Friday, September 19, 2014

Get Ready for the Solar Bull Market

If you are interested in or invested in solar, and have been paying attention to the market and the news in the past 6 months, you are a pretty happy person right now.

The industry is rolling along with tremendous inertia, on course to double in size every 24 - 30 months at recent growth rates. It kicked ass in 2013, expanding by roughly 35 percent in installed capacity. Worldwide, this meant 35 GW of new solar were built in 2013 alone, with analyst forecasts that 2014 will finish as an even bigger year, with 49 GW added. In the first quarter of 2014 has only continued to build steam. Nearly half of all the new power plants built around the world in 2013 were renewable, according to the latest Global Trends in Renewable Energy Investment Report, and in the first 6 months of 2014, more solar energy generation was added to the US grid than natural gas power. So much for the shale revolution. What we are about to witness is the solar revolution.

While exciting for environmentalists, these facts are not lost on the market. The Ardour Global Renewables Index was up 50%. The top solar stocks outperformed the market by 100s of percentage points (that's percentage points, not basis points). Here's a graph of what the annual solar installations have looked like in the past few years. This is not the cumulative figure.

But will these trends continue beyond the current hype? Or are we in the midst of a solar bubble? 

This is no bubble, and here are five big reasons why:

1. China 
China represents now a major source of both demand and supply in the solar industry, and they are putting it in the ground at a tremendous rate. China's goal of installing 8 GW of new rooftop solar by year end on top of the 13 GW already in existence is a strong source of global demand (China is the red in the above bar chart, clearly a significant portion of global demand). 

But China is not just installing solar at a breakneck pace, it's also manufacturing solar. Since China is now home to large chunks of the solar supply chain, as well as a considerable amount of final assembly, its unlikely that their aggressive policy-driven demand targets will slacken in the near future.

2. Financial Innovation 
One of the biggest challenges to solar has always been its high level of capital intensity, coupled with high perceived risk by investors. These two factors together result have traditionally resulted in higher financing costs for solar power. But this trend is finally winding down, never to return.

Several new financing structures have emerged to allow solar companies to capitalize on their future profits today, instead of having to wait for the 20-year payback period people think of. The first are solar-backed bonds, Solar backed bonds are a new structure, similar to mortgage backed bonds, that allow solar companies to bundle the future payments received from solar electricity sales to the grid and sell them to investors. In exchange for a modest 4% or 5% cut to entire investors, solar companies can use this structure to essentially cash out their 20-year power purchase agreements today. The capital is then freed up for further investment.

This year, Solar City issued its second set of these bonds to the tune of $200 million, and this market it just heating up.

Another financial innovation the Yield Co., operates similar, but uses an equity structure instead of debt to monetize future solar cash flows. NRG energy, a major national utility company, recently . debuted shares of its own Yield Co. in 2013 and the stock has already rewarded investors with a north of 75% return in just its first 12 months trading.

While these types of transactions are still small in relative terms, the fact that credible financial institutions like Credit Suisse, Goldman and BAML are underwriting them is a good sign that they are gaining traction and will become an increasingly attractive option for solar companies looking to finance rapid growth.

3. Costs are Plummeting, Moore's Law Style
The price of Solar PV panels dropped 99% from 1977 - 2014, and at an accelerating pace. 60% of that price drop has happened in the last three years - since 2011. Prices have plummeted so rapidly that even major financial institutions --not green groups-- are writing reports about the strategic threat solar poses to the natural gas industry.

The bottom line is that as prices continue to fall, solar has already reached the fabled point of "grid parity," in many places with or without subsidies. In plain English: solar in many places has hit the tipping point where its more expensive not to have solar than to have it.

4. Innovation in Grid-Scale Storage
One critique that has often be leveled against solar is its unpredictability. If only we had some sort of affordable battery technology, critiques argue, solar would make sense. Well, that time is also now. While battery storage is early in its technology innovation lifecycle, it's moving along at a rapid clip, driven in part by the demand created by an explosively growing solar PV market. Several small companies have recently raised capital to commercialize next generation grid-scale battery solutions, and Germany as usual is ahead of the game deploying these technologies at grid scale to prove the concept.

A new International Energy Agency study found that the grid should not have a problem absorbing all this new solar. Contrary to the frequent argument of renewable energy doubters, high penetrations of 30% should be achievable without economic disruption, according to the IEA. In California, the nation's largest grid operator announced it had a day in March this year where 18% of the grid's energy came from solar, and that in the future it believes it can absorb as much as 30% without a problem. California's solar capacity doubled 2013.

With the evidence mounting that our grid infrastructure has no problem integrating even relatively large proportions of solar generation even with current technology, even traditional coal-reliant utilities like Georgia Power and Tea Party groups are starting to get in line.

Long story short: 24/7 solar power is just around the corner.

5. Electric Car Symbiosis
Tesla is doing pretty well. If its sky-high stock price and P/E ratio is any indicator, investors as a whole are pretty bullish about electric mobility. Some interesting research out of UBS's Investment Bank has shown that solar and EV's are forming a symbiotic relationship that will be mutually beneficial to the momentum of both industries.

According to UBS, the combination of batteries, electric cars and solar power will put "enormous pressure" on the utility system by rapidly making centralized fossil-fuel based generation facilities obsolete.

So I'm pretty bullish on solar. Now you know why.