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SunPower (NASDAQ:SPWR) has doubled down on residential solar PV to grow its business. The US has a very low adoption of rooftop solar PV and EIA reports for 2021 indicate that this provided less than 1.1% of US electricity generation, with utility scale solar PV providing a further 2.8% of US electricity generation. California has much higher penetration making up 38% of US rooftop solar capacity, but there have been some policy makers seeking to wreck California’s rooftop solar PV business. Here I give my view as to why investment in residential rooftop solar PV in the US via SunPower makes sense to me. I’m strongly influenced by what has happened in Australia. New developments at SunPower involve broadening the product offering to include management of power produced from their residential solar PV installations. This includes batteries and soon integrating a Battery Electric Vehicle to the residential system. The SunPower story is getting more compelling.
Australian rooftop solar PV
Not everyone succeeds in a booming market. While the Australian solar PV market is booming, not everyone is succeeding. This month one of Australia’s biggest residential and commercial solar PV installers, Infinite Energy, has decided to exit the market because of low margins and COVID disruptions. Infinite Energy was acquired by Japanese giant Sumitomo (OTCPK:SSUMF) in 2019.
The above does not change the reality that residential solar PV is having an increasing presence in powering the Australian grid as I’ve covered recently. In 2022 Australian rooftop solar PV is found on three million homes, providing 16 GW of capacity, and being found on almost 1 in 3 homes. It isn’t an exaggeration that by 2030 most Australian homes will have solar PV and at times residential solar PV will provide more than 100% of Australian electricity needs. Combine this with batteries, the integration of electric vehicles with household power storage and as a buffer for the grid, and the importance of household solar becomes obvious.
The potential for rooftop solar PV in the US
The Australian story above makes clear that rooftop solar PV is both immensely popular and making a large contribution to grid power. The US doesn’t have Australian sunny skies all over, but there are very large areas of the US where rooftop solar PV has the potential to provide a big proportion of US electricity needs. A now dated but very detailed 2016 NREL report indicated the potential of US rooftop solar to produce 39% of US electricity needs. With improvement in solar PV technology there is little doubt that this potential is now considerably higher.
In 2021 12% of Australian electricity was produced by 25.3 GW installed solar PV capacity, and 64% of that (7.7% of Australian electricity consumption) came from rooftop solar PV. Given rooftop solar PV produced ~1% of US power in 2021, there is a long way for rooftop solar PV to grow in comparison with the current (rapidly rising) Australian rooftop experience. This statistic alone provides a core reason to pay attention to SunPower, because it has focused its business on this aspect of solar PV.
California
To get the story that I don’t understand out of the way first, there have been moves to disadvantage household solar PV generation in California. One version of this story is that this is about seeking to switch solar PV generation from local production (rooftops) to utility scale solar PV projects, with a cynical view being that such a switch would enable utilities to make profits by investing in the pole and wires needed to move the power from distant desert sites and charging customers for this with a happy return over a long period. This angle makes sense for me as an Australian who has seen gold plating of poles and wires being a big money spinner for Australian Utility companies in the past. Whatever the details, it is clear that the initial attempt to mess up the household solar industry in California seems to have met resistance.
In the comments on the Q4 2021 earnings call, SunPower CEO Peter Faricy was optimistic that the outcome will be more moderate and more favourable for solar customers and solar employees than at first thought. Clearly a lot of heat is being generated in this process! He expects an outcome in Q2 2022.
Given that just about everyone involved with renewable energy developments and decarbonization sees solar PV as becoming the cheapest and biggest contributor to decarbonizing the global economy (well I think offshore wind might end up a draw), one must conclude that this is a fight between localised small solar PV adoption versus huge solar farms. My take is that both have a role. Of course, massive scale leading to dramatic cost savings is a winner for large scale solar PV, but with that comes the need for grid management and infrastructure to move the power around. This can be as expensive as the capture technology. The point about rooftop solar PV is that much of the power generated is used on site or close by, which means a different scale of grid reshaping, although there are other complexities to be addressed.
I suspect the latter point explains why it may not be possible to build a house in California soon without a solar PV setup on the roof. California is getting serious about being more aggressive toward renewable energy targets, and so is the rest of the US.
What might put rooftop solar PV in the US on an even faster trajectory?
Having 10 kW solar panels, which produce substantially more power than I use gives me some insight into issues surrounding adoption of household solar PV. A key point is that at this stage things are piecemeal and mostly a solar PV adopter needs to do a fair bit of research. One ends up dealing with several companies in sorting out exactly what one should be thinking about. Even the industry is not necessarily clear about the scope and scale of a solar PV project.
The Q4 2021 earnings call makes clear that SunPower understands this issue and has set about making it easy, not only for obvious issues, but also in terms of getting a bigger view of what localised power generation means. They have put together a one-stop solution (including financing) to simplify the process and to make customers aware of where this technology is headed. This is a big advantage for SunPower and I expect we’ll see that this is going to drive its business in the near term.
Electrification of transport and integration of the BEV into household power management
SunPower is becoming more an integrated residential power generation, storage and energy management business. This makes sense as one of the problems for residential adopters is understanding and working out how to adapt to self power production and to make best use of it.
SunPower’s story
SunPower’s Q4 2021 earnings call came after a disastrous 63.8% fall in share price year on year. Things have recovered somewhat since, but year on year the result is still down 33.4%.
The Q4 earnings call was upbeat as CEO Peter Faricy talked up SunPower’s 5-pillar strategy for outperforming on the residential US solar business. These pillars are:
Pillar 1. Customer care
Pillar 2. Growth
Pillar 3. Best and affordable products
Pillar 4. Digital innovation
Pillar 5. World class financial solutions (goal to increase residential financing from 35% in 2021 to 45% in 2022) to help SunPower close residential deals faster.
The above five pillars are well summarised in the Q4 2021 transcript and it is worth having a look at these details. Faricy makes the point that he’s built a strong leadership team to execute on these areas of the business.
SunPower has big plans for expansion in the US in 2022, following a Q4 2021 customer base of 427,000, a 42% increase in Q4. Residential gross margins are a healthy 20% and there is expected to be substantial growth of the digital business in 2022. The Blue Raven acquisition last year is a big part of regional expansion.
The US ban on Russian oil importation is a boon for residential solar, especially with the prospects of substantial BEV growth leading to accessing home solar PV for vehicle charging.
SunPower has an integrated vision for where solar PV sits. This provides the business with interesting attach rates for the products beyond solar PV. The plan for new homes is not just installing solar PV, but to add to that batteries (Virtual Power Plant integration too!) and an electric vehicle! … everything just gets rolled into the mortgage. Added to that is making the package work for backup power when the grid goes down.
SunPower still holds a war chest of 2.5 million Enphase (ENPH) shares, after selling one million Enphase shares to fund the October acquisition of Blue Raven Solar.
Keeping things in the family: the TotalEnergies connection
In February TotalEnergies (TTE), a 51.7% shareholder of SunPower, announced a definitive agreement to acquire SunPower’s Commercial & Industrial Solutions business for $250 million. SunPower’s Commercial & Industrial Solutions business was a distraction and loss maker for SunPower, so exit for a good price was a useful outcome for SunPower. The business did not fit with SunPower’s renewed focus on residential solar and energy services provision. It represents a further simplification after the SunPower spinoff in August 2020 of its global solar PV manufacturer and international panels sales and installations business as Maxeon Solar Technologies (MAXN). Note that TotalEnergies is a 36.4% shareholder in Maxeon. TotalEnergies plans to use the acquisition of the SunPower Commercial & Industrial Solutions business to build its B2B and sustainable development plans for the US. So the plan from TotalEnergies’ perspective is to help focus SunPower and give it resources to focus further on its digital products and customer experience, while growing another aspect of TotalEnergies solar business in the US. As has been pointed out elsewhere, there are significant benefits from SunPower’s spinoff of Maxeon and planned sale of the Commercial & Industrial Solutions business to both of these parties, as well as the major shareholder TotalEnergies.
TotalEnergies itself has a large scale solar business, which is targeting 4 GW of cumulative solar PV and energy storage in the US by 2025, and so it could be argued that TotalEnergies has a major commitment to all levels of solar power generation and its application, but it participates through various companies. While this involves some complexity, it also means that each individual business has a clear focus, allowing for minimal distraction from each company’s core purpose. TotalEnergies global business had 10 GW renewables in 2021 and plans to increase its renewables business to 35 GW gross generation and storage capacity by 2025 and 100 GW by 2030, to become a top-5 producer of energy from solar PV and wind.
SunPower being controlled by a larger partner undoubtedly has positives and negatives, but on balance I suspect that this benefits SunPower shareholders substantially, although it could mean that in the future the businesses with a solar focus in the TotalEnergies family might be subject to further fine tuning of their business activities. In particular I find the opportunity for Maxeon to sell its panels in the US other than through SunPower, to the Commercial & Industrial solar market, might create some ambiguity between the businesses.
A significant claim by SunPower is that it is the only US Distributed Energy Generation, Storage and Services provider which provides a one-stop-shop that is designed, can be financed, and is warranted by a single company.
Conclusion
In this article I’ve shown that the US has barely begun the process of adopting residential solar PV power generation and integrating that with domestic energy storage and transport (BEV integration). The potential in the US is huge and the Australian market is already demonstrating the scale and validity of the residential solar PV market. SPWR has clear and strong focus on this emerging market, and it is aggressively growing from its Californian base, which will be addressed in an imminent Analyst Day.
Watch out for the SPWR Analyst Day, as this might be a time to pay attention about possible investment in SunPower. Notwithstanding a 16% increase in share price this month to $20.91, SPWR is still trading at a 33% discount over the past 12 months. I suspect that the fall in share price reflects uncertainty about the Biden Administration’s ability to push through its dramatic renewable energy program. Reality now is about whether SPWR’s business plan and the market it addresses is ready to take off. I think it is. There seems room for further share price improvement and the Analyst Day could be a trigger.
I am not a financial advisor, but I follow closely the energy transition from fossil fuels to electrification of power and transport. SPWR has a strategic place in the US home solar PV market and increasingly more generally in residential power management. I hope that my commentary is useful to you and your financial advisor when considering solar investment.
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