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 * Can solar power deflation?


FORWARD THINKING | Article - 7 Min
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CAN SOLAR POWER DEFLATION?

2 Authors - FORWARD THINKING
11-02-2022 · 7 Min


AUTHORS

ULRIK FUGMANN
CO-HEAD AND SENIOR PM, ENVIRONMENTAL STRATEGIES GROUP
EDWARD LEES
CO-HEAD OF THE ENVIRONMENTAL STRATEGIES GROUP
In this article:
 * Solar is set to soar
 * Solar’s deflationary benefits
 * US: growth powered by government policy
 * Europe aiming for the rooftops
 * Multiple investment angles
 * Identifying the long-term winners

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The current energy crisis may mean the green transition is sailing through more
turbulent waters, but the underlying tide remains strong. The argument for
clean, renewable energy supplies has only been reinforced by the war in Ukraine,
which has added both energy security and fuel price inflation to the list of
environmental reasons why this transition is so critical.

Increasingly, governments, businesses and consumers are rethinking what energy
they consume, how much energy they consume and where that energy is going to
come from in the future. Many are turning to solar, with solar PV generation
increasing by a record 22% last year from 2020 levels[1].

Solar is particularly gaining traction among residential energy users amid
concerns over spiralling fuel prices, potential blackouts this winter, as well
as a desire by individuals to cut their carbon footprints. The switch to solar
also presents an attractive investment angle as its projected growth over the
next decade is huge, yet an abundance of relatively small companies makes it
tough for investors to identify which these of businesses could become the
superstars of tomorrow.






SOLAR IS SET TO SOAR

The energy challenges presented this year have made it abundantly clear that
energy power systems are desperate for change. Aside from the growing need for
cleaner energy, fuel inflation has skyrocketed, and climate events have
disrupted the reliability of traditional energy systems.

Many of us are now also living our lives differently. Since the pandemic, more
of us work from home on a regular basis and we are also embracing digitally
enabled domestic appliances – the Internet of Things – so that our reliance on
connectivity and having a stable, consistent electricity supply has never been
greater.

For most domestic users, solar represents the best option for taking greater
control of our energy generation. Solar gains its power from the sun, meaning
it’s a decentralised fuel system. As long as there’s even just a little
sunlight, you can generate electricity. Homes are still connected to the central
grid, which can fill any energy gaps for when there is not enough light for
solar to produce power. Batteries can also be used to store excess energy to
help householders gain greater benefit from the energy their solar panels
produce.

Unsurprisingly, this has seen the adoption of residential solar soar worldwide.
Recent analysis suggests global rooftop solar PV installations are expected to
jump to almost 95 GW by 2025, up from 59 GW in 2020[2].


SOLAR’S DEFLATIONARY BENEFITS

In this world of rising living costs, solar can present a more economic solution
for homeowners and highlights a structural and deflationary difference between
renewable and fossil fuel-based energy sources.

The latter are commodities, part of the Earth’s finite resources and require
costly extraction for supply to be maintained. As mankind’s thirst for fossil
fuel has continued to grow, the easily assessable reservoirs – those close to
the surface or on land – have diminished, prompting producers to source
alternative supplies from less accessible areas – such as deep water or the
polar regions or by using alternative extraction techniques like fracking. Such
efforts to extract fuel comes at a greater cost and has a much lower chance of
success. This is one of the reasons why the cost of fossil fuel has trended
higher over time. While it is impossible to predict what will happen to fossil
fuel prices in the long-term, in the interim they will continue to be driven by
supply and demand forces, as well as being impacted by geopolitics and
manipulated by producers such as OPEC. It is therefore fair to assume that they
will remain inflationary.

The price trajectory for renewable energy is completely opposite. Solar gains
its electricity from the sun, and is free at source, but that power can only be
harnessed by technology. Technology, as defined by Moore’s Law, is generally
deflationary which means that not only will the speed and capability of
technology increase every two years, its price will also lower. While the
accuracy of Moore’s Law can be debated, its application to solar is valid.
Recent advances in photovoltaic technology mean that solar panels now convert
more sunlight into electricity; efficiency improvements have seen the power
rating of a standard size panel increase from 250W up to 400W[3]. At the same
time, the International Energy Agency confirmed that solar power schemes now
offer the cheapest electricity in history[4], while the European Commission (EC)
has said that the price of solar PV panels decreased by 75% from 2009 to 2019[5]
on the back of growing market demand. Solar does, indeed, appear to be
deflationary.

While deflationary, solar can’t escape traditional supply / demand dynamics and
many consumers turning to solar may find they have to be patient in the
near-term as supply chain delays are plaguing the industry. While most of this
disruption can be linked to the ongoing fallout from the pandemic, amid factory
closures and transportation challenges, trade disputes have also held up supply
– most notably between the US and China.


US: GROWTH POWERED BY GOVERNMENT POLICY

The US is currently the leading country in residential solar capacity[6], and in
Q2 2022 the segment set its fifth straight quarterly record which represented a
37% increase year-on-year[7]. Despite such strong growth, the nation’s overall
adoption rate is still a mere 3%[8] suggesting there is much more growth to
come.

American homeowners tend to favour a combination of rooftop solar and battery
storage, which despite supply chain problems, often still work out cheaper than
buying electricity directly from utility companies. Many US solar companies also
offer attractive installation packages which can often mean no upfront expense.
In many states, the attraction of solar has been reinforced by recent grid
outages – extreme weather events have caused disruption (notably in Texas last
winter) and this summer California urged its residents to use less energy due to
record heat levels. Meanwhile, in states such as Hawaii – which relies on
imported energy – solar represents a home-grown, lower cost alternative.

The US solar market has recently received a further boost from President Joe
Biden’s new Inflation Reduction Act, which includes ten-year tax incentives for
solar that provides the industry with some much-needed long-term certainty.
Experts suggest this legislation will prompt the segment to triple over the next
five years[9].


EUROPE AIMING FOR THE ROOFTOPS

Demand for solar power in Europe has been strong, thanks to the region’s leading
carbon emission goals. In 2021, the European Union (EU) saw an increase of 34%
new solar PV capacity on the previous year[10]. And Europe’s efforts to end its
reliance on Russian fuel for power generation should see greater demand for
residential solar, with the compound annual growth rate forecast at 7.6% for the
rest of the decade[11].

As in the US, growth is expected to be supported by favourable government
policy. The UK currently has Europe’s largest market for residential solar, with
homeowners benefiting from selling their surplus electricity back to the grid.
At the start of 2022, the government also reduced tax on the sale of renewable
power generation products to promote further growth. In Germany, the government
introduced a subsidy on solar panels with battery storage back in 2016, and also
has feed-in tariffs for surplus energy generation. While France provides
preferential loans for homeowners to install solar power in their homes.

In the EU, domestic policies are also bolstered by the European Commission which
is seeking to make solar the largest electricity source in the EU, with more
than half that share coming from rooftops. New proposals – as part of the EC’s
REPowerEU plan – aim to make the installation of solar panels mandatory for all
new buildings by 2029. Its goal is to generate over 320 GW of solar photovoltaic
energy by 2025 (more than doubling 2020’s levels) and almost 600 GW by 2030[12].


MULTIPLE INVESTMENT ANGLES

Unlike the traditional energy sector, which is dominated by national and global
champions, the solar market is characterised by a much broader range of
suppliers. This makes it highly competitive, as companies vie to take a
technical edge, combat supply challenges and tackle regular regulation and
government policy changes.

However, the investment angle is not solely about the suppliers and installers
of solar power. Attractive opportunities also exist around the components that
are used to make solar equipment – such as the inverters and batteries. Software
is an area that is changing rapidly thanks to the growth of machine learning in
this space. Such technology is now offering virtual power plant micro grids, the
ability to benefit from two-way charging from electric vehicle fleets so surplus
power can go back to the grid, and the development of new algorithms that can
help users sell back energy to the grid at optimal times and prices.   

Finally, the new US Inflation Reduction Act creates a strong ‘made in America’
investment bias, as companies will be incentivised for onshoring manufacturing
and the sourcing of primary materials. Such onshoring trends should also help
alleviate supply chain blockages over time.


IDENTIFYING THE LONG-TERM WINNERS

There is no denying that the energy transition is creating an influx of
investment opportunities – particularly in the solar segment. However, the vast
number of companies operating in this space and the speed of transformational
developments makes it extremely difficult for investors to identify the
companies that will thrive and survive for the next ten to 20 years.  

At BNP Paribas Asset Management, the role of our Environmental Strategies Group
is not only to identify the newest environment solutions in the marketplace, but
also seek out those companies that are truly making an impact. By using an
expert and holistic lens – which factors in past themes as well as future trends
– we aim to target those businesses that could prove to be the long-term winners
of tomorrow.

References

1 https://www.iea.org/reports/solar-pv

2 https://www.powermag.com/a-global-look-at-residential-solar-adoption-rates/

3
https://www.cleanenergyreviews.info/blog/most-efficient-solar-panels#:~:text=Due%20to%20the%20many%20advances,from%20250W%20up%20to%20400W

4
https://www.carbonbrief.org/solar-is-now-cheapest-electricity-in-history-confirms-iea/

5
https://www.globenewswire.com/news-release/2022/09/13/2515428/0/en/Europe-Residential-Solar-PV-Panels-Market-Size-Share-Trends-Analysis-Report-By-Technology-By-Grid-Type-By-Country-And-Segment-Forecast-2022-2030.html

6 https://www.powermag.com/a-global-look-at-residential-solar-adoption-rates/

7 https://www.seia.org/research-resources/solar-market-insight-report-2022-q3

8 https://www.powermag.com/a-global-look-at-residential-solar-adoption-rates/

9
https://www.cnbc.com/2022/09/08/solar-installations-will-nearly-triple-over-the-next-five-years-seia.html

10 https://www.solarpowereurope.org/insights/market-outlooks/market-outlook

11
https://www.grandviewresearch.com/industry-analysis/europe-residential-solar-pv-panels-market-report#:~:text=The%20Europe%20residential%20solar%20PV,7.6%25%20from%202022%20to%202030

12 https://earth.org/eu-set-to-make-solar-panels-mandatory-on-all-new-buildings/

Disclaimer



Please note that articles may contain technical language. For this reason, they
may not be suitable for readers without professional investment experience. Any
views expressed here are those of the author as of the date of publication, are
based on available information, and are subject to change without notice.
Individual portfolio management teams may hold different views and may take
different investment decisions for different clients. This document does not
constitute investment advice. The value of investments and the income they
generate may go down as well as up and it is possible that investors will not
recover their initial outlay. Past performance is no guarantee for future
returns. Investing in emerging markets, or specialised or restricted sectors is
likely to be subject to a higher-than-average volatility due to a high degree of
concentration, greater uncertainty because less information is available, there
is less liquidity or due to greater sensitivity to changes in market conditions
(social, political and economic conditions). Some emerging markets offer less
security than the majority of international developed markets. For this reason,
services for portfolio transactions, liquidation and conservation on behalf of
funds invested in emerging markets may carry greater risk.

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GLOBAL HEAD OF STEWARDSHIP & PROXY VOTING, BNP PARIBAS ASSET MANAGEMENT
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CHIEF MARKET STRATEGIST


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