In this article, I would like to talk a little bit about the development of solar technology in the US, the massive potential it has, and its future outlook with regard to the US electricity generation market. In order to fully understand an equity's value or potential value, it is essential to understand the underlying technology behind it (or at least some portion of it) and the potential for application to its respective market. After discussing technologies and markets, we will talk about why solar stocks have such massive upside and which are the best options going forward.
- Segmentation of Solar Tech
Currently, there are two dominant technology types in the solar industry, photovoltaics (PV) and concentrated solar power (NYSE:CSP) systems. These solar technology segments demonstrate a similar primary trait, both harness radiative energy directly from the sun and use it to produce work in the form of electricity. However, the two segments may vary greatly in terms of how they capture that energy and eventually turn it into useful work. For example, solar PV systems convert radiative energy directly into DC electricity by using photovoltaic cells, which act as a semiconductor. This electricity could then be stored in a battery bank or be converted into alternating current (NYSE:AC) and fed directly into a grid. Conversely, solar CSP systems vary in terms of technology and direct application, however, all systems demonstrate similar characteristics in that they use reflective surfaces to heat a working fluid (typically oil or molten salt) that is either used for mid-term storage, space-heating applications or used in an aqueous heat transfer system to run a steam turbine, called a Rankine system. More background technology information may be found here.
For the sake of this article, we will focus only on solar PV systems.
Figure 1: Global Cumulative Solar PV Installed Capacity
On a global scale, solar systems have been one of the fastest growing energy markets. Solar PV, in particular, has experienced significant strides since the turn of the 21st century, experiencing the most rapid growth of any renewable energy segment since 2000. Figure 1 demonstrates this significant and rapid growth. Of particular note is the dramatic rise in only the last five years in which global cumulative installed capacity of solar PV generation rose nearly 600% from 23,108MW in 2009 to 136,697MW in 2013.
2. US Solar Development
Figure 2: $/Watt costs in the US since 1977
Similar to global development, solar in the US has experienced significant growth over the last 10-15 years. Installed capacity by the end of fiscal Q2, 2014 in the US was approximately 15.9GW, the majority of which belongs to the utility segment followed by large industry, and finally, by residential installations. Furthermore, in 2014, more than half of all newly installed electrical capacity in the US was from solar. This staggering development from the early 2000s is primarily contributed to a concept grounded in finance termed the Swanson Effect, or Swansons Law, in which SunPower Corp. founder, Richard Swanson, noted that PV cell costs drop approximately 20% every time that manufacturing capacity doubled. Figure 2 depicts visually the drastic $/watt cost reductions of solar PV cells from 1977-2013. In 1977, a one watt cell would cost $76.67; comparatively, in 2013, that cost had fallen to just $0.74 per watt. In other terms, PV cell costs in 1977 were approximately 10,360% higher than in 2013. Of the approximate 16GWe currently installed in the US, an astounding 6.5GW is estimated to have been installed just this year.
3. Future Global Outlook
In September 2014, the International Energy Agency (IEA) issued two reports in which they stated a road map that depicts solar PV and CSP as the dominant electricity generation technologies by 2050. The reports entitled 'Technology Road-map: Solar Photovoltaic Energy' and 'Technology Road-map: Solar Thermal Electricity' highlighted global total generation estimates of 16% and 11% for solar PV and CSP technologies, respectively; a projection that would reduce global CO2 emissions by approximately 6 billion tones each year. IEA Executive Director Maria van der Hoeven stated costs as the primary developmental catalyst for solar technologies thus far, "The rapid cost decrease of photovoltaic modules and systems in the last few years has opened new perspectives for using solar energy as a major source of electricity in the coming years and decades."
4. US Future Outlook
Figure 3: Short-term US Solar PV Outlook (SEIA)
Future solar generation in the US shows strong growth potential both in the near term (years) and on a longer timescale (decades). The Solar Energy Industries Association (SEIA), who conducts market research for the US solar industry, conducted a short-term forecast over the next two years, which show record-breaking solar PV installation projections. Figure 3 depicts a rough SEIA estimate of 8,500MWe of further installed solar PV capacity in 2015 followed by an additional 12,500MWe in 2016, both of which would set substantial US installation records, respectively. Additionally, the SEIA estimates that a significant increase in short-term solar development will be in the residential sector, as residents further realize the benefits and cost-saving potential of distributive generation systems.
In the mid-term, the US Department of Energy (DOE) has launched the 'SunShot Initiative' aimed at further developing solar technology by increasing system efficiencies and further lowering costs. The 'SunShot Vision Study' recently projected a scenario in which solar PV and CSP technologies experience a 75% cost reduction between 2010 and 2020. In such a scenario, it's estimated that solar systems would account for 14% of all US electricity demand by 2030 and a staggering 27% by 2050. Additionally, their projection by 2050 would add an estimated 390,000 new US solar jobs, reduce CO2 emissions by 28% (760m MT), and would equate to approximately $50 billion USD in annual cost savings due to lower electricity prices. All of which would have vastly significant impacts on the US energy system, economy and environment.
Okay, okay, so I've thrown a bunch of statistics around but what does this mean for equity investors?
Well, this means that US solar companies such as First Solar (NASDAQ:FSLR), SolarCity (SCTY) and SunEdison (SUNE) have tremendous short and long-term potential, to put it bluntly. Furthermore, after the recent October market correction and ongoing oil speculation, solar entry points are lucrative (even more so after Monday's market hammering).
It all boils down to whether, as an investor, you want to bet more on distributive generation within the residential sector (SCTY), utilities (FSLR) or on R&D/Tech (SUNE). In my opinion, however, each market segment will reap the benefits of massive upside and substantial gains over the coming years and decades.
Of course, this upside has already been experienced by many tech savvy investors. Take a look at three mid-cap solar stocks since late 2012. First Solar experienced the most modest gain at roughly 50% over the time period, while SunEdison exploded over 400% and SolarCity nearly 500%. A direct result of technology advancements, allowing PV electricity generation to be more competitive with conventional technologies. Furthermore, each pick has devalued since early July of this year, after a reaction to October's market correction and recent oil concerns. While this devaluation may scare some investors, I see it as an excellent entry point to those investors who missed the bus on solar the first time around.
FSLR data by YCharts
The Bottom Line
I expect solar PV technology to experience significant development over the coming years and decades, resulting in substantial gains as photovoltaics continue to erode the market share of electricity generation from conventional technologies. A recent devaluation offers excellent entry points for both long and short investors, who should consider adding mid-cap solar equities into their portfolio.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.