The tailwinds supporting the secular shift from non-renewable to renewable energy are strong and growing. Solar PV is experiencing tremendous growth from a low installed base while gains in technological efficiency, favorable policy and financial innovation are all increasing prospects and visibility for investors. Global recognition of the economics for a solution with zero marginal cost of production and low potential future waste liabilities are cementing solar at the core of the massive replacement cycle for energy systems.
The energy created by the sun that reaches the earth per year is equal to approximately 20,000 times the total demand by society. Photovoltaic (PV) cells are comprised of abundant materials and are designed with no moving parts’ they capture the sun’s energy and convert it into electricity. This electricity is exchanged for hard currency. There is minimal security, transport, environmental or storage hurdles. This is the solar power growth story.
Total installed solar PV capacity increased 32% in 2014 to a cumulative 180 Gigawatts or between 1-2% of global electricity demand. 1 Gigawatt (GW) of solar PV is enough to power roughly 200,000 homes.
By comparison, global wind capacity stood at around 369 GW at the end of 2014.
Growth typically follows productivity gains. The pair of graphs below contrast the productivity gains (CAPEX efficiency) in solar vs. declining productivity in the Oil & Gas industry. In a confirmation of Future Bright’s thesis, investors have been rewarded for investing in industries with rising CAPEX productivity. In the case of solar, industry is building more capacity, with less dollars, using less land.
The productivity of CAPEX is driven by a familiar story: Moore’s Law for the scaling of semiconductor technology.
Technology: The cost to install Solar PV has fallen dramatically over the last five years. The Photovoltaic cell, the core component of a solar power plant based on semiconductor technology, has fallen in cost by roughly 80% (right graph) while total installed cost have fallen by roughly half. With power prices stable or rising, these efficiency gains have led to improving economics for investors and implementers of renewable energy like solar PV.
A sample of projects from 2014 by the National Renewable Energy Laboratory (NREL) shows for utility scale projects, renewables like solar PV and wind have largely satisfied the cheapest to deliver condition for utility adoption.
As Solar PV costs fall, global grid parity is on the horizon. Grid Parity occurs when a capacity source reaches or falls below the cost to generate electricity on the grid. In 2014, Solar PV had achieved grid parity in over a dozen US states and in over 100 countries. Deutsche Bank recently predicted 80% of the global market will reach grid parity by 2017 (Bloomberg, Cleantechica).
What happens when an energy technology with zero marginal cost of production reaches grid parity with fuel-based substitutes? We now stand at that intersection.
PV costs have continued to fall in 2015. Reported prices in both developed and developing markets have dropped an additional 10-20% in the past six months (Cowen). Germany, one of the worlds more mature markets for Solar PV and not a low-labor cost market, installs rooftop systems at around $1.2/W, which is around ½ the cost in the US market indicating further potential for CAPEX efficiency in growth markets like the US.
Policy: Policy support for renewables has been generally favorable around the globe. Job growth and the will to mitigate climate change risks are two main reasons for this support. Policy support can take many forms some of which include: Renewable Portfolio Standards (RPS), Feed-in Tariffs (FiT), Renewable Energy Credits (REC/SREC) or Tax Credits (including Carbon Taxes).
Renewable Portfolio Standards are state or federal level guidance for the percentage of the capacity mix that utilities must provide from renewables. For example, California just raised its renewable RPS to 50% and other states such as Massachusetts, Vermont, New Jersey and New York have progressive goals for RPS. To see your markets RPS, click here: RPS by State.
RPS are often paired with Feed-in Tariff or Renewable Energy Credits to create the proper market based mechanisms and incentives for growth. In SREC markets, renewable energy developers receive their negotiated offtake price (often a long-term contract discussed below) plus the value of the SREC at the time energy is produced. Forward markets exist for SREC’s with institutional participation allowing developers to hedge and increase bankability of projects. Feed-In Tariffs are mandated prices between developers and utilities for approved projects. Tariff rates typically ‘step-down’ overtime as capacity is added to meet goals.
FiT’s and RPS are also used at the country level across the globe. Some examples include:
- Japan’s FiT system for solar implemented after the Fukashima disaster has resulted in 69GW of approved projects in less than 2 years
- India has a seven-year goal of over 100GW of solar PV. Instrumental private capital partners like SunEdison are arriving to make the grid of the future a reality in India.
- China’s recent accord with the US on carbon emissions anchors the countries’ position as a leader in investment into renewables and manufacturing. China could invest up to $2T over then next 15 years in renewables under the parameters of the Nov 14’ accord (WEO, Bloomberg).
Tax Credits have been instrumental in kick starting growth for market like the United States. The 30% Investment Tax Credit (ITC) will step-down, unless extended, to 10% at the end of 2016 and is expected to drive growth in the 2015-2016 development cycle.
THINK TANK: Future Bright predicts the 30% ITC for solar could be extended.
While there remains regressive policy in particular states and/or countries, it should be no doubt that governments’ the world over see their job security more than ever tied to their ability to steer the economic ship towards a low carbon future. Future Bright expects low-carbon strategy and climate change to be an inseparable part of elections and the democratic processes globally going forward.
Case in point – the Obama administrations final draft of the Clean Power Plan (CPP) directly addresses limits on carbon emission by imposing state-level standards and implementation guidelines. The CPP plan calls for emission reductions of 32% by 2030 vs. 2005 guidelines on a national basis and will be responsible for driving large investments in renewables and efficiency.
With or without policy support, overall growth prospects for renewables remain attractive, especially for developing markets:
- According to the International Energy Agency, non-OECD countries will require $10 Trillion in investments into power generation and transmission. For non-OECD countries, sustainable development like renewables offer a cost advantage over substitutes
Improving economics and growth eventually attract expertise and innovation in financial engineering. We are seeing the early stages of a tremendous growth in financial innovation for renewable right now.
Financial Innovation: Solar Power has been made bankable by a financial innovation known as the Power Purchase Agreement (PPA). The PPA is a long-term offtake contract for all or a portion of the power produced by a solar plant which typical ranges from 10-25 years. PPA’s are signed with utilities, commercial or residential buyers and often carry escalators of between 1% and 5%. The escalators, the low and falling cost of solar and the ability to generate onsite energy with no transmission costs often generates contracted PPA’s below market prices for electricity. This shared savings approach used in solar represents the key driver of growth in renewables and other areas of sustainable investment.
Other financial innovations have arrived to scale the development of new solar capacity. Recognizing the value in stable cash flows for assets with inelastic demand, financial innovators have delivered the Yield Company. The Yield Company is a dividend oriented growth company spun out from a sponsor that bundled and acquires renewable energy assets to distribute cash flows to shareholders. Both public and private yield companies exist as a source of long-term value creation for owners given the growth prospects for renewables. Yield companies are analogous to the MLP boom fueled by the US shale gas expansion. In 2014, Yield Companies had a combined market capitalization of around $30B vs. $500B for MLP’s. The Yield Company is expected to lower the cost of development capital over time and fuel long-term growth in renewable capacity.
Impact: In addition to the economic value, renewables offer investors and communities other significant social and environmental dividends. These include:
- Jobs: There are now over 7 million clean energy jobs worldwide. In the United States, Solar energy jobs grew at a 21.8% rate in 2014 vs. overall job growth of 1.3% (Energy.gov, The Energy Collective)
- Reduced Water Use: To see the future of scarcity challenges, look west. Solar and Wind offer conservation benefits over substitute like hydraulic fracturing or nuclear in that they use little to no water in operation. Look for more about water on this blog. Its maybe the biggest blindside risk out there.
- Security: whether it is from natural disaster or terrorist attack, renewables offer more resilience over the conventional grid. During hurricane Sandy, the 32MW Long Island’s Solar Farm endured minimal damage and was available for operation almost immediately. There were no reports of significant damage to solar and wind farms after the storm. If you doubt the threat of attacks to our energy infrastructure, google ‘The Metcalf Incident’ where you will read about the nearly successful assault in 2013 on a major PG&E sub-station responsible for providing power to Silicon Valley.
- GHG Reductions: Renewable energy assets generate electricity with no global greenhouse gas by-product. The lack of pollution and the will to mitigate climate change through potential carbon taxes provides further upside potential to renewable energy asset owners.
Bottom Line: The economics make sense. Accelerating gains in technological efficiency, policy tailwinds and financial innovation are combining with positive impact qualities to make the Solar Power Growth Story unstoppable.
DEMAND: Corporate and Country Level Adoption is Strong
Solar Makes Sense
Long-term asset owner will continue to be drawn by the zero operational supply chain and low potential future waste liabilities; qualities which should enhance value in times of economic stress. Individual investors and institutions have multiple ways to invest from liquid equities to fixed income securities to direct long-term investments and alternative fund structures. Renewable Energy asset ownership is ideal for institutions such as pension funds seeking to address potential asset liability mismatches.
- Database of State Incentives for Renewables and Efficiency, www.Dsire.org
- National Renewable Energy Laboratory, NREL, www.nrel.gov
- United Nations Environement Programme, http://www.unep.org/climatechange/mitigation/
- S. Energy Information Administration, EIA, www.eia.gov
- International Energy Agency, IEA, iea.org
- Cowen & Co
Disclosure: Future Bright is a think tank and advisory in sustainability and investing. Future Bright has worked with renewable energy developers, energy efficiency funds, assets managers and vertical farms on progressing solutions towards sustainability. This note is not an offer of services or investment of any kind. This is a blog post for informational purposes only. Those interested in consulting services, design work or industry analysis should contact Future Bright directly. (www.futurebrightblog.com)