Over the past 5 months or so, we have seen 50% lower oil prices in the US and the rest of the world. Firms that produce oil have seen their respective stock prices crash. We have also seen equities remotely related to energy get hammered as well, including solar manufacturing firms. This is illogical as I will point out in this article.
First we need to classify solar a bit better, and understand the economics of solar. Solar is part of the business and customer spending sector - it's a consumer product much like a big screen TV, commercial forklift, or a new car or truck. Solar firms are not energy firms, but hi-tech consumer product companies.
Second we must understand the economics that drive solar consumer spending. The cost benefit for solar is pretty simple. There are two components - how much does it cost per KWH to produce your own electricity, and how much do you offset or save per KWH of electricity by installing solar.
When I installed a 7kw solar system on my home the economics were compelling. I am paying about 6 cents per KWH to produce my own energy, and offsetting cost from the grid of over 14 cents per KWH. The cost benefit is even more impressive in the future as my cost is fixed, while electric rates will increase over time. For the past 10 years my utilities rates have been increasing at about 6% per year.
Sample cost benefit from my 7kw array over time (in months). Fully installed cost of about $2.4 a watt, 18% solar insolation rate, and 6% rate in grid inflation.
This cost benefit will be different for every premise based mainly on the electric rates imposed on that building by the local utility company and the sites solar production rate (insolation rate). The cost to install a solar system can vary as well based on local permitting fees and the local cost of labor.
So the equity markets must somehow think that much lower oil prices will reduce the retail price of electricity. Let take a quick look at the charts:
As we can see from the EIA data, oil prices have no correlation to retail electric rates. Oil goes up, electricity prices go up, oil goes down, electricity prices still go up. As many other articles have pointed out, oil is typically not used by utilities to produce electricity. The main feed-stocks for utilities are coal, natural gas, and nuclear.
Also utilities base much of their rate cases on capital needed to maintain their aging electric grids. Regulated utilities consider themselves rate case machines. Every two years they will file a new rate case to increase electric rates to recover the investments needed to produce and deliver electricity to customers.
All across the USA and most of the world's large economies (Euro Zone, China, India, Japan, etc.), businesses and home owner are getting a large infusion of cash - more disposable income. Oil is still deeply embedded in almost all economic activity across the globe - it's not just the price at the gas pump.
Lower manufacturer and shipping costs will further reduce the cost to install a solar system. For my 7kw array the cost for just shipping the equipment from California was about $1,000 dollars - or about 15 cents per watt. Also, the price I paid for my solar modules included shipping - so both equipment cost, as well a transport to sites around the world, will be reduced due to lower local transport. These two factors will allow for the on-site production of electricity from solar to be lower.
In my opinion the largest positive factor for the solar industry will be the world-wide increase in consumer spending due to 50% lower oil costs. The main target markets for the solar module manufacturers are: Germany, China, Italy, Japan, USA, Spain, France, Australia, Belgium, UK. These countries are all importers of oil and should see significant economic stimulation from much lower oil costs.
The last of the four positive factors for the solar industry from lower oil prices is a bit more speculative. 2015 CAPEX budgets are now being set by oil and gas producers around the world. Most budgets that I track are down on average of 30%, from just a few months age. Natural gas rig counts are now starting to fall:
In 2014 natural gas production has been increase rapidly year over year. The EIA natural gas weekly report for the week ending Dec. 17th just reported a 12.4% increase in natural gas production from same period in 2013. This increasing supply has been due to significant increase in dry gas production from the Marcellus shale area of PA and increased associated gas from oil drilling in most other shale areas. This large increase in production in 2014 is leading to lower natural gas prices.
Looking forward my theory is that with a combination of fracked well depletion rates, lower drilling for both oil and gas, increasing natural gas demand drivers such as: coal to gas switching, export LNG facilities, and increase aggregate demand, we will see natural gas prices rising in the second half of 2015 and beyond.
Higher natural gas prices during the summer months will increase electric rates during the daytime summer months to compensate utilities for running their peaking power generation. This is a perfect fit for solar which produces its power during the day, and most production during the summer months of May thru September.
My favorite picks to play disconnect between economics and the perceived negativity in solar equities are: JASO, FSLR and TSL. I currently have positions is TSL and JASO, and may start a position in FSLR in the near future.
Disclosure: The author is long TSL, JASO.
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.