Cost of capital
The downstream solar industry is a capital-intensive industry. Incumbent players are required to invest huge amounts of capital upfront in selling their products and gaining market share. Therefore, any increase in interest rates could have a significant impact on the profit margins of companies like Sunrun.
Sunrun is required to maintain the quality of its assets to raise capital at low cost. The increase in the cost of capital should increase the discount rate at which future cash flows are discounted and reduce the present value of the assets.
Downstream solar (TAN) players like Sunrun (RUN), Vivint Solar (VSLR), SolarCity (SCTY), and SunPower Corporation (SPWR) depend on a variety of state and federal tax credits, incentives, and rebates to expand their business.
Tax credits are crucial for raising low-cost capital through tax equity funds. Moreover, incentives like property tax exemptions, sales tax exemptions, and net metering encourage customers to go solar.
Any changes or uncertainty in regulations could have a significant impact on the sales of Sunrun. For instance, the elimination of net metering system in Nevada led to the market exit of Sunrun. It also impacted Sunrun’s 1Q16 guidance.
Change in regulations and policies related to rate design could decrease the value of electricity generated from solar panels and reduce the savings for homeowners. This in turn could impact Sunrun’s sales.
Apart from its peers, Sunrun faces competition from traditional energy companies such as Duke Energy (DUK), Southern Company (SO), and NextEra Energy (NEE). Any decrease in residential electricity rates could have a negative impact on services offered by Sunrun.
Moreover, diversification of traditional energy companies into solar power generation could decrease Sunrun’s revenue from the sale of SRECs (solar renewable energy certificates).
Sunrun’s concentrated business
According to company filings, more than 58% of Sunrun’s customers were in California as of December 31, 2015. Moreover, the company expects to further increase its customer base in California. Any changes in regulatory framework and weather conditions in this region could seriously impact Sunrun’s operations and infrastructure.
In the next part of this series, we’ll compare Sunrun’s operational performance with its peers and understand the differentiating factors.