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Shifting solar rules could dim Sunrun’s share price

Solar stocks, including Sunrun [RUN], have seen their share prices dimmed by a potential change to solar rules in California.

Between 15 and 19 March, Sunrun’s share price has fallen 10.5%, after proposed changes to California’s solar rooftop programme were put forward by the state’s investor-owned utilities — San Diego Gas and Electric, a subsidiary of Sempra [SRE], Southern California Edison, which is owned by Edison International [EIX], and Pacific Gas and Electric [PCG].

By close on 19 March, Sunrun’s share price was down 19.9% for the year to date at $55.58. This was a long way from the $100.93 intraday high it hit on 12 January and the company’s stellar performance last year. During 2020, Sunrun’s share price jumped a massive 402.4%.


Sunrun's share price rise in 2020


According to ETF.com, circa 30.5 million Sunrun shares are held across 111 ETFs in the US. The Invesco Solar ETF [TAN] has the biggest allocation, with a 7.24% weighting as of 19 March.

The Invesco Solar ETF was down 12.8% so far in 2021 (through 19 March’s close). Meanwhile, the iShares Global Clean Energy ETF [ICLN], which had a 2.8% weighting in Sunrun shares on 19 March, was down 17.4% in the same period, underperforming the S&P 500’s 4.2% increase in the same period.


Lights out for solar growth?

For the past decade, federal subsidies for solar projects and technology developments have helped foster growth in the alternative energy space, which has driven investment in stocks like Sunrun. 

However, the California Public Utilities Commission (CPUC) plans to update the rules for how owners of rooftop solar systems are compensated by the end of the year, which has sparked a fierce debate between utilities and solar companies.   

On 15 March, the state’s three investor-owned utility companies proposed new charges and a reduction to the compensation for net energy metering, which allows customers to sell any excess energy back to the utility company. Solar businesses oppose the plan, saying it would undercut the industry’s growth, according to The San Diego Union Tribune.

As one of the leading solar panel installers in the state, Sunrun’s share price led the decline across solar stocks on 16 March, the day after the announcement, falling 8.6%. SunPower [SPWR] and Sunnova Energy International [NOVA] tumbled 8% and 4.9%, respectively.


Sunrun's share price drop on 16 March


Analysts predict significant pushback on the proposals. Stephen Byrd, an analyst at Morgan Stanley, expected the grid access fee alone to eliminate any cost benefits of solar.

However, he did recognise that “prior efforts from California utilities to impose material grid access fees have been rejected by the CPUC,” in a note to clients seen by Barron’s.

Byrd raised his rating on the stock from equal weight to overweight and cut his price target to $86 from $89 on 10 March, according to TheStreet. He said that Sunrun had a compelling value.


Narrowing focus

The residential solar market still remains a competitive industry, ValueAnalyst wrote recently in Seeking Alpha. Given that Sunrun has a 20% share of that market, the company could still capture a lot of the expected growth.

The global solar market is expected to grow at a compound annual growth rate of 17% between 2020 and 2025, according to Mordor Intelligence.


The compound annual growth of the global solar market between 2020 and 2025


However, with the cost of solar trending downwards as the cost of utilities increase, investors could see more market consolidation in the industry.

“Over a longer period, I expect the market to consolidate, and fewer players will remain in the market. The average cost for a 6kWh system is around $18,500, and Sunrun remains quite competitive when costs are compared to this number. Overall, cost structures remain quite competitive, and Sunrun is likely to continue on its path without facing large issues,” ValueAnalyst wrote.

Sunrun’s share price was rated a strong buy among 14 analysts polled by TipRanks. The stock had an average price target of $82.61, which would represent a 48.6% climb from its 19 March close of $55.58.

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