A cheap and emissions-free technology, we shine a light on solar’s potential and how investors can look to tap into this growth opportunity.
October 4, 2022
Managing Director, Head of Investment StrategyRBC Europe Limited
Photovoltaic (PV) systems or solar power systems are devices that convert sunlight into electricity. They can take the form of mini-grids for personal use on rooftops, or combined in solar farms to generate electricity on a commercial scale.
Solar energy only really took off this century. The technology, created in the U.S. in 1954, was initially almost exclusively used in the space industry. In 2000, after prices of modules had fallen markedly, Germany passed a law to boost renewable energy development, creating an exploitable market for the solar industry in the process. A fixed price on energy generated from renewable sources encouraged people and companies in Germany to utilize solar panel systems.
Line chart showing the global average price of solar PV module prices, measured in USD per watt for the period of 1976 through 2019. From a high of more than $105 per watt in 1976, the price dwindled to less than $5 per watt by 2000 and has continued to decline in subsequent years.
Note: Prices measured in 2019 USD
Source – LaFond et al. (2017) & IRENA database; OurWorldinData.org
China, spotting an opportunity, ramped up solar cell production to a scale which remains unmatched in the West, and the country accounts for 70 percent of global production today. Having gained popularity in Europe, solar energy use has spread globally.
Solar farms are often thought of as only belonging in sunny climes—the world’s largest solar farm with 2.25 gigawatts (GW) of capacity and covering 14,000 acres (56 square kilometers) is located in India. But these installations can operate in colder climates and under cloudy conditions, though with relatively lower efficiency. Alberta boasts Canada’s largest solar farm, the Travers Solar Project, which has 465 megawatts (MW) of capacity spread over 3,300 acres (13.4 square kilometers) and can provide energy for up to 150,000 homes. Solar panels can be built to withstand as much as two meters of snow and temperatures well below zero.
Today, solar represents a mere 3.6 percent of global energy generation, though the percentage varies widely by country.
Despite its seemingly low share of global electricity production, solar is one of the fastest-growing renewable energy technologies and appears poised to play a major role in the global electricity generation mix in the future.
Line chart showing solar’s share of electricity production for select countries from 1995 to 2021. The majority of the countries were at or near 0% through 2008. But solar’s share of electricity has increased everywhere with Yemen, Chile and Australia now producing more than 11% of all their electricity from solar, and various countries (Vietnam, Spain, Netherlands, Greece, Italy, Japan, and Germany) producing between 8% and 10%. The UK, U.S., India and China generate approximately 4% of their electricity from solar, but it is growing rapidly. Canada generates not quite 1% of all its electricity from solar and growth has been subdued in recent years.
Source – BP Statistical Review of World Energy (2022), Ember’s Global Electricity Review (2022), Ember’s European Electricity Review, OurWorldinData.org
According to the International Energy Agency (IEA), the sun could be the largest source of electricity by 2050, accounting for more than a quarter of worldwide power generation. The IEA estimates that solar PV systems could generate up to 16 percent of the world’s electricity by 2050 while solar thermal power—another solar technology—could provide an additional 11 percent of electricity.
In the more immediate future, BloombergNEF expects new-build solar capacity to grow annually by 11 percent to 2030, with Europe and Asia to add the most capacity, though expansion in North America will be important too, thanks in particular to the U.S.’s recent climate legislation.
Column chart showing the capacity of new-build solar panels by region from 2010 to 2030. The forecast uses a middle-case scenario established by BloombergNEF, an energy research provider. Growth has been strong in the past and BloombergNEF expects it to exceed 10 percent per annum for the rest of the decade.
Note: The “buffer” represents the new-build panel capacity that is particularly difficult to estimate with any accuracy, such as the capacity geared towards the residential market, a growing part of the overall market, but one for which there isn’t reliable data.
Source – BloombergNEF
There are several factors driving solar’s increasing popularity.
Line chart showing the all-in cost of operating generation assets which use various energy sources, such as coal, natural gas, nuclear, onshore wind, and solar, over the period 2009–2021. For all energy sources, the cost has declined markedly, except for nuclear, which is now more expensive to generate than it was in 2009. Onshore wind and solar are now the cheapest ways to generate electricity at $38/MWh and $36/MWh, respectively.
Note: The LCOE is the lifetime cost of building and operating a generation asset, expressed as a cost per unit of electricity generated ($/MWh). It includes all the costs a generating facility may face, including pre-development, capital, operating, fuel, and financing costs.
Source – Lazard’s levelized cost of energy analysis
The solar industry didn’t escape the post-pandemic supply chain disruptions, with 2022 marking a second consecutive year of high prices for most solar components and materials.
Two-thirds of the production cost of a solar module derives from materials, including copper, steel, aluminum, and polysilicon, a common form of silicon, itself a material with semiconducting properties.
These commodities suffered from supply chain disruptions which led to higher prices. Polysilicon prices surged more than 200 percent in the two years to August 2022, with supply unable to keep up with strong global demand for solar panels as China, which accounts for approximately 80 percent of global polysilicon production, maintained strict COVID-induced lockdowns. However, after spiking earlier this year, the prices of most metals fell sharply over the summer.
Soaring polysilicon prices have encouraged producers to ramp up capacity significantly and rapidly. BloombergNEF expects a return to a state of oversupply could lead polysilicon prices to drop from the August 2022 peak of US$39.19/kg to US$15/kg in 2023 and less than US$10/kg in 2024. Such a drop in an important raw material would be reflected in the price of solar modules.
Moreover, in the U.S., the Inflation Reduction Act offers generous subsidies for domestic manufacturing. While details are still being ironed out, such support is likely to restart idled polysilicon capacity while attracting new investment for module assembly and possibly wafer production, according to BloombergNEF.
It is often thought that renewables are too unreliable due to their intermittent nature and that they are not well-suited to meet surging demand early in the morning and again in the evening. Such concerns are understandable given a grid cannot run the risk of blackouts.
Moreover, it has been difficult to add a lot of solar to the existing power grid because there is a limit to how much energy can be put on it—too much solar could overpower it, so excess energy needs to be put somewhere.
Storage can help stabilize the grid, balance energy output with demand, and increase the efficiency of renewables. So far, storage solutions for solar have been cumbersome.
Still, battery technology is improving. Lithium-ion technology is becoming a viable option for storing at least a few hours’ worth of solar energy that is generated in the middle of the day, when demand is low, for use in the evening, when generation declines but demand shoots up.
Batteries aren’t the only way to store energy, but they are the fastest-growing solution for short-term storage. For longer-term storage, a different kind of battery, the flow battery, can be used. In this type of storage, the charge is stored outside of a battery cell, so as to store a greater amount of energy for a longer period of time. But flow batteries remain expensive.
Another method is “gravity drops” in which heavy objects, such as cement blocks or bricks, are hoisted into the sky by, for example, giant cranes. These massive weights are then lowered under natural gravitational force to create electricity.
This method works in a similar way to pumped hydropower but is more practical. Hydropower funnels water uphill before releasing it through turbines to create electricity, and thus necessitate two bodies of water and a hill to function, requirements which are not always at hand. Gravity drops can store energy for between six and 14 hours.
BloombergNEF thinks solar energy storage solutions will eventually evolve into a mix of lithium-ion batteries alongside hydrogen solutions, whereby solar energy generates electrical power that is converted into hydrogen to be used as fuel.
As solar is a technology that has become cheap so quickly, more efficient use of it offers much promise, such as by installing solar arrays in existing spaces, including:
Beyond expanding the applications of solar technology, a game-changing innovation would be solar panels which work at night. The World Economic Forum reports that a team of scientists at Stanford University have developed solar panels which absorb energy from the sun during the day and radiate that stored heat back into the air at night. This creates a difference in temperature between the cooler panels and the warmer air. A thermoelectric generator converts that difference in temperature into electricity.
Presently, at night these solar panels only produce a small fraction of what they can generate during the day, but the technology will likely evolve. Developing it to scale holds the potential to reduce or even eliminate the need for storage.
We see several industries with the potential to benefit from the increased importance of solar as an energy source:
Solar appears set to play an increasing role in our energy supply. Its many advantages, including being the lowest-cost technology and emissions-free, make it an attractive candidate, in our view, to help countries decarbonize. The energy crisis today makes this even more of an imperative. Generous incentives in Europe and now also in the U.S. should further underpin solar’s growth.
In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.