“Do You Think Man Will Ever Walk on the Sun?" | Part 1

Written by: Aaron Visse, CFA | Forward Investing

“Do you think man will ever walk on the sun?” This was the epic question posed to Buzz Aldrin by comedian Sacha Baron Cohen on the satirical program, “ Da Ali G Show .” While we are pretty sure that mankind will never walk on the sun (no, not even in the winter when it’s cold, per a follow-up question from Baron Cohen), we are seeing signs that solar power is rising (puns intended) and is in fact stepping on the toes of the traditional utility business model.

The increased adoption and continued evolution of solar technologies are very complicated topics that can quickly descend into lots of math and a plethora of arguments over various factors and assumptions. Since this is a blog post and not a white paper, the focus here will be high level and will concentrate on the facts that we can understand and measure today.

Solar is in its infancy as a power resource. Future projections about the timing of major technological breakthroughs and resulting adoption rates will vary widely among intelligent observers (and will likely prove spectacularly wrong in the fullness of time). Early projections about the personal computer or mobile telephone markets come to mind as reminders of how inaccurate even the experts can be in hindsight when opining about the efficacy of emerging technologies. With all that said, we do know several things today:

Solar is currently an incredibly small part of the U.S. energy mix…
The chart below, based on U.S. Energy Information Administration (EIA) data, shows U.S. electricity generation by source in 2013. Coal represented 39% of energy generation, followed by natural gas at 28% and nuclear at 20%. Renewable generation, both hydroelectric and other, represented only 13% of total energy generation.

As this chart shows, even within the renewable generation segment, solar is a mere pipsqueak. The vast majority of renewable energy is supplied by conventional hydroelectric at 51% and wind with 32%. Solar represented only 2% of the renewables segment, or just about 0.2% of total generation in 2013.

…But solar is the little acorn that could become the giant oak…
The chart below shows the five-year compound annual growth rate (CAGR) in U.S. electricity generation. It is notable for several reasons:

In the last five years, net power generation by all sources is actually negative (-0.3%), which represents a lack of demand growth in the U.S. since the 2008 global financial crisis.

Net generation from natural gas has grown modestly (+4.8%) in the presence of the U.S. shale revolution, while net generation from coal has declined by a similar amount (-4.4%).

Net generation from renewables has increased at a faster clip (+6.5%).

Despite the aforementioned decline in overall net generation, generation from wind increased at a very healthy clip (+24.8%).

But the most striking transformation is clearly taking place within the solar photovoltaic (PV) realm, which saw a CAGR of 155.8% over the same time period. There are many reasons for this increase such as government policy (subsidies), rising environmental awareness (which impacts government policy) and technological advancements, etc. While the merits of these factors (outside of the obvious gains in technology) can be debated, it is hard to argue that the addition in scale isn’t a huge positive in terms of new investment for such a nascent technology.

…Because two factors will continue to support this trend…
Simply put, the price of conventional generation continues to rise, while the price of solar continues to fall. This is where things can get quite a bit more complicated, but we do know a few things today. It is well understood in a few markets like California and Hawaii, where the average price of electricity is relatively high in comparison to the national average and where solar resources are relatively abundant, that solar PV is competitive with retail electricity rates. Perhaps less well understood is that rising electricity prices in combination with falling component costs, lower financing costs and the availability of tax incentives has led to a number of U.S. states currently achieving “grid parity,” the critical point at which the cost of electricity generated by solar is equivalent to energy taken from the grid. Current projections, which have admittedly proven too optimistic in the past, are that the U.S. will achieve grid parity between 2014 and 2017.

The chart to the left below compares electricity price and demand going back to 2004. As the chart shows, even in the midst of relatively stagnant demand, the price of electricity manages to go up (as all of us with utility bills are painfully aware).

At the same time, the price of solar PV continues to decline. As the final chart next to it shows, from 1998 through 2013, price declines of installed solar have averaged approximately 6% to 8% per year, with a clear acceleration in that trend seen in recent years, according to data from the Lawrence Berkeley National Laboratory.

…All of which could have meaningful implications for investors
While but a minor speck on the electricity generation landscape today, solar has the potential to become a very disruptive technology for both the electric grid and the various utilities that operate it. In Part 2 of this post, we will discuss some of the challenges that solar faces to achieve greater scale, some of the threats it poses to the existing utility landscape, and companies and industries that are poised to benefit/suffer from such trends.