Earlier this year, SunEdison set a course to become the first renewable energy supermajor.
In mid-July, the project developer’s stock was up ahead of the initial public offering of its YieldCo, TerraForm Global. SunEdison had also made several billion-dollar acquisitions of wind and solar companies, and had just announced plans to enter the residential solar market with the acquisition of Vivint Solar for $2.2 billion. At the time, SunEdison had a $9 billion market capitalization.
Things have changed dramatically.
Yesterday, SunEdison’s stock fell 34 percent, from $4.59 at the start of the day to $3.02 per share at market close, losing tens of millions in market value the morning after Vivint reported lackluster third-quarter earnings. News also came yesterday that hedge fund manager Daniel Loeb recently sold off his shares in the company, and that hedge fund manager David Einhorn's Greenlight Capital had slashed its position by 25 percent.
Investors have not responded well to SunEdison’s growth strategy, and have specifically expressed concerns over the Vivint acquisition. The developer’s stock has tumbled more than 85 percent from a 52-week high of $33.45 in June.
To comfort investors, SunEdison leadership announced “difficult but appropriate actions” in late September that included reducing project development by 20 percent, narrowing its geographic focus, and laying off roughly 15 percent of the company’s 7,300 employees.
So far, the proposed changes have had little effect. By Tuesday evening, SunEdison’s market cap had sunk below $1 billion -- far less than the Vivint acquisition price from July.
Reactions have been mixed. Some view the selloff as an overreaction. In an investor note, equity analysts at Oppenheimer & Co. said they expect SunEdison to see significant cash inflows from selling off projects to third parties over the next four months. Meanwhile, some pundits have suggested that SunEdison is a bankruptcy candidate.
What's going on?
SunEdison’s problems are particularly acute, but the world’s largest renewable energy developer isn’t suffering alone.
NRG Energy -- a traditionally fossil-fuel-heavy independent power producer that recently made a billion-dollar push into rooftop solar, wind and electric vehicle charging -- lost 50 percent of its value from June 2014 through September 2015. NRG’s stock dropped another 35 percent when CEO David Crane announced he was splitting off the company’s green business earlier this fall.
Publicly traded solar stocks are also down across the board. Rooftop PV installers SolarCity and Sunrun are down 58 percent and 43 percent, respectively, from recent highs. Solar manufacturers Canadian Solar and SunPower are down 45 percent and 35 percent, respectively, from their highs earlier this year. Most YieldCos have also come crashing down in price as well.Listen to Stephen Lacey and Shayle Kann discuss the YieldCo bubble in a recent episode of the Interchange.
The paradox is that while stocks are getting hammered, on the whole the solar sector is seeing record growth in projects. PV installations in the U.S. increased 30 percent in 2014 over 2013, and are slated to increase 25 percent in 2015 over 2014. There are now more than 20 gigawatts of solar in the U.S. overall. Globally, the solar industry will likely install roughly 55 gigawatts' worth of projects this year.
Utilities, large corporations and even fossil-fuel companies have started to acknowledge that renewable energy is a valuable and growing part of the energy system. In September, the CEO of Royal Dutch Shell said that the economic case for renewables has become “overwhelmingly compelling,” adding that he believed solar would eventually become the “dominant backbone of our energy system."
“From the solar perspective, it’s a bizarre confluence of contradictory events,” said Julie Blunden, board member at CalCEF Ventures and SunEdison's former chief strategy offer, speaking at GTM’s Solar Market Insight conference earlier this month.
The market turned for SunEdison on July 20, the day TerraForm Global made its initial public offering and the Vivint acquisition was announced, she said. But the shift in investor sentiment wasn’t unique to solar, Blunden argued. Over the summer, investors also walked away from other acquisition-hungry companies like Valeant Pharmaceuticals International and the metals company Glencore.
Publicly traded solar companies are also suffering from poor performance in the overall energy market, according to Blunden. Oil prices have fallen by more than half since mid-2014 due to a production boom in the U.S., slowing demand in Europe and China, as well as OPEC’s unwillingness to curb its production to stabilize markets. The oversupply of oil has a minimal impact on the demand for renewable electricity, and yet solar stock prices have been moving in sync with fossil fuels, said Blunden.
“The thing I worry about right now is that the capital markets have so connected solar stock value with what’s happening in the energy markets, the conventional fossil fuel markets,” said Blunden. “It’s insane.”
The solar industry needs to do a better job educating investors that the fundamentals of the solar market are not affected by the risks associated with stranded assets in the fossil-fuel markets, said Blunden.
According to Lynn Jurich, CEO of Sunrun, the solar industry also needs to do a better job of attracting investors that play a long game. Today, solar stocks are predominantly owned by trading firms and hedge funds. Many of these investors have lost money because of falling energy prices and are dumping renewable energy stocks.
“That hurts us,” said Jurich, who also spoke at the Solar Market Insight conference.
“We’ve got to educate growth investors, the long-term investors that want to hold stocks that believe in the long-term macro-trends,” she said. “We need to bring those people into the markets.”
Many energy and financial experts argue that solar is a stable investment. Contract prices are locked in for roughly 20 years, the panels have performance guarantees, the sun is free, and projects typically have high-quality offtakers, such as utilities and universities. Plus, solar energy is now cheaper than retail electricity almost everywhere in the U.S., and it’s becoming cost-competitive on a wholesale basis with almost every other kind of generation, including natural gas.
Several analysts attributed the poor performance of renewable energy stocks to a disconnect between the long-term underlying value of solar assets and what investors are willing to pay for them. For example, NRG Energy investors had little tolerance for losing money to support the company’s emerging green business -- even if that green business may potentially be worth more in the long term.
“There was a mismatch between what investors wanted us to do with our cash -- which was give it back -- and what we wanted to do, which was put it in growth businesses,” CEO David Crane told The Wall Street Journal.
Overall, renewable energy development is a sound market, said Noah Kaye, senior analyst at Oppenheimer, in an interview. But there's "a massive disconnect between the fundamentals and where the stocks are."
“What you really need to see is the overall environment for investment to improve,” he said. “And then as people do the fundamentals work and realize that [renewable energy] industry leaders are putting capital to work and generating positive cash flows for projects, we think there will soon be a meaningful reason to invest in the stock," said Kaye.
Is there demand?
While experts argue that the fundamentals are strong today, there are reasonable uncertainties about the medium term, particularly in the U.S.
Some investors are concerned about the stepdown of the federal solar Investment Tax Credit at the end of 2016. GTM Research forecasts a sharp drop in project deployments in 2017; although the market is expected to rebound in the following years.
Political battles over state-level renewable energy policies could be another source of investor worry.
“To me, the investment issue here is very simple: do we have demand for the product?” said billionaire investor Tom Steyer on a recent press call.
Steyer, a prominent climate-change activist, launched a campaign this year calling for all U.S. presidential candidates to release detailed plans on getting to a 50 percent national clean energy mix by 2030. A national energy policy would give investors confidence in the long-term stability of the renewable energy market, he said. (On a global level, a climate deal in Paris could create similar certainty.)“
If there’s uncertainty about revenues, then investors get very skittish very fast,” he said.
Julien Dumoulin-Smith, a senior analyst at UBS, said that narrow-minded investors fail to appreciate that the Obama administration has already put in place one of the biggest policy drivers for national renewable energy procurement.
“The Obama Clean Power Plan is the single most bullish data point we’ve seen in years for renewables,” he said. “In some respects, investors are very myopically focused on near-term data points like the ITC extension, and if you listen to the companies, they’re saying the driver here is the CPP."
“The outlook for solar has never been so bright, but so many investors fail to fully appreciate it,” he added.
Dumoulin-Smith underscored that poor solar stock performance in recent months is not about the prospects for clean energy -- it’s a valuation issue. The problems stem from specific companies setting expectations too high and then resetting them, he said.
Whatever the reason, a lot of companies are suffering due to the turmoil in the market. And that worries Blunden, who sees it as "a real threat to our pace and scale trajectory.”