Solar Energy Gets Cheaper… Will Companies Finally See Profits?

Eric Fry By Eric Fry
Macro Strategist, The Oxford Club

Alternative Energy

Solar power is catching fire. The industry is entering a new phase of growth – one that will feature soaring profitability, not just soaring revenues.

For several years, solar power has been growing faster than most other power-generation technologies… and that growth rate has gone parabolic during the last two years. The entire world seems to be going crazy for solar power.

Last year, for example, the U.S. nearly doubled its installed solar power generation capacity… and China installed twice as much solar power capacity as the U.S. did…

The breakneck growth is continuing this year, as China is on track to set a new world record for solar installations in a single year. India is also boosting its solar power capacity. It recently became the world’s third-largest generator of solar power.

Two factors are fueling the solar boom: Falling costs and the desire for clean air.

The cost of solar power installations has been plummeting in both the residential and utility-scale markets.

“Solar power is now cheaper than coal in some parts of the world,” Bloomberg News reported. “In 2016, countries from Chile to the United Arab Emirates broke records with deals to generate electricity from sunshine for less than 3 cents a kilowatt-hour, half the average global cost of coal power. Now, Saudi Arabia, Jordan and Mexico are planning auctions and tenders for this year, aiming to drop prices even further.”

In most of the world, solar power is still more expensive than conventional power-generation technologies. But the gap is rapidly closing.

Furthermore, the true cost comparison between solar power and other technologies involves more than just dollars and cents. Clearly, the toxic emissions that spew from coal-fired plants impose a cost on the planet that solar panels do not.

Most countries understand and appreciate this dynamic, which is why the two most populous – and polluted – countries on the planet (China and India) are ramping up their solar power capacity.

India, which is home to 13 of the world’s 20 most polluted cities, has ample motivation to deploy clean power sources, no matter their direct costs. That’s why the country plans to install 100 gigawatts of solar power by 2022 – or more than seven times its current installed capacity.

But despite the global boom in solar power installations, most solar stocks have not been booming. During the last 2 1/2 years, the MVIS Global Solar Energy Index has slumped nearly 50%, while the MSCI World Index has advanced about 19%.

Ironically, the sluggish performance of solar stocks is a direct result of the solar industry’s success.

The rapidly falling cost of solar power that is helping to boost its popularity is also making it difficult for solar power companies to grow their profits… or to make any profits at all.

Up and down the solar power supply chain, companies are struggling with razor-thin profit margins. That challenge remains. But the industry appears to have reached a tipping point.

Solar panel prices are still drifting lower, but they are no longer plummeting. And anecdotal evidence is starting to indicate that leading companies in the sector will be able to expand their margins and increase profitability.

Solar stocks seem to be “sniffing out” these improving conditions in their industry. After falling to its lowest level in nearly four years at the end of 2016, the MVIS Global Solar Energy Index is on the rebound…

This recent advance is probably the start of a much bigger move to the upside. As solar power continues to gain a larger share of the global power generation capacity, profitability is likely to increase significantly.

Keep a close eye on the solar sector.

Good investing,