Solar Power Stock is a Strong Buy
Solar power has long been hailed as a sound alternative to fossil fuels and other non-renewable sources of energy. This alternative has witnessed exceptional growth in the United States and overseas and continues to play a role in our country’s energy mix. The Solar Energy Industries Association has announced that the U.S. installed 13.3 gigawatts (GW) in 2019 alone of solar photovoltaic (PV) capacity to reach 77.7 GW of total capacity, enough to power 14.5 million households. The energy source accounted for 40% of all new electric generating capacity added to the U.S. grid, higher than any other source (SEIA). As of February 2020, the industry employs more than 242,000 people and added $84 billion to the U.S. economy in 2016 (Rhodes). Furthermore, the U.S. Energy Information Administration projects solar to be the fastest-growing energy source until 2050 (EIA). As if that is not enough, the U.S. Bureau of Labor Statistics estimates that the solar PV installer will be the country’s fastest growing job until 2028, with a median income of $42,000. In other words, solar power no longer represents a mere fringe energy source; it is quickly becoming critical to U.S. energy and security. However, challenges remain that the industry continues to address as it becomes part of daily American life, including energy storage and effective market-incentivizing legislation.
Solar power companies have also benefited from strong growth. Companies such as Verengo Solar, SolarCity and Sungevity have installed thousands of individual units nationwide (Conserve Energy Future). The companies are also becoming adept at catering to various segments of the economy; solar panels are being courted by households, businesses, and universities, among others. The diversity in customers and markets indicate that these companies will be more likely to sustain external shocks, as they could shift their sales and marketing strategies to other areas of the economy. Public companies have also seen strong growth and investor confidence. In fact, the solar industry outperformed the S&P 500 in the past year (Investopedia). While it may be too early to tell, it would seem the industry has also suffered fewer losses from the coronavirus pandemic, as the Invesco Solar ETF recorded a total return of -4.7% compared to the S&P’s -13.7% in the 12-month trailing period. One company case study that exemplifies the industry’s strong growth is First Solar Inc, which has seen YoY quarterly returns of 102.4%. Finally, the overall industry is set to grow at a Compound Annual Growth rate of 20.5% from 2019 to 2026 (Allied Market Research). Needless to say, investors should be bullish about yield opportunities in this exciting field.
While the industry as a whole has seen impressive expansion, individual states have accounted for large portions of this growth. For instance, Southwestern states, including California and Arizona, have generated the most solar power by a large margin. In fact, in March 2020 California and Arizona together produced 4,241 thousand megawatt hours, accounting for 43.6% of the country’s output (Choose Energy). This discrepancy makes sense for several reasons. First and foremost, states in the Southwest have higher rates of sun exposure than other regions. Secondly, these states are often strapped for water. It has been documented that solar energy systems are associated with lower water footprints, incentivizing demand for this energy source in those states (Allied Market Research). Geographic determinism is clearly at play here, as states more endowed with sunlight are able to produce and better utilize solar panels. However, that is not to say that other states could not increase their market share. Companies and research labs are developing methods to optimize sun exposure, including by determining the best angle at which to place the panel based on geographic location. These best practices will allow solar companies to increase competitiveness relative to wind or hydro sources in states with lower levels of sun exposure, as well as maximize solar potential.
The solar industry has, however, encountered challenges that it will need to tackle. First and foremost is the issue of storage, which has been modeled as the Duck Curve. Solar energy generation peaks at mid-day due to the sun’s position; however, consumers’ demand does not match this generation schedule. This mismatch leads to overgeneration which can reduce the price of the energy produced. Furthermore, as generation potential increases, so does the mismatch between supply and demand. Therefore, the dilemma has been described as a “duck curve” owing to the belly-shape that forms over an intra-day period (Vox). As for possible solutions, R&D teams in the U.S. and Europe have been working to develop storage capabilities for the various panels. Energy storage has long been another momentous challenge facing the renewable energy industry. In past years, storage capabilities have had difficulty exceeding four hours, which in some circumstances still do not meet the demand-side requirements. Some successful outliers have included 8minute Solar Energy’s 400MW solar-plus-storage Eland complex, which was recently purchased by Capital Dynamics (Energy Storage News). These developments and others indicate that the race to maximize storage capabilities is on.
One final challenge to the solar industry is tariffs, specifically those enacted under the Trump administration. As is well-known, the U.S. government imposed tariffs on Chinese goods, including bifacial solar modules and may seek to increase the tariff rate in the coming months (Deloitte Industry Outlook). While the U.S. and China have entered a Phase One deal, trade experts are skeptical of the two parties coming to a comprehensive agreement soon. Recent tensions over China’s imposition of the national security law on Hong Kong might also derail these bilateral talks. However, the industry’s manufacturing costs have been decreasing in past years, which could help offset an increase in tariff rates. In fact, solar construction weighted project costs fell 37% from 2013 to 2017. This decline should allow solar companies to continue generating positive rates of growth even amidst trade uncertainties. That is not to say, however, that investors should ignore the trade negotiations and tariff expansions.
In terms of public policy, states have largely come to embrace this new technology. Through tax incentives and government funding, solar power is quickly becoming commonplace in most regions of the country. One area that could benefit from even more government support is research. While the Department of Energy recently announced $128 million in new projects to advance solar technologies, the agency’s plan only spans 22 states (Department of Energy). The department could be even more effective by funding projects in states that would benefit from foundational research and early-stage resources to make up for the natural disadvantage in potential output. This technology will be critical to the era-defining strategy to mitigate climate change (MIT Energy Initiative). Ultimately, as the country moves to embrace non-fossil resources, investors and the government can work in conjunction to support and promote solar power, which has consistently proven to be a reliable, safe, and sound energy choice for American households and businesses.
Works Cited:
1. Solar Energy Industries Association. (2020, March 17). U.S. Solar Market Insight. Accessed May 27 on https://www.seia.org/us-solar-market-insight
2. Rhodes, Joshua. (2020, February 3). The Future of US Solar is Bright. Forbes. Accessed May 27 on https://www.forbes.com/sites/joshuarhodes/2020/02/03/the-us-solar-industry-in-2020/#32d739105ed3
3. U.S. Energy Information Administration. (2019, January 24). EIA’s Annual Energy Outlook 2019 projects growing oil, natural gas, renewables production. Accessed May 27 on https://www.eia.gov/todayinenergy/detail.php?id=38112
4. Rinkesh. 15 Best U.S. Solar Energy Companies. Conserve Energy Future. Accessed May 27 on https://www.conserve-energy-future.com/americas-best-solar-energy-companies.php
5. Reiff, Nathan. (2020, March 19). Top Solar Stocks for Q2 2020. Investopedia. Accessed May 27 on https://www.investopedia.com/investing/top-solar-stocks/
6. Hariharan, Shruti; Prasad, Eswara. (2019, October). Solar Energy Market Outlook - 2026. Allied Market Research. Accessed May 27 on https://www.alliedmarketresearch.com/solar-energy-market
7. Choose Energy. (2020, June 1). Solar energy generation by state. Accessed on June 3 on https://www.chooseenergy.com/data-center/solar-energy-production-by-state/
8. Waters, Carlos. (2018, May 9). This “duck curve” is solar energy’s greatest challenge. Vox. Accessed May 27 on https://www.vox.com/2018/5/9/17336330/duck-curve-solar-energy-supply-demand-problem-caiso-nrel
9. Keating, Cecilia. (2020, January 24). ‘Breakthrough’ California solar-plus-storage project bought by California Dynamics. Energy Storage News. Accessed May 27 on https://www.energy-storage.news/news/breakthrough-california-solar-plus-storage-project-bought-by-capital-dynami
10, Motyka, Marlene. (2020). 2020 Renewable Energy Industry Outlook. Deloitte. Accessed May 27 on https://www2.deloitte.com/us/en/pages/energy-and-resources/articles/renewable-energy-outlook.html
11. Department of Energy. (2019, November 6). Department of Energy Announces $128 Million in New Projects to Advance Solar Technologies. Energy.Gov. Accessed May 27 on https://www.energy.gov/articles/department-energy-announces-128-million-new-projects-advance-solar-technologies
12. MIT Energy Initiative. (2015). The Future of Solar Energy: An Interdisciplinary MIT Study. MIT. Accessed May 27 on http://energy.mit.edu/wp-content/uploads/2015/05/MITEI-The-Future-of-Solar-Energy.pdf
