How solar can brighten investment portfolios

A young industry

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 utilise solar panel systems.

PV module prices fell drastically over 20 years

Global average price of solar PV modules, $ per watt

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.

Germany fixes price of renewable energy

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.

Solar energy to gain importance

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.

Solar’s share of electricity has increased everywhere

Select countries’ share of electricity production from solar

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.

Canada

United States

United Kingdom

China

Germany

Japan

Australia

Yemen

Spain

Chile

Vietnam

India

Netherlands

Greece

Italy

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.

New-build solar panel capacity growth study for various regions based on a mid-case scenario

Gigawatt (direct current)

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.

Mainland China

India

Other Asia

Europe

North America & Caribbean

Central & South America

Middle East & North Africa

Sub-Saharan Africa

Buffer

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

What’s behind solar energy’s appeal?

There are several factors driving solar’s increasing popularity.

• Cheap solution: At the end of 2020, solar was the cheapest of all energy sources, taking into consideration all the costs of constructing, operating, and maintaining a solar facility over its lifetime, or the levelised cost of energy (LCOE), according to calculations by Lazard, an advisory firm. From mid-2021, rising commodity prices increased the LCOE of both wind and solar, though more slowly than for other energy sources.
• Diversify a country’s energy sources: The current energy crisis in Europe has reinforced the need for countries to diversify their energy portfolios so as not to be overly dependent on one source nor on unreliable suppliers. While the immediate response to low natural gas supplies has often been more drilling, plans to roll out new solar capacity have been accelerating in many countries in Europe, as well as other regions.
• For instance, Germany’s official target is now to reach 215 GW of solar capacity by 2030, up from its current 63 GW of installed capacity. This suggests a very rapid acceleration of deployment over the rest of the decade. Germany has already experienced strong demand for solar panels from residential and small commercial customers due to rising power prices and voluntary actions to reduce demand for Russian gas.
• In Italy, 823 MW of solar capacity were installed during the first five months of 2022, an amount close to the capacity installed in all of 2021. Italy’s transmission system operator Terna suggests that 40 percent of the new installed capacity was for the residential segment.
• Help countries reach net-zero targets: Solar panels produce electricity without creating CO₂ emissions. Admittedly, the manufacturing of panels consumes a great deal of energy and creates emissions, but over their 30-year lifespan, solar panels are an attractive way to help countries realise net-zero targets.
• The Inflation Reduction Act in the U.S. extended the tax credit for solar by 10 years and introduced new production-based tax credits for solar manufacturing. These are likely to be a boon to an industry that suffered from tariff-related disruption for years. On June 6, 2022, the White House postponed possible duties on silicon solar module imports from Southeast Asia for two years, which should encourage additional solar installations.
• Meanwhile, China’s 14th Five-Year Plan, issued in June 2022, targets to double the capacity of wind and solar over 2021–2025 from that of 2016–2020.
• Benefits from government incentives: In the U.S., the Inflation Reduction Act offers many incentives that should make the clean energy transition more affordable, including tax credits for electric vehicles, home electrificatiCO2on upgrades, heat pumps, and solar systems.
• In particular, the legislation extends a 30 percent tax credit for residential solar systems that was due to end in December 2022, to January 1, 2034. Leased or purchased battery storage systems also qualify for a 30 percent credit.
• Bloomberg points out that in concert, the incentives are mutually reinforcing. Electrifying a home with solar energy that is also used to charge an EV cuts fossil fuel costs and greenhouse gas emissions. Battery systems enable homeowners to store excess solar energy generated during the day and tap it at night, thus avoiding high electric utility rates. Batteries can also help keep the lights and internet on during climate-driven blackouts, an increasingly common occurrence.
• Canada also offers incentives, as does Australia. Europe has long been offering support for emissions-reducing initiatives, providing incentives that aim to make clean energy the most efficient and cost-effective option for households. Most European countries that subsidise residential rooftop solar panels pay homeowners a premium on the electricity their systems supply to the power grid. Some countries also offer subsidies to install solar panels, including France, Germany, and Italy.
• For households, once the investment in a solar system is recouped, the electricity it generates is essentially free, except for maintenance costs and the service fees a utility charges to connect to the grid.

Solar energy is now the cheapest way to generate electricity

Average unsubsidised levelised cost of energy (LCOE), $/megawatt hour (MWh)

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.

Gas peaker (natural gas)

Combined cycle (natural gas)

Nuclear

Coal

Onshore wind

Solar PV – crystalline

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 levelised cost of energy analysis

Supply chain bottlenecks

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.

Storage solution?

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 stabilise 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.

Innovations

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:

• Rooftops: Some retailers in the U.S. are already taking advantage of their solar-ready real estate. Walmart generates up to 30 percent of the energy for its California stores from solar panels on its rooftops. Ikea has installed solar panels at 90 percent of its U.S. outlets.
• Parking lots: Disneyland Paris recently unveiled the first section of its guest parking lot solar canopy, having installed 46,000 solar panels covering 7,000 parking spaces. These will generate 10 GW of electricity per year, or enough to power a town of some 5,000 people, while offering the additional benefit of keeping cars in the shade.
• Farmland: Solar modules can be built in such a way that the soil beneath them can still be used effectively for growing vegetables. A study by the University of Arizona found that these crops responded well to these structures, which can protect against heavy rain and hail, and ensure that less water is used for irrigation as the soil retains moisture longer when partly shaded. Farmers can use the solar energy on their farms, or sell it to the grid.
• On water: Solar panels can be mounted on floating raft-like structures. Singapore has a floating solar farm on a reservoir that produces enough electricity to power 16,000 four-room flats. The panels are cooled by the water, which makes them more efficient and reduces water evaporation, an important advantage at a time when water is becoming ever more precious.

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.

The solar industry ecosystem

We see several industries with the potential to benefit from the increased importance of solar as an energy source:

• PV panel manufacturers and suppliers: Dominated by Chinese companies, though with some North American firms as well, this sector includes polysilicon and PV wafer producers and panel manufacturers. Some companies in this space are also focusing on storage and the maintenance of solar projects.
• Solar system installers: These companies offer engineering, procurement, construction, or even storage services for solar projects for utilities or residential/commercial markets.
• Solar technology: These companies provide technology for solar panels, such as inverters, which convert the solar panel’s DC (direct current) energy to AC (alternating current) power used in homes, and/or technology that can improve solar cell production yields.
• Infrastructure: Most renewable infrastructure companies hold solar assets alongside other renewable assets such as wind or hydro. Nevertheless, their exposure to solar may be substantial.

Let it shine

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 decarbonise. 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.