How Sunrun Could Use The Sun To Create Energy And Alpha

Generating energy from the sun now forms one of the foremost needs for many nations across the world racing to avert anthropogenic climate change. While this will be mostly met by utility-scale solutions, residential solar power stands to play a material part. San Francisco-based Sunrun (NASDAQ:RUN) enables US households to generate energy from their own rooftops. The company handles the whole process from site survey to installation to the generation of the first KWh.

The benefits are multifaceted. By producing and consuming electricity at home with rooftop solar panels and rechargeable lithium-ion batteries, households are able to decouple themselves from the not fully decarbonized electricity grid. It also enhances resiliency in periods where load shedding might be necessary. Further, and depending on the state, rooftop solar could produce electricity at a cheaper rate for households than their current electric bills. This would essentially create a source of positive cash flow after the initial rooftop solar investment is paid back.

Sunrun is a pioneer in the field with more than fifteen years of experience with a stock price that whilst down 41% from its 52-week peak, still sports a 5-year return of over 500%.

Whilst the pandemic era gains are nearly all gone, the company exists within a new energy zeitgeist characterized by a visceral need for energy security against Russia’s full weaponization of its natural gas supplies. Natural gas had led to a great displacement of coal across the United States since the start of the new millennium. It constituted just under 40% of total US electricity generation in 2021. Russia’s war has disrupted its supply and led to an incredible boom in US LNG exports to Europe. Whilst helpful for the Europeans, it has led to US natural gas prices rising to a high multiple versus its historical level.

Rising US electricity prices will have the impact of incentivizing an even greater uptake of rooftop solar solutions. Assuming there is an inverse relationship between residential electricity costs and rooftop solar uptake would see Sunrun stand to benefit from this new zeitgeist by allowing its customers to tap the sun.

Rooftop Solar And The Inflation Reduction Act

Russia’s invasion of Ukraine has led to the hastening of the transition to more sustainable energy. Hence, whilst solar power remains a tool to try and restrict the rise in mean global temperature to well below 3.6 °F above pre-industrial levels, it now forms a critical geopolitical weapon in the face of the energy crisis. The Inflation Reduction Act is less about reducing inflation and more about pulling forward the transition to renewables.

The act will dramatically accelerate Sunrun’s business with management describing its passage as a “major step forward for humanity“. It’s significant with $370 billion allocated to decarbonization initiatives over 10 years and with generous tax credits to make rooftop solar more affordable.

To say Sunrun is staring at future quarters of strong demand and healthy revenue growth would be an understatement. August electricity bills for US consumers were up by 15.8% last August, the biggest gain since 1981.

This should see Sunrun’s customer base expand and will likely allow the company to cross 1 million customers quicker than would otherwise have happened. The company’s last reported earnings for the fiscal 2022 second quarter saw new installations grow by 33% year-over-year to 246.5 MW. This exceeded the high-end of guidance and allowed total solar energy capacity to rise to 5.14 GW. The quarter also saw new customer additions increase by 21% over its year-ago quarter to reach a new record of 724,177.

I would be remiss not to mention the much publicized California solar subsidy reforms. As the state represents around 40% of Sunrun’s revenue, the proposed reforms stand to add new grid-use charges and shifted to a net billing structure that would materially lower incentives for rooftop solar customers. The California Public Utilities Commission is set to release its proposed decision by September 29, setting up a date for what will likely see material volatility in the company’s shares. If California proceeds with the stated reforms, the company will see a substantial weakening of growth and will likely have to pull its year-ahead financial guidance.

A Planet Run By The Sun

Sunrun has set out on a mission to create a planet run by the sun and in doing so create alpha for shareholders. Critically, its business model is set to be boosted by historical events and the unprecedented fiscal intervention of the US government with the Inflation Reduction Act.

However, the company’s progress has failed to be translated into meaningful cash flows with a cash loss from operations of just under $200 million as of its last reported quarter and a bigger loss of $915 million for the trailing twelve months. Further, there is some doubt as to the extent to which natural gas prices remain elevated. New capacity from other countries is set to come online with most analysts predicting an LNG glut in the medium-term.

Sunrun has a great future but faces material risks. Long-term debt of $7.4 billion is more than 100% of its market cap with interest payments of $48 million. Whilst secured against its solar assets, such a financing structure will forever hamstring profitability and is enough to dissuade prudent investors. This is a company to watch.