A bright future: the best ways to invest in solar energy

Solar energy was long dismissed as unprofitable and unproven. But it has come of age. It is providing stiff competition to conventional energy sources and its ascendancy looks unstoppable, says Matthew Partridge.

This year has seen many dramatic changes, but one milestone in particular stands out. For over two months, from early April to mid-June, coal power made no contribution to the national grid – the longest period since the 1880s. While this was partly due to the slump in energy prices, it shows that non-renewable sources of energy – coal in particular – are on their way out. 

The renewable-energy sector is made up of multiple sources, such as wind and tidal power, but the biggest winner in recent years has been solar energy. In 2009 it accounted for 20,000 megawatts (MW) of global capacity; by the end of 2020 the figure is estimated to be 720,000MW – enough energy to power around 522 million homes. And the future for this energy source looks bright.

Costs are falling everywhere

The key reason solar power is taking over as the energy of the future is that its cost has plummeted in recent years as the technology behind it has improved. Liam Thomas, chief investment officer (CIO) of New Energy Solar (a company that buys and runs large solar-generation facilities), and also CIO of the US Solar Fund, notes that there are several ways to measure the price of solar energy. 

The levelised cost of energy (LCOE), the long-term price that a utility needs to charge to cover its costs and satisfy its investors, is generally regarded as the industry benchmark. Using this measure, the cost of energy from large-scale US solar plants has declined by an average of 13% a year for the last five years. This means that in the US, solar power “is already competitive with other forms of newly-built energy generation”, and in many states, especially in the southern part of the US, “solar is now the cheapest form of new-build energy production”. 

While it is still generally cheaper to generate energy from a conventional power plant, the cost of solar energy is declining so quickly that solar plants are starting to undercut them on price. This cost-competitiveness means that a majority of new solar build in the US is now motivated by economics rather than the demands of regulators.

America receives a lot more sunlight than most of Europe and the UK, so solar producers in Britain are still at a cost disadvantage compared to other power sources. But even this is changing, says Wayne Cranstone of Gresham House Asset Management. In Britain solar and onshore wind are “already the lowest-cost forms of renewable energy”, and they are also “very close” to grid parity, which means that developments of the right size in the right location “can still be profitable in the UK without subsidy”. There are even a few projects as far north as Scotland.

Solar producers are also finding ways to get around the volatility of electricity prices. One strategy is to agree a power purchase agreement (PPA) with clients. Under these arrangements, companies agree to purchase a certain amount of power generated from a solar plant at a fixed inflation-linked price for between ten and 15 years. These agreements can either involve the company getting the power directly from the plant, or via an electricity company, which in turn buys an equivalent amount of power from the solar plant. This greatly reduces the risk for the producer, and greater certainty lowers overall financing costs. 

Batteries are getting better

Until recently one of the problems hampering widescale adoption of solar power has been that, unlike coal or gas plants, which could effectively provide power on demand at any time of day, the output of solar plants is limited by the amount of sunshine. This was a particular problem since demand tended to peak in the evenings when people came home from work – precisely when solar generation is at its lowest. However, while this is still an issue, both solar power companies and utilities are starting to find ways to get around it, says Christian Roessing of Pictet Clean Energy. 

One simple solution is to find economical ways to store the electricity generated. Fuelled by the growth of the electric-car industry, the costs of lithium-ion batteries, which can store excess electricity, “have come down by around 90% over the last decade”, says Roessing. While they are still not yet quite low enough to completely eliminate the need for additional power, he predicts that “within the next three to four years, [costs] are likely to have fallen enough to make short-term storage of solar power affordable”.

Meanwhile, as Andrew Buglass of Buglass Energy Advisory says, a “big shift” is taking place in how national energy grids are operated, which should hopefully smooth demand and reduce (though not completely eliminate) the need for storage. For example, the National Grid in the UK has developed the Demand Turn Up service, which encourages conventional producers to reduce output at times of low national demand and high renewable output, so that they only operate when renewables are silent.

In addition to encouraging conventional power companies to fill in the gaps in solar power generation, the National Grid’s initiative also attempts to nudge demand toward the times where solar production is at its strongest, cutting the cost of consuming electricity at these off-peak times. 

Buglass also notes that the coronavirus crisis, which has seen more people working from home, has already led to some dramatic changes in power consumption, which should further favour solar producers as well as show electricity companies that the “pattern of consumption is not set in stone”.

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