There comes a point in every industry when it has to adapt and mature.
Technologies and companies need to become as efficient as possible. Standardization needs to become ubiquitous, and scaling needs to be seamless and drive down costs.
That time has come for solar.
Unfortunately, how a vast majority of solar power has been deployed to date simply won’t work as the power source matures.
While home solar installations aren’t going anywhere, and should continue to grow, they are not what will drive a vast majority of growth going forward.
Instead, it is going to be utilities that pave the way, with the latest high-efficiency cells that are about to come into the market.
While SolarCity and similar big players may still grow and succeed, the real money is going to be gained from investing in companies that can adapt to the new, utility-scale generation to come.
The Problem
The very nature of home solar power is fundamentally not compatible with the electrical grid as we know it.
Outside of completely rebuilding the system, decentralized solar power generation has to exist alongside the traditional distribution system, which only drives up costs and reduces efficiency.
Unfortunately, this completely upends how utilities get paid. Disruption isn’t bad at all, in my opinion, but your local utility has the political clout to push its agenda through.
We’re seeing the results of that now. Net metering laws have been gutted in many states, with the ability to sell power into the grid severely curtailed.
At the same time, tax breaks and other incentives are being allowed to expire, or are straight-up revoked. Subsidies are under review in 24 states right now.
Although the utilities are certainly more worried about their bottom lines, they also have solid data on their side.
As Reuters recently noted, “Unsubsidized utility-scale solar power costs $50 to $70 per megawatt-hour (or 5 to 7 cents a kilowatt hour), compared with $52 to $78 for the most efficient type of gas plant, according to a 2015 study by investment bank Lazard. Generating power from residential rooftop panels is far more expensive, ranging from $184 to $300 a MWh before subsidies, the report said.”
The simple fact is that rooftop solar can save you some money, but when deployed en masse, it is not able to scale or significantly reduce overall cost.
The Utility Model
Today, contracts are being signed that guarantee that large systems that sell directly to utilities will dominate the sector.
Utility-scale solar is going to account for more than 70% of all solar power added to the grid this year, according to industry research firm GTM Research.
The announcement that heralded the pivot came in 2014, with Austin Energy in Texas announcing a 150 MW project that can support about 30,000 homes at a cost of 5 cents per kilowatt hour.
Since then, other deals have been inked around 4 cents per kilowatt, vastly cheaper than any other power source, renewable or fossil, available.
Across the southern U.S. in particular, the solar sector is almost exclusively the domain of utility-scale projects now.
Georgia, for example, has a negligible amount of rooftop solar, but is going to install the sixth-most solar capacity this year.
Investing in the Boom
All of this leaves investors in a bit of a quandary. Utilities are going to bake in this growth, while the value of their grids and traditional power sources continues to outweigh and dilute the value per share of solar.
Pure residential plays are already on the ropes. SolarCity is being built into Tesla at greatly reduced share prices. The company stock is down over 50% since the start of the year alone.
And then there is SunEdison, Inc., which is trading at literal pennies to the dollar compared to share prices a full year ago, as bankruptcy proceeds.
However, there are solar companies that are perfectly positioned to take advantage of the new boom.
The new utility-scale generation prices in advances in efficiency based on technologies just coming into the market.
The owners of the patents are the only pure plays available to us, and large-scale deals and roll-outs are all but inevitable.
Nick has covered this sector for some time, and has plenty of comprehensive research available for anyone interested in how the solar sector is changing.
