Solar companies make hay while sun shines on industry
In the past year I’ve become much more bullish on the prospects for distributed solar generation. Distributed simply means that the energy production, in this case solar energy, is produced at or near the place where it’s consumed. Don’t get me wrong, solar still enjoys some State and Federal kickbacks, but even without that help solar will definitely become competitive in its own right. Another caveat, I don’t mean to say that solar will displace nuclear, coal or natural gas, which provide incredibly important base load power. Rather that solar, growing from a tiny installed base will grow incredibly fast for many years to come.
I come to this point of view after being negative on both wind and solar for many years. However, once one throws away the idea that solar has to, “beat” or replace base load power sources, (without) subsidies, then the solar picture comes into focus. Solar is a niche market, only applicable to select locations due to the amount of sunshine and locations that have relatively expensive incumbent electricity rates. Of course, as the costs of solar come down, the locations amenable to distributed solar are increasing. For example, the northeastern U.S. is a hot market in rooftop solar, especially Massachusetts. Massachusetts has relatively high electricity rates, so it’s getting a lot of attention by solar companies despite it not being known as a sunny state like California or Florida.
Solar a niche market, but growing very rapidly
Not only is the cost of producing solar panels in decline with dozens of companies around the world producing at meaningful scale, but the efficiency of the panels is increasing as well, albeit slowly. Currently, the best solar panels can convert about 20% of the sun’s energy into electricity. And of course, that conversion is only happening when the sun is shining. However, a free-standing home with solar panels on the roof can routinely meet 50%-100% of its electricity needs. This is only possible because the energy produced on that rooftop is fed into the grid and returned to the customer when needed, like at night. Some critics point out that since the distributed solar electricity still needs to go through the grid, it’s not making the user energy independent. That’s true. In a storm the solar houses on the block will lose power as well. Be that as it may, distributed solar is a rapidly growing niche market that I’m increasingly excited about. In addition to single family rooftops, solar works perfectly well on schools, malls, military bases, hospitals, fire houses, landfills, data centers, parking lots, (car ports), arenas, airports, warehouses…the list goes on. Another key to my change in thinking is the speed with which solar can be deployed at the local and commercial/industrial levels.
Nuclear power plants costs billions of dollars and can take a decade or more to turn on. Nuclear remains a viable and good choice for densely populated countries. But a dozen or more companies can place solar panels on my rooftop within a month or two. Companies like Vivint Solar and Solarcity not only install the panels, they can offer zero down leasing options as well as handle all the permitting issues with municipal agencies. Vivint Solar (NYSE: VSLR) and Solarcity (NASDAQ: SCTY) trade at aggregious valuations, I would not invest in these companies. But, the reason for the overvaluation is that solar is reaching a tipping point the same way that electric vehicles are. I don’t know when that tipping point will come, but it’s coming.
Community-owned solar’s time has come
Get our daily investorintel update
Consider two more salient points on solar. Second homes, i.e. vacation homes are not occupied year-round, but the sun shines year-round. When no one is in the vacation home, the home could be a net generator of electricity– generating income for the home owner. The same dynamic is at play for schools which are not used in the summer and could be net generators of energy that gets fed into the grid. The second point that I think will really move the needle is community-owned solar. In this scheme, a town can allocate unused land, perhaps 20 acres worth, to set up a solar farm. The energy produced on that system gets fed into the grid and the local people can get a share of the solar farm’s energy, saving money for each homeowner who enrolls in the plan. Importantly, the operating cost of the solar energy generation does not go up over time. Therefore, a solar farm’s contribution of electricity to the grid need not experience the kind of inflation that incumbent coal, gas and nuclear power companies have been putting through. That inflation protection is also a key to understanding distributed solar.
Like rooftop installations, a community-owned solar system can be deployed with minimal capital from end users. Investment funds frequently team with builders of these systems to fund the construction. In return they get a portion of the savings from the solar system. Instead of home owners saving 25% on their monthly electricity bills, perhaps they save 15% and the investors and builders earn income on the difference. Community solar is very compelling because a lot of households don’t want solar panels on their roofs, but every one of them could save with community solar. Due to economies of scale at the solar farm level, the opportunity for larger savings than might be achieved with an individual system is possible.
Solar will never replace base load power from nuclear or natural gas
To be clear, solar is not home free, there remain challenges. Energy density is a valid argument against wind and solar. Nuclear power plants produce by far the most electricity per square acre of land hosting the reactor(s). Solar energy requires substantially more land to produce intermittent power fed into the grid. However, if one places solar in places that can’t otherwise be utilized, like on a rooftop, energy density becomes a moot point. To reiterate, I’m thinking of solar as a niche market, not a replacement for base load power.
Many towns and cities don’t want nuclear power plants nearby. If a giant utility builds a new nuclear plant does that even mean the region’s electricity rates will go down? Probably the opposite because rate payers often fund the capital expenses of utilities. Instead of real savings with community solar, rate payers might have to pay more for a new nuclear plant they don’t want. Further, speed to market is a prime selling point for solar. Penetration of solar at the residential level is roughly 1% in the U.S. vs 12% in Australia. Clearly there’s plenty of room for growth. Instead of impeding the growth of distributed solar, utilities are beginning to join the club. This is a trend worth watching. In the meantime, small solar power companies can make hay while the sun shines.
InvestorIntel is a trusted source of reliable information at the forefront of emerging markets that brings investment opportunities to discerning investors.