No one today doubts the enormous economic benefits of the Internet, yet the dot-com crash of 2000 happened nonetheless.
The reason was simple in retrospect. Deflation. The Internet cut costs more dramatically than investors anticipated. Business models had to adjust and, as they did, we got Google (NASDAQ:GOOG) (GOOGL), Facebook (NASDAQ:FB) and Salesforce.com (NYSE:CRM).
I wrote last week the same is going to happen in biotech. This doesn't mean biotech isn't great, just like the Internet. But we're investing in it today based on the pre-Internet cost of finding cures, and the pre-Internet exclusivity of cures. Supply is going to overcome these assumptions, prices will decline, and a lot of companies will go bust as a result.
The same thing is going to happen in energy as well. We saw it happen in oil last year. Now it's going to happen across the energy landscape, and that's going to impact even investments in solar.
Here is a clue from Texas. Austin Energy has put out a new Request for Proposal for solar energy. Its last contract got a firm bid of $40 per megawatt-hour. Now bids are coming in 20% lower. Austin is also sitting on a 2008 deal priced at $160 per megawatt-hour, and thinks it can buy systems at $20 per megawatt-hour in 2020.
This is a good thing. No, it's a great thing. This is technology economics applied to the energy sector. But if you're sitting on a 2008 contract, or a 2012 contract for a solar installation, it's a very bad thing.
Solar systems are priced as a mortgage against what the system will produce. A SolarCity (SCTY) lease will have you paying today's cost of solar energy 10 years from now. This is the way mainframes got bought in the 1950s.
But what happens to a homeowner selling in 2020 with a 2015 system on their roof? Austin Energy can roll that money-losing 2008 cost into its rate base, and that may work for some time because very little of its 2015 energy comes from that 2008 plant. But even this game has a sell-by date.
Fortunately, we have a precedent for all this in the computing industry. What happened as computing costs declined was that they gradually stopped being capital property. I wrote my 1982 PC off my taxes as a capital good over five years. By the 1990s, I was getting myself a new PC each Christmas and writing the full cost off that year's taxes.
How fast will this happen with solar? So far, it has been happening faster than anyone expected. I predict it will continue to move faster than anyone expects. That's why I don't want the Sunrun (NASDAQ:RUN) IPO, and it is why I still don't have any solar stocks in my portfolio, as much as I love the sector. I just can't be certain enough of the long-term winner to pull the trigger.
Eventually, all this means solar starts crowding out other forms of energy, starting with those systems requiring a long capital payout. I haven't seen a new nuclear system even proposed for construction in weeks and weeks. Southern Co. (NYSE:SO) and SCANA (NYSE:SCG), which committed to such systems a few years ago, must be getting nervous right now. Even thorium reactors are priced based on multi-decade paybacks, and who can be sure of them anymore?
But who says it stops there? How long does Shell (NYSE:RDS.A) (NYSE:RDS.B) expect to wait for its new Arctic drilling effort to pay off? What price is that based on, five years from now, for the resulting oil?
Solar will survive this, the same way computing did, by shortening its cost-recovery horizon. Instead of getting your money back in 20 years, you'll expect to get it back in 10, or 5. But there is real pain on the way to that, for the people who bought based on a 20-year payback.
So there will be a crash, and there will be a readjustment. It will actually be less severe for solar than for other forms of energy, but it will be real everywhere, as we move toward an energy economics based on abundance rather than scarcity.
Disclosure: I am/we are long GOOGL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.