A panel and an inverter walk into a bar

IRINA SLAV OCT 23, 2023

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IRINA SLAV ON ENERGY

A panel and an inverter walk into a bar

IRINA SLAV

OCT 23, 2023

∙ PAID

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The panel tells the barman “I’ll have a double sunny with a touch of distant frost.”

The inverter says “Grid Volt Error” and dies.

Yeah, okay, this was a lame joke but not as lame as some inverters, believe me. I’ve heard a dozen inverter-related horror stories over the past eight months and I didn’t even know there could be an inverter-related horror story.

This post, however, is not about inverters. Inverters and their fragile nature is part of the bigger solar energy topic I’d like to rant about today because it has been a while since the last time I did. Also, because they deserve it.

The spark that lit this week’s fire was a new report from something called the Global Systems Institute — a creation of the University of Exeter, which boasts its home city “is a world-leading centre in climate change research with more IPCC authors than any other city in the world.” Which tells you all you need to know about the authors.

Anyway, the report makes the amazing conclusion that we are now at “a global irreversible solar tipping point”. Initially, when I saw this quote in the headline of the news release, I thought they’re talking about solar going down. Alas, this was not the case.

The report makes the claim that by 2050, solar installations would be the dominant source of energy globally, which we all have to admit is hysterical. Another hysterical claim the report makes is that by 2044, solar would be the source of more than half of the world’s electricity. Because it will have become the most efficient and cost-effective form of electricity generation. I’ll give you a moment.

Now that the chuckling is over, let’s look at some quotes as an appetiser before the main course.

Between 2010 and 2020, the cost of solar PV fell by 15% each year, representing a technological learning rate of around 20% per doubling of installed capacity. At the same time, the installed capacity has risen by 25% per year, causing and partly caused by these cost reductions.

Yay for solar. Between 2010 and 2020, that is. Things have been a teeny bit different since 2020 but that’s no reason for those researchers from the the Global Systems Institute to lose their optimism. Quite the contrary.

If these rates of rapid co-evolution are maintained, solar PV and wind power appear ready to irreversibly become the dominant electricity technologies within 1-2 decades, as their costs and rate of growth far undercut all alternatives.

Ah. The bright, clean, sunny and, most importantly, irreversible future of humankind. It only depends on a small “if” that can get easily overlooked while reading the paper with appropriate enthusiasm.

Now for the main course: After $280 Billion Wipeout, Green Stocks Confront Soaring Debt Costs. This headline appeared in Bloomberg at the end of last week and the report below the headline told a story that is very different from what the authors of the GSI paper tell us in it. Tragically, it is just the latest in a growing string of such sad stories.

The Bloomberg article was inspired, if this is the right word, by a profit warning from Israel-based industry major SolarEdge. An inverter manufacturer, to be precise. It reads like a horror story because what prompted the profit warning was — take a deep breath — lower demand in Europe.

The very idea of a decline in the demand for solar installations, not in China, not in Brazil, or Kenya, or Mexico, but in Europe, should be unthinkable. Yet, per SolarEdge’s CEO, it’s not just thinkable, it is actually happening.

“During the second part of the third quarter of 2023, we experienced substantial unexpected cancellations and pushouts of existing backlog from our European distributors,” Zvi Lando said in the update.

“We attribute these cancellations and pushouts to higher than expected inventory in the channels and slower than expected installation rates. In particular, installation rates for the third quarter were much slower at the end of the summer and in September where traditionally there is a rise in installation rates.”

Easy to see why solar stocks took a tumble on Friday. Tell traders “Lower demand” and watch them stampede for the exits. And, as already noted above with no small amount of evil satisfaction, this lower demand is not happening in a random, transition-indifferent place.

This lower demand is happening in Europe, where those who set the rules are falling over themselves to enable the installment of as much solar as physically possible and then some. What, as someone less polite than my extremely polite self would say, gives?

Well, the Bloomberg article linked above suggests it has to do with rising costs — borrowing costs, more specifically — as central banks in Europe and the U.S. struggled to rein in inflation.

A Rystad Energy report from July this year, however, tells a story that is a little bit different and a lot simpler. The report said that there was 7 billion euro worth of imported Chinese solar panels sitting in European warehouses because, wait for it, there was not enough demand for solar.

Again, that report came out in July and in it Rystad also said that “From 2021 to 2022, the amount of Chinese solar modules imported by European countries increased by 112% to about 87 GWdc. The installation rate in these countries has yet to meet anticipated levels, resulting in a sizeable gap of almost 47 GWdc in 2022 in shipped versus installed modules.”

This year, the panels in storage amount to some 40 GWdc, where the dc stands for direct current and it needs mentioning because Rystad has a reputation and does admit that the inversion from direct to alternating current involves some “energy lost”. Anyway, the amount of capacity currently sitting in storage is equal to the total amount of new solar installed in Europe in 2022.

So, it seems that last year, Europe imported more than twice the panels it actually installed. And this happened amid a veritable political offensive in support of solar, along with wind and the rest of it. And an actual struggle to secure energy supply amid a gas shortage. You’d think there would have been a shortage, not a surplus of panels, especially such a significant one. To repeat that question, what gives?

Well, it seems that what we are witnessing in solar energy is yet another reality check. Just look at what else Rystad said in that July report: “Judging by the market in 2023 to date, we expect Chinese imports to increase by 38% annually and reach 120 GWdc. While installations will gain momentum – jump 57% versus last year to hit about 63 GWdc – the gap will widen in absolute terms, with a difference of 57.4 GWdc at year end.”

Yet, the first half of the year appears to have not been a credible indicator for the second half if an industry executive tells us that demand for solar installations actually slowed down during the third quarter.

“In particular, installation rates for the third quarter were much slower at the end of the summer and in September where traditionally there is a rise in installation rates.”

When you see lower demand for something at a time when it usually picks up, something is not right. It could be a temporary hiccup or it could be a trend but it’s definitely not right. And it might well be a trend.

“After a second straight disappointing quarter of results/guidance, we find it hard to defend the stock: we underestimated the effects of the combination of ongoing inventory, end market demand, and now margin issues that are likely to serve as headwinds for the stock for the foreseeable future given what appears to be a significant deterioration in visibility,” said Goldman Sachs analyst Brian Lee in a note issued Friday that downgraded SolarEdge from Buy to Neutral. And it dragged other solar stocks with it.

There has been some underestimation going on in solar all right. It has been going on for quite a long time, at that. The reason for this underestimation is the flood of reports like the one from Exeter University’s Global Systems Institute — all these researchers saying solar is so cheap and good it will take off like a Concord (may the bird rest in peace) in no time.

Now this flood is breaking into the wall of reality. Apparently, people are refusing to play along. Or rather, forget people, businesses are not playing along.

Every time I go to one of the huge supermarkets in town I wonder why their large flat roofs are not covered with solar panels. We’re talking international retail chains that certainly have the money to afford them and they certainly have the motivation to take advantage of all the government incentives for solar. So why aren’t they doing it?

Perhaps the reason has something to do with the things like supply reliability. Perhaps it has something to do with battery costs. Perhaps those retailers know a thing or two about levelised cost of electricity. Or perhaps retailers are just big, fat, lazy fans of evil oil and gas, and coal, who knows.

Because, honestly, the number-one argument — and complaint — of the solar industry, namely, long permitting procedures, simply won’t cut it this time. Because governments have been doing everything in their powers to ease and shorten these procedures all over Europe. It is really difficult to believe they have summarily failed.

It appears, to borrow Goldman’s turn of phrase, that along with the underestimation of the challenges facing the solar industry, there has been a lot of overestimation going on on the demand side of the solar equation.

Someone less delicate might call it a hype. Or a bubble. And it looks like the bubble popped quietly last week. Well, relatively quietly. That Bloomberg article from above talks about a $280-billion drop in the market cap of “green stocks”. Since this August. It talks about green stocks turning into a “no-go zone” for many investors.

One investment manager from Pictet tells Bloomberg that “Renewable energy stocks are four times more sensitive to interest rates than traditional oil and gas companies, due to bigger debt levels and their long-duration nature.”

That’s odd, isn’t it? Why would industries as surely profitable and supported by governments and bankers have an average leverage ratio of debt to 12-month earnings of 3.8, when evil oil’s ratio is just 1.1? I don’t know. It might have something to do with forecasts and walls they run into.

I mean, look at this forecast from SolarPower Europe, the industry body. It was released in December last year, and cheered the 47% increase in solar capacity additions during that year, omitting, of course, the buildup of panels. It probably didn’t look ominous at the time.

The Brussels-based lobby group also wrote that “We are confident that further annual market growth will beat all expectations, exceed 50 GW deployment level in 2023, and more than double from today to 85 GW in 2026.”

Well, I guess they could not have foreseen the rate hikes, the raw material cost inflation that has never had anything to do with broader inflation, and the possibility that maybe, just maybe, not as many people — and businesses — as expected would be eager to go solar. By the way, SolarEdge was one of the sponsors of the report. Funny old world we live in.

P.S. This just in: Solar company Sunnova warns of looming energy crisis but it’s not what you think. The company’s CEO graciously told the FT that “we are headed to an energy crisis of some sort,” in oil or power. To avert it, we need — you guessed it — more solar.

Oh, and said CEO lamented the fact that investors had failed to appreciate, and I quote the FT, “Sunnova’s ability to increase prices as the costs of solar equipment fall.”

This is my mic. This is me dropping it.