Another Reason to Invest in Solar

Guess who said this:

I have no hesitation to predict of course in years to come solar will be the dominant backbone of our energy system, certainly of the electricity system.

A.) Al Gore, B.) Elon Musk, or C.) Ben van Beurden, CEO of Royal Dutch Shell?

If you guessed van Beurden, you are correct.

The CEO of one of the largest oil companies on the planet also said:

Amid tumultuous oil markets and tumbling costs as photovoltaic cells are rolled out globally, the value of solar is already evident…

Of course, we don’t need him to tell us that.

Truth is, this isn’t “news” — although when the CEO of an oil company speaks positively about solar, it does make for a good headline. Especially when some in the U.S. solar industry are fearful about what could happen in the absence of the investment tax credit (ITC), which I discussed in last week’s piece.

3 Stages of Growth

The response to last week’s article was interesting…

I received a lot of feedback from pro-solar folks who believed I was shortchanging the industry.

Nothing could be further from the truth. But to deny that the end of the ITC could make things rough for a while would be dishonest.

That’s not to say I don’t remain bullish on solar. After all, this is a global market that won’t live and die by a tax credit in the United States. However, as investors, we must stay objective.

The good folks over at the Solar Energy Industries Association (SEIA) actually did a good job of this in a recent report that defines the next decade for the U.S. solar market broken down into three stages — and taking into account the loss of the ITC.

Stage one looks at the current state of the industry through the end of 2016.

During this time we will likely see an unprecedented boom in solar installations. Improved economics, low interest rates, and the rush to complete projects before the end of the ITC will result in a major growth spurt for the sector.

Stage 2

In the absence of an ITC extension, five macro factors will be at play from 2017 through 2019, pushing the market in different directions. As the SEIA explains:

1. The ITC rush of 2016 will be over, and project pipelines for commercial and utility-scale developers will be lighter.
2. Project economics will be very tight.
3. Interest rates could rise during the period, putting upward pressure on cost of capital for solar projects.
4. Obama’s Clean Power Plan (CPP) will not yet have taken full effect. The first compliance date for the CPP is 2022, but the rule issued by the EPA includes a Clean Energy Incentive Program intended to support renewable energy installations in 2020 and 2021. One unintended consequence of this program, if it is left unchanged, is that states may design their policies to support solar installations in those years, even at the expense of earlier years (2017-2019), since those earlier installations won’t receive the same credit.
5. Despite the obvious headwinds, solar project costs will continue to fall and increasingly large pockets of demand will remain open. The overall market may decline substantially year-over-year in 2017, but growth from the new, smaller base will resume thereafter.

Stage 3

From 2020 through 2025, a new era of growth will begin, as CPP compliance will incentivize states to support the solar market. Meanwhile, project costs will be significantly below today’s levels, which are already quite low.

All in all, this analysis seems pretty cut and dry. Although to deny that the SEIA is working diligently to keep the ITC in place for another five years would be naïve.

However, there are other major players in the solar industry who actually believe the ITC isn’t necessary at all and, in fact, is hindering U.S. solar deployment.

The Economics Make Sense

Former SunEdison CEO Jigar Shah commented on this a couple of years ago, writing:

…based on the cost of solar that I am personally investing in, solar is now cost-effective without subsidies for ideal customers in 300 utilities in 30 US states. Those 300 utilities account for about 20% of all of the electricity sold in the United States (using Energy Information Administration Form 861 data). Based on my experience, my thesis is that phasing out these subsidies will lead to 1) greater system cost reductions, 2) lower cost of money, and 3) greater standardization in the industry — all leading to a greater acceleration of solar PV deployment in the United States.

I tend to side with Shah on this.

Yes, fossil fuels and nuclear remain heavily subsidized, but in its quest to capture more and more market share, the solar industry will have to learn to live without the ITC. Whether that happens next year or six years from now is still unknown.

But make no mistake — even in the event that the ITC is extended for another five years, that will be the end. The ITC will no longer be necessary at that point (assuming it’s necessary now), as the economics of solar will simply make it illogical to pursue much else.

And truth be told, we’re pretty much at this point already.

To a new way of life and a new generation of wealth…

Jeff Siegel

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Jeff is the founder and managing editor of Green Chip Stocks. For more on Jeff, go to his editor’s page.

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