The Age of Solar has Arrived

Solar companies reported their first quarter earnings this past week and their stocks took a hammering. As the market closed on May 7, First Solar (NYSE: FSLR) saw its share price down 5.75%; SolarCity (NYSE: SCTY) was off by 9%; and SunPower Corp. (NYSE: SPWR) was down nearly 3%.

But the sell-off was short-lived. First Solar's quarterly revenue of $950 million beat analysts' estimates of $800-$900 million. That translated into an earnings per share of $1.10, far above the $0.50-$0.60 that Wall Street expected. The company offered a very upbeat analysis for the rest of the year.

And that reflects the trajectory for the industry as a whole - the future is very bright. To be sure, solar still makes up a small share of the electric power industry, accounting for less than 1% of generation last year. But, investing is about growth, and in the energy sector nothing is growing like solar.

Costs Go Down, Growth Goes Up

After years of stratospheric hype and little to show for it, solar is finally poised for a takeoff. The U.S. installed 4,751 megawatts in 2013, a 41% jump from the year before. The Solar Energy Industries Association predicts that the sector will expand by another 26% this year as well, adding another 6,000 megawatts of capacity. Put another way, solar grew 418% between 2010 and 2014. Try finding a growth rate like that elsewhere.

Much of it has to do with the dramatic fall in the cost of a photovoltaic module. The average solar panel manufactured today costs less than $0.60 per watt, down from nearly $2/watt in 2010. Costs have declined by 60% since just 2011. The more costs decline, the more megawatts the industry can install. And as more and more capacity comes online, economies of scale bring costs down further.

First Solar has led the industry in squeezing out as much costs as possible from a PV module. It has one of the cheapest manufacturing costs for its thin film solar - only $0.46 per watt. And last year First Solar partnered with GE, its only real rival in the thin film space, to achieve even greater efficiencies in their technologies. First Solar acquired the intellectual property of GE's portfolio, and GE received 1.75 million shares in First Solar in exchange. This will allow First Solar to build some truly massive utility scale projects, such as the 290 megawatt Agua Caliente project that just came online in Arizona in April, and is currently the largest operational solar farm in the world.

With individual panels so cheap at this point, the remaining costs are tied up in siting, permitting, and financing, or "soft costs." This is where SolarCity's innovative financing scheme comes in. SolarCity managed to securitize debt for new solar installations and sell bonds. This has reduced the cost of finance, allowing the company to expand without having to use a ton of upfront cash.

Whereas First Solar offers investors a conventional manufacturing company to invest in, SolarCity offers a radically different approach. It is more of a decentralized utility company, selling power instead of a manufactured product.

SolarCity provides panels for free to customers, and charges them a monthly payment. It retains ownership over the panels, and the zero upfront cost for the customer makes it that much more attractive. SolarCity is not posting huge profits now, but that is only because it is lining up projects. Once they are up and running, they are essentially cash cows - revenue streams with no further costs, unlike say, a traditional utility that has to pay for fuel.

And the results speak for themselves. SolarCity installed under 300 megawatts for 2013; in 2014 it expects to install 500-550 megawatts, and double that total for 2015. When solar becomes truly mainstream, SolarCity will deserve a lot of the credit.

Using the Sun at Night

Still, while solar may be growing rapidly, its Achilles heel is the intermittency. For that the industry will need to figure out a way to capture the energy and store it for later use.

The results of a new study from scientists at Harvard University and MIT offer a promising answer to that conundrum. Published in the journal Nature Chemistry in April, the scientists invented a "photoswitch," which is a molecule that can take on two different forms. It takes in light and can store it the energy for later use. What is most exciting is that the energy can be stored indefinitely with these photoswitches. When the user wants to use the energy, it can be released as heat. Though the concept is still a ways off, if commercialized it could boost the viability of base load solar power. And even if this particular story doesn't play out, there are a million more like it, meaning the energy storage problem will eventually be solved.

More realistically in the medium term is lithium ion batteries. Elon Musk, CEO of Tesla Motors and also Chairman of SolarCity, announced plans to build a massive lithium ion battery factory in the southwestern part of the United States, known as the "gigafactory."

When completed in three years, it will dramatically increase the production of battery capacity and bring down costs. Musk believes that the factory will be able to churn out more lithium ion battery capacity in 2020 from this single factory than the entire world produced in 2013. He predicts that in its first year of operation, the gigafactory will slash the cost of batteries by 30%.

Roadblocks Ahead

Now there is no doubt that solar is headed for big time growth. The question is just how fast that growth will be. And there are some looming fights over the next several years that could determine whether or not solar explodes or merely grows briskly.

On the positive side are any efforts to restrict air pollution from power plants. The Obama administration has already put some regulations on coal plants - such as limits on mercury emissions - but its pending rules due out in June on greenhouse gas emissions could lead to a wave of coal plant shut downs over the next 3-5 years. That will boost demand for solar as utilities scramble to comply.

Actions at the state level will help as well. Renewable portfolio standards exist in 29 states plus the District of Columbia. This has been a major driver of growth, but since many are beginning to be maxed out, some states are beginning to add even more generous incentives. For example, New York Governor Andrew Cuomo just announced a $1 billion public-private partnership that will build out 3 gigawatts of solar in his state.

On the other hand, opponents of solar are seeing the reading on the wall and are beginning to fight back, particularly at the state level. Friends of solar beat back attempts to scrap renewable portfolio standards in Kansas, Ohio, and North Carolina so far. But the attacks are not letting up, and there is no guarantee solar's allies will be able to defend the RPS's indefinitely.

Another big fight is over net metering. The ability of owners of solar panels to sell excess power back to the grid is a key determinant in making solar economical. Most states allow this to happen, but as solar has begun to capture some serious market share in places like California, Arizona, and Hawaii, utilities are mounting campaigns to scrap net metering. Arizona placed a modest tax on solar panel owners as a result.

Conclusion

For a long time investing in renewable energy has been speculative, but not anymore. And despite the attacks on solar by utilities, the genie is out of the bottle. Costs will continue to decline and solar panels will continue to proliferate. There are big question marks over which companies will lead the way, and how fast they will grow, but there is no question that the age of solar has arrived.