As solar power growth continues to accelerate, it’s time for investors to take a step back and make sure they have realistic expectations. Solar panel pricing has fallen dramatically in the last five years and both rooftop and grid-scale installations have seen enormous growth as a result. Investors have seen the benefits of this explosive growth in the stock price of companies like Solar City.
Solar optimists believe this growth has a long road ahead of it. And while the technology certainly does have a lot of potential, this year may see a peak in solar growth rate. To be clear, there will probably still be additional solar installed for many years to come. But the rate of increase in installations is likely to slow starting in the next 24 months for two reasons.
First, the most attractive solar locations have largely been taken at this point. Certainly there are still many acceptable locations for solar projects, but basic economics dictate that the best and most profitable solar locations would be used first. Related: Top 6 Myths Driving Oil Prices Down
Rooftop solar in places like California is already well established, and most other states simply do not offer the combination of attractive weather and green incentives of California. Similarly, grid-scale solar projects have been coming down the pipe so fast that their growth rate has actually exceeded rooftop solar in the last year. 2014 saw the fastest rate of solar growth yet, and that was helped in large part by grid scale projects.
Second and even more important: Federal incentives programs for solar energy are coming to an end in 2017. These temporary subsidies have the effect of pulling forward demand for solar power projects. Essentially anyone with a reasonable solar power project (or who wants rooftop solar) has a direct or indirect incentive to get it now rather than wait. It is unlikely that Congress will renew these incentives.
Solar power is at grid parity in many areas and it’s hard to make a compelling case that the federal government is still needed here. Further from a political standpoint, congressional gridlock is likely to keep the incentives buried in congressional committees. Republicans are probably less likely to favor solar than Democrats, with Republicans controlling both parts of Congress right now, prospects for a Democratic takeover look dim. Related: Former Exxon President On Mission To Clean Up Oil Sands
Given all this, investors need to resign themselves to the very real likelihood that these are solar powers best growth days. Again, that does not mean solar is not a viable power source - the recent NV Energy deal underscores solar’s viability. But buying stocks at the peak of their growth is rarely a winning strategy. The market is probably not yet pricing in the substantial slowdown in growth that firms like SolarCity will face in a couple of years.
Adding to the complexities that solar investors face is the burgeoning fight between utilities and rooftop solar installers. Utilities have infrastructure costs and want to see solar users pay connection fees for the insurance value of being connected to the grid. That’s a reasonable argument in the same way that a person who never has a car accident still has to hold car insurance even if they promise to pay out of pocket for any damage they cause in a future hypothetical accident.
Moreover from an economic standpoint, state regulators want to see utility companies continue to exist and will never allow solar rooftop installation to become an existential threat to the utility industry. Again, that’s not good for the likes of SolarCity. Related: Buffet’s Solar “Insurance” Coup In Nevada
Overall then, while solar power, through the likes of SolarCity and other firms, is definitely a viable business, investors need to take a careful look at the multiples they are paying today. If solar’s growth does in fact start to slow in the next 12 to 24 months, those multiples are going to come down fast and take a lot of investor’s drams with them.
By Michael McDonald of Oilprice.com
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