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Ignore the Naysayers: Solar Is the Tech Story of the Decade

The destruction wrought in recent days by hurricanes Harvey and Irma has brought the topic of climate change to the fore. The spectacle of worsening storms also has generated renewed calls among Democrats in Congress for the expansion of “green” energy, particularly solar.

However, many investors are frightened away from solar energy, because of the aggressively anti-green stance of the Trump administration. They fear that the roadblocks placed by fossil-fuel friendly Republicans will prove insurmountable.

President Trump has derided climate change as a hoax and vows to resurrect coal. U.S. EPA Administrator Scott Pruitt said this week that it’s “insensitive” to hurricane-afflicted Floridians to discuss climate change. The EPA has deleted mentions of climate change from its website and it’s in the process of rolling back regulations intended to encourage renewable energy.

Florida Gov. Rick Scott has even forbidden his state’s bureaucrats from using the terms climate change and global warming. This week, while visiting storm-stricken areas in his state and speaking to reporters, Scott has dodged any green-related questions.

On environmental issues, Democrats tend to occupy the opposite side of the spectrum. But here’s the real story: The partisan divide on green energy is a moot point.

Regardless of the anti-green rhetoric you’ve been hearing lately from political leaders (and regardless of your own views on the matter), solar power is here to stay and getting stronger.

So ignore the solar bears, who are multiplying but misguided. Some analysts argue that persistently low oil and gas prices will compel end users to abandon solar in favor of cheaper fossil fuels. U.S. benchmark West Texas Intermediate now hovers at about $48 per barrel; Brent North Sea crude, the benchmark for international oils, hovers at about $54/bbl. At such prices, the thinking goes, energy users would rather stick to oil.

But if you believe these misconceptions, you’ll miss one of the most exciting investment opportunities to come along in decades. Two of the largest solar industry exchange-traded funds — the Guggenheim Solar ETF (NYSE: TAN) and the VanEck Vectors Solar Energy ETF (NYSE: KWT) — have generated year-to-date returns of 30.96% and 24.95%, respectively, compared to 11.74% for the S&P 500.

Solar is the new normal…

The infrastructure for the solar industry is pervasive and entrenched, leading to a “price decoupling” of solar and fossil fuels. Solar and other renewable energies are now part of the energy status quo and no longer need high oil and gas prices to attract users. According to data released in June by the U.S. Energy Information Administration (EIA), the U.S. set a renewable energy record this year as wind and solar reached 10% of all electricity generation.

To be sure, Trump and his appointees are fossil fuel adherents — Exhibit A is Secretary of State Rex Tillerson, former CEO of Exxon Mobil (NYSE: XOM). It’s also true that the Obama administration’s Clean Power Plan is effectively dead and the GOP-led Congress is unlikely to adopt legislation that expedites the development of green energy.

However, while help from Uncle Sam is nice for solar to have, it’s not necessary. For starters, not all energy mandates and regulations emanate from the federal level; many states and localities have done their part to encourage solar. The aggressively pro-solar state of California stands in the vanguard.

California’s solar electricity generating capacity in 2003 was puny; today the state now accounts for nearly half of the country’s solar capacity. California constitutes the world’s sixth-largest economy and, as it does with many trends, it leads the U.S. in solar capacity growth. This rapid expansion in California is expected to continue for the rest of 2017 and beyond, setting an example for other states and for the world. The chart below tells the story:

The Golden State Lights the Way

Total solar capacity growth in California, 2003-2016 (in megawatts).

Source: The EIA

Oil prices are range bound at the $50/bbl threshold, yet solar power continues to thrive in California and elsewhere. This is not what the textbooks have taught us about the relationship between crude oil and solar. So what gives? For answers, let’s turn to the Gartner Hype Cycle.

From Breakthrough to Mainstream

The Hype Cycle is a graphical presentation developed and used by technology research and advisory firm Gartner for representing the maturity, adoption and social application of specific technologies.

Each Hype Cycle describes five crucial phases of a technology’s life cycle:

1) Technology Trigger: A technology breakthrough kicks things off; excitement builds.

2) Peak of Inflated Expectations: Early publicity spawns a flurry of success (and failure) stories. Some companies adapt; others fall by the wayside.

3) Trough of Disillusionment: Interest diminishes as reality fails to live up to the hype. A shake out ensues, but the smartest early adopters survive and continue to invest and experiment.

4) Slope of Enlightenment: The technology becomes better understood and implemented. Second- and third-generation products emerge.

5) Plateau of Productivity: Mainstream adoption takes off.

Simply put, solar has already passed through its breakthrough and hype periods and is now in the mainstream for sustainable, long-term growth.

The solar industry has not seen its fortunes diminish in the face of cheaper fossil fuels, because solar moves along its own supply-and-demand dynamics within its plateau of productivity. Solar’s customers are increasingly dependent on inexpensive, reliable power from the sun and see no reason to switch.

Investors can expect the solar industry’s upward trajectory to last for decades, as major developing countries such as China plow considerable resources into renewable energy and the price of photovoltaic (PV) cells continues to plummet.

Consider the recent announcement from China’s National Energy Administration that the country’s goal is to increase solar-power capacity fourfold by 2020. In its bid to fight chronic air pollution and pivot away from coal, the government wants to boost PV capacity by 20 gigawatts per year from now until 2020 (one gigawatt = 1,000 megawatts = 1 billion watts).

Fact is, solar power is becoming more pervasive, larger in scale and cheaper to produce. The average price of a solar panel has dropped by 60% since 2011 and technological advances continue to push down costs.

According to the Earth Policy Institute, an increasing number of countries are aggressively pursuing solar power as costs come down. More than 30 countries now claim capacity of over 100 megawatts, a figure that the institute expects to double by 2018.

Notably, Germany has announced the goal of decommissioning all of its nuclear power plants by 2022 and converting almost completely to solar and wind power by 2050. Germany is the world’s largest solar market and the economic growth engine of Europe. German Chancellor Angela Merkel, a proponent of solar power and the most powerful politician on the Continent, is cruising to victory in national elections on September 24.

Another tailwind for solar are advancements in storage technology, particularly lithium-ion batteries. Lithium is a lightweight, silver-white metal that’s used to create heat-resistant glass, ceramics and lubricants. It’s used in a host of industrial applications and vital to the production of steel and aluminum.

The biggest use for lithium is in batteries that power electric vehicles and store renewable energy such as solar. According to market research firm IHS Markit, lithium-ion batteries represent the fastest-growing form of energy storage and will be a part of about 80% of storage installations by 2025.

The solar power industry should continue its market-beating performance, regardless of economic ups and downs or the gyrations of oil and gas prices. Whether you think global warming is just a bunch of hot air or a real phenomenon, the accelerating adoption of solar power around the world won’t be stopped.

Besides, as we’ve seen with Irma and Harvey, political winds in America are prone to suddenly change direction.

 


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