Three Reasons Solar Energy Has Never Shined Brighter
Solar energy, much like any rapidly growing industry, is a prime target for the ire of pessimistic prognosticators, spelling the inevitable bubble burst.
However, unlike many other rapidly growing industries, solar energy is poised, by many analysts, to become “one of the major investment themes of the next 10 to 20 years.” In fact, according to Invictus Capital, solar energy is set to be one of the most cost-competitive and fastest-growing energies in the world.
How exactly is that possible?
Well, there are a variety of factors that have enabled such growth, but perhaps none more impactful than the following three reasons that make solar power such an incredible investment.
Returns Linked to Inflation
The solar power market is a lower-risk investment that is 100% asset-backed and offers investors predictable, long-term, inflation-linked returns contracted through power purchase agreements (PPAs). PPAs are a financial agreement entered into between a solar developer and a customer whereby the customer purchases the energy output of the panels over their economic life (generally 20 years).
In addition to long-term stable returns, solar investments provide direct exposure to the substantial potential upside from increasing power prices. These prices are forecast to increase both in developed (8–12% in North America and the EU) and developing markets (20% in India and China) by 2030.
Portfolio Diversification
Energy infrastructure investments (such as solar) are attractive to investors due to the diversification benefits they bring to an investment portfolio. Typically, energy investments exhibit low correlation to traditional assets such as stocks and bonds and provide a hedge against inflation since the revenue generated from the underlying contracts is linked to inflation.
While solar investments currently comprise less than 1% of total allocations in institutional investor portfolios, this is expected to change significantly in the next 20 years whereby over $10 trillion in new investments will pour into the sector.
Technology innovation + Lower Prices = Higher Returns
Solar power is already cheaper than most renewable energy sources and in many countries has already achieved grid parity (meaning the levelised cost of producing power is equal to or less than the price of power from the grid). China, one of the world’s largest consumers of energy, achieved solar grid parity earlier this year according to research in Nature magazine.
A key driver in achieving solar grid parity is declining capital costs. Since 2010, the cost of solar has declined 75%; the greatest of all alternative energy sources. The IEA forecasts that the costs will decline by a further 15% to 35% in the next 5 years.