Gordon Johnson: Solar ITC Extension Could 'Cripple' Installations Next Year

• While shares of Sunedison Inc SUNE and Yingli Green Energy Holding Co Ltd (ADR) YGE have lost more than 70 percent year-to-date, SolarCity Corp SCTY shares are down 4 percent and JA Solar Holdings Co., Ltd. (ADR) JASO shares are up 20 percent.
• Axiom’s Gordon L. Johnson maintained a Sell rating on all four companies.
• The ITC extension could cripple current expectations for solar installations in 2016, Johnson stated.

Analyst Gordon Johnson provided an insight into the impact of the five-year extension to the solar investment tax credit [ITC] on the PV industry. He believes that the ITC extension would adversely impact solar demand next year, since there is no longer any need to “rush to install” in the US, which is “bad for everyone in the industry.”

Solar Energy Industry Association [SEIA] & GTM Research data indicate that solar installations in the US were around 4.1GW year-t-date. The SEIA/GTM estimates for 2015 stands at ~7.4GW, implying 141.7 percent sequential growth in 4Q15.

The Bloomberg New Energy estimates are at ~9GW, translating to 259.3 percent sequential growth in the fourth quarter.

Johnson commented, “While we acknowledge strong 4Q seasonality, looking at historical U.S. installations, & using SEIA/GTM’s own data, the implied 4Q/3Q15 increase, would be the largest ever (i.e., the 4Q/3Q changes in ‘10/’11/’12/’13/’14 were 95.0%/66.0%/90.4%/118.9%/58.4%).”

In the absence of a demand pull-in next year, US demand is likely to be much worse than anticipated. “Against this backdrop we see the PV module market shifting back into a state of structural oversupply,” the analyst wrote.

Johnson added that the ITC extension would also make it tougher for project DevCos, like SunEdison and SolarCity, to sell their projects. The reasons cited are:

1. An unquantifiable number of utility projects that were not going to get done due to the ITC cut now can
2. It will enable marginal cost DevCo.s to continue to compete