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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Solar’s Growth Poised To Slow

Solar’s Growth Poised To Slow

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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  • gus on August 02 2015 said:
    Ridiculous: "The most attractive solar locations have largely been taken." The price of solar is expected to fall another 40% in the next 2 years, dramatically increasing the number of locations where it is the lowest cost option. Future solar projects will deliver even better returns, compared with those built in the "most attractive locations" of the present and past... because the tech keeps getting better and scale improves.
  • Edward on August 03 2015 said:
    It's absurd to say that the most attractive solar locations have largely been taken. The solar resource is universal. It's not like veins of gold concentrated in a few locations. Even the worst places have a substantial resource, which is why Germany, with it's famously perpetually overcast skies, was still able to be the first place to develop a substantial solar industry. As the cost of solar falls, the zone profitable locations expands, not contracts. As a matter of fact, you could say that the solar industry is only now starting to expand into the best resource areas. Up until recently the industry was driven by subsidies in a few advanced industrial economies (Germany, USA, China, Japan, Europe, etc.) Now it is being driven by economics, so we are seeing its rapid deployment in places with a lot of sun and/or high incumbent energy prices (India, middle east, Brazil, Hawaii, island nations, places without a reliable grid, etc.) While the tax credit in the United States is set to fall, and then expire in the coming years, other tax and energy regulations in the US and around the world are becoming more favorable for solar. Carbon taxes and cap and trade schemes are expanding, as well as favorable FIT's, such as net metering and 'value of solar'.
  • Aaron on August 03 2015 said:
    The notion that all of the good solar locations are already taken is ludicrous to me. Also even without government incentives solar will pay for its self in the long run and it's still worth doing. in my opinion solar just going to become more affordable on thus more of a popular addition when building new homes
  • brc on August 03 2015 said:
    The author claims that "First, the most attractive solar locations have largely been taken at this point." Nonsense. The attractiveness of solar PV is almost entirely determined by the cost of the grid. New York gets less sunshine than California yet solar PV installations are booming.

    He goes on to say "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." True. And as the cost of solar PV continues to fall, and there is every reason to believe it will, solar PV will SURPASS grid parity. Doesn't basic economics dictate that PV will be preferable to grid power?

    I know what you're thinking: The sun doesn't shine at night. That's were batteries come into the economic equation. There are a variety of different technologies being developed: lithium sodium, magnesium, vanadium-flow and, as with solar PV, costs are dropping fast.

    Cheap solar PV plus cheap stationary batteries will transform the grid. The old hub-and-spokes model for power generation and distribution is dying before our eyes. Coal is only the first casualty.
  • dave on August 20 2015 said:
    Circa 1904 " Henry Ford has sold about a 1,000 cars, so there isn't much of a market left. At 8 horsepower the performance is not going to improve. At $150,000 (2015 $) the price isn't going to drop either". The car has been an interesting experiment".

    Horse Trade's Association

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