stocks as indicated by the 5-6% decline in the main indices. The solar sector was particularly weak with the TAN falling by 7.3% during the month. The primary catalyst was Enphase’s Q1 earnings report, which reminded the market of the fear of a significant slowdown in the US residential solar market in the second half of the year. This is primarily attributed to the impact of the new net metering regulation (NEM 3.0) in California, but higher interest rates are also impacting demand in important solar states like Texas and Florida.
To be clear, this is old news. However, the last factor to impact solar stocks and its investors is the commencing debt ceiling debate where the Republicans are asking for an extensive list of cost reductions, including slashing the IRA and other funding for fighting climate change. This would be terrible for solar companies and one sell side analyst categorized it as a ‘buyers strike’ until there is more clarity on this issue.
This was one key reason why we reduced net exposure early in the month. However, in the bigger picture, it is a speed bump. Let us take a step back and consider the long-term opportunities in rooftop solar and while our optimism may be tempered in the near term, it remains high for the future.
While utility scale solar is the cheapest form of energy globally, rooftop solar is not. However, it offers several other advantages. First, it does not require additional land use as it utilizes existing rooftops. Second, it generates power at the point of consumption, reducing the need for extensive grid infrastructure. Moreover, rooftop solar is highly resilient since there is no single point of failure risk associated with large power plants. This decentralized energy resource (DER) concept also opens up opportunities for virtual power plants (VPPs). A VPP is effectively a number of residential batteries managed in the cloud as storage backup during peak load periods. For the customers, this is beneficial as they can choose to opt in or out of the programme and monetize their surplus electricity. During the last quarter, we witnessed the establishment of several VPPs across the US.
At the end of the month, The Brattle Group, a premier consulting group, released a notable study on the economic impact of VPPs on the grid. According to their findings, leveraging VPPs to balance the grid load can be considerably cost-effective. In fact, it found that VPPs were 40-60% cheaper than traditional natural gas-fired peaker plants or utility-scale batteries. This cost advantage underscores the financial viability and attractiveness of VPPs as a grid management strategy.
More importantly, we expect the value proposition of VPPs to grow over time. As the number of electric vehicles (EVs) integrated into the grid increases, their batteries can serve as valuable storage backup for VPPs and thus reduce the need for expensive infrastructure investments.
Please note that we are not suggesting that costly infrastructure investments will not be necessary, the energy transition requires a diverse range of solutions. However, the integration of VPPs and the potential utilization of EV batteries would be important contributions to strengthen the grid to prepare for increased electrification, not only of cars.
The energy transition is often subject to politicization, with proponents of specific technologies, such as for instance solar or nuclear, vying for dominance. The truth is, we need a diversified portfolio of energy sources. A common misconception is that meeting the charging demands of EVs will be impossible. However, the reality is that electrifying personal transportation alone does not pose a major challenge for the grid. For instance, by our calculations, electrifying every car in Sweden would increase electricity demand by only about 10 TWh or 7% of the total electricity consumption. This estimate assumes 5 million cars driving an average of 35 km per day, consuming on average 150 Wh/km.
The attractiveness of owning an EV will improve as more VPP offerings are introduced. The car will effectively start generating cash flow while supporting the grid. Moreover, increased EV penetration drives more demand for rooftop solar and smart home energy solutions. This is one reason why we believe the longer-term outlook for the residential solar players is bright.
