The Economics of Solar

There’s a powerful force driving growth in the solar energy industry: affordability.

By Eric Johnson

Sept. 15, 2015—Al Gore delivered a keynote this spring on The Future of Energy, a topic to which he has devoted much of his recent career. The conference he addressed, put on not by the Sierra Club but by the financial media company Bloomberg, was dubbed the New Energy Finance Summit, and Gore’s message was typically bold: Economics are making a solar future inevitable.

Gore has spent much of the past decade developing the financial expertise that would get him invited to keynote a Bloomberg conference. In addition to his day job as chairman of the nonprofit Climate Reality Project, Gore is a senior partner at Kleiner Perkins Caufield & Byers, one of Silicon Valley’s premier venture capital firms, a position he’s held since 2008.

The cause of this historic shift to solar energy? Recent innovations that have made solar energy affordable to average Americans. Gore didn't use the phrase “tipping point,” but devised a metaphor to explain that the affordability of solar and other renewable energies have brought us to a history-altering moment.

“It's a little bit like the difference between 32 degrees and 33 degrees Fahrenheit,” he said. “That's a difference of more than one degree. It's the difference between ice and water.

“And in markets, the difference between more-expensive-than, and cheaper-than, is the difference between financing that is frozen up, and capital that is flowing liquidly to new investments.”

The cause of the drop in prices is pure economics of scale: As more and more families and companies switch to solar, prices drop. That’s the kind of thing that can create a virtuous cycle: Prices drop further, and adoption spikes. And adoption of solar energy is undeniably spiking.

Some of this is due to the adoption of solar by large corporations. The Solar Energy Industries Association released a report last fall showing that the average price of commercial photovoltaic projects had dropped by 45 percent since 2012. “As solar prices continue to fall, more businesses in more states turn to solar to cut operating costs.”

Residential solar is growing even faster. On a graph, we see what Silicon Valley likes to call a “hockey stick.” Fortune magazine reported last week that solar’s residential growth is accelerating rapidly.

“The amount of home solar roofs grew 70 percent year-over-year for the most recent quarter,” writes Fortune senior writer Katie Fehrenbacher. “So far this year, 40 percent of all the new electricity-generating capacity came from solar.”

And, as Gore reported, the capital is flowing. According to a recent report by the Frankfurt School, the United Nations Energy Program and Bloomberg New Energy Finance, global green energy investments surged 17 percent in 2014, to $270 billion. That’s likely to keep the virtuous cycle spinning.

While renewable energy stocks have slid a bit since petroleum prices plummeted last year, many analysts see that as a temporary situation. Ultimately investors look to a company’s earnings when deciding where to put their money, and revenues in the green energy sector are way up.

Stuart Bernstein, a senior analyst at Goldman Sachs, calls this “a transformational moment in time” that “will be important from a societal perspective, and it will be good business for us and our clients.”

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One of the companies in Goldman Sachs’ portfolio, the San Mateo-based SolarCity, is particularly well positioned to facilitate mass-adoption of solar energy. The company is chaired by Elon Musk and run by his cousins, Lyndon and Peter Rive (who, incidentally, started their first company, Everdream, in Santa Cruz).

In nine years SolarCity has grown to be the nation’s largest rooftop solar company, and its growth is accelerating. In July, the company reported a 67 percent year-over-year revenue increase.

Stephen Byrd of Morgan Stanley upgraded SolarCity to an “overweight” rating, indicating that its value exceeds its current stock price, and upped his price target to $93 per share—almost double the stock’s current price.

And SolarCity clearly has its eye on the future. In 2010, the company was awarded $1.8 million by the California Energy Commission to study the feasibility of integrating its solar panels with batteries made by Elon Musk’s Tesla. SolarCity spent that money (and some of its own) developing software that controls the interaction between a photovoltaic array, the Tesla battery and the power grid.

The familial relationship between SolarCity and Tesla also bodes well for both companies.

Last June, Tesla broke ground on its $5 billion Gigafactory outside Sparks, Nevada, so named because it will produce enough batteries to store 35 billion watts of energy per year. And in April Tesla unveiled its plans for the Powerwall battery, designed to solve solar energy’s biggest problem: storage.

Meanwhile, SolarCity is building its own Gigafactory in Buffalo, New York, which will be the largest manufacturer of solar panels in the Western Hemisphere.

Along with SolarCity’s financing innovations, which allow homeowners to switch to solar with no upfront cost, these developments put the company in a unique position to scale. That would be good for SolarCity and its investors, and for anyone who hopes to live in a post-fossil-fuel future.

In concluding his talk at the Bloomberg conference, Al Gore made the point that what’s good for the green-energy industry is good for the world.

“This is happening—we are going to win this battle,” he said. “And the business community is leading the way. The only question is when.”

Follow this link to find out how you can switch to solar immediately.


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I think that solar industry also needs data room providers to have place of storing necessary documentation.