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A Beginner’s Guide to Investing In Solar Energy Projects
- Due to improved solar energy technology, the amount of money it takes to produce energy via solar panels has significantly dropped. The energy storage facility has also become more affordable due to the reduced cost of lithium-ion batteries. This makes solar power a strong contender in the renewables market.
- Solar energy producers and utility providers are working together to find a solution to the increased demands on power during the times when solar energy production is low. This has resulted in changes to how the national energy grids are operated, allowing for traditional power providers to mainly operate when renewable energy production levels are at their lowest.
- There are many types of solar energy investments out there. Four of the principal investment types include solar company stocks, solar income funds, mini energy bonds, and renewable mutual funds.
Renewable energy is considered by many to be one of the most important industries of our time. For a long time, solar energy was dismissed as being ‘unprofitable’ and even unproven by those who failed to see its true potential. However, time has shown that solar power presents some strong competition for conventional energy sources, and its future continues to look bright.
With the unprecedented challenges presented in the fight against climate change, nations around the world have agreed to gradually decrease their emission outputs and make some significant environmental changes. There is now a substantial global shift from our dependence on fossil fuel and traditional energy industries.
Conversations about renewable energy are happening everywhere and are dominating government and business initiatives. This suggests that the people and companies involved in clean energy could soon reap the rewards of a rapidly growing industry. In fact, some believe that the majority of companies could soon be using solar power to provide energy for their operations. An excellent example of this is Apple Inc., which now has an office in Singapore that is 100% solar-powered. This is the future, and solar companies are set to come out on top.
Savvy investors are seeing solar energy as a great opportunity, and many are hopping on board early. Surprisingly, the majority of potential investors have been relatively slow to catch on. Part of the trouble is trying to figure out where to start with solar energy investments. How exactly should you invest in solar energy? Do you need to invest in the solar companies themselves? Or do you invest in solar funds provided by the government? Are there other options out there to get involved in solar energy? To help navigate through the tough decisions and solar energy uncertainties, we have put together this handy beginners guide.
Why Is Solar Energy The Future?
New solar power builds in the USA are now motivated by economics
The main reason for solar power taking the spotlight as the ‘energy of the future’ is due to the cost it takes to produce energy via solar means has significantly fallen. This is primarily due to the constantly-improving technology behind solar energy. With this being said, how do we measure the price of solar energy?
The ‘levelised cost of energy’ (LCOE) is the long-term price that a utility requires to charge to cover its operating expenses and satisfy its investors, and is commonly regarded as the energy industry’s benchmark. The International Renewable Energy Agency (IRENA) reported in 2019 that the price of energy from large-scale solar plants in the USA had dropped by an average of 13% per year for the past five years. This implies that, in the USA, solar power is already competitive with other forms of newly-built energy generation. In many states across the USA, especially in the southern states (where there is hardly ever an absence of sun), solar power is now the cheapest form of all new-build energy production.
Although conventional power plants are still mostly cheaper to generate energy from, the cost of solar energy is declining so quickly that many solar plants are now able to undercut conventional power plants on price. This cost-competitiveness shows that many of the new solar power builds in the USA are now motivated by economics, rather than the pressures of regulators or the green energy movement.
The USA does receive a lot more sunlight than the majority of the UK and Europe, so solar energy producers in Britain are still at a cost disadvantage compared to other power generating supplies. However, this is understood to change soon: in Britain, solar and onshore wind are already the lowest-cost renewable energy forms. British solar and onshore wind are also incredibly close to grid parity, indicating that developments are finally of the right size and in the right location to still be profitable in the UK without subsidy. Even a few projects are as far north as Scotland, which is known as being a rather dark place.
Solar energy producers are also finding intelligent methods to get around unpredictable electricity prices. One of the main approaches is to agree on a power purchase agreement (PPA) with clients. Under a PPA provision, companies decide to buy a specific amount of power produced from a solar energy company at a fixed inflation-linked price for around 10 to 15 years. These types of agreements can either require the company buying the energy to get the power directly from the solar plant, or via an electricity company, which sequentially purchases an equivalent amount of power from the solar plant. This dramatically decreases the risk for the producer. In investment, it is generally found that greater certainty reduces overall financing cost
How is Solar Energy Storage Improving?
The cost of lithium-ion batteries has come down by around 90% over the past decade
Historically, one of the main issues facing the wide-scale adoption of solar power has been the fact that solar plants were limited by the amount of sunshine. It was a particular dilemma for solar companies since there was a high demand for power in the evenings when most people are home from work, which is precisely when solar production is at its lowest. Having to rely upon weather conditions is not a dilemma the gas or coal plants face, as they can effectively provide power on demand at any time of day.
Although solar plants are still obviously reliant on sunshine, both solar plants and utility companies are working hard to find ways to get around the evening power demand. One of the most obvious solutions is to find an economical approach to store the solar electricity generated during sunny conditions. Thankfully, due to the booming electric-car industry, the cost of lithium-ion batteries (which are great for storing surplus electricity) has come down by around 90% over the past decade.
Although the cost of lithium-ion batteries is not low enough to totally eradicate the need for additional power (yet), it is predicted that prices are likely to have fallen enough to make short-term solar power storage within the next four years much more affordable on a broader scale.
While the industry waits for lithium battery costs to continue to reduce, there is a significant shift taking place in how the national energy grids are operated. With any luck, this should smooth demand and decrease (though not altogether remove) the need for power storage. For example, the UK National Grid has created the ‘Demand Turn Up’ service, which encourages conventional energy producers to decrease energy output during times of low national pressure and higher renewable output. This means that traditional power providers only operate when renewable energy production is at its lowest.
In addition to the approach of encouraging the established power companies to fill in the energy gaps in solar power generation, the National Grid in the UK has also pushed power demand towards the periods when solar production is at its strongest. They have done this by incentivising the consumer; reducing the cost of electricity consumption at off-peak times.
During the coronavirus crisis, more people are working from home, which has led to some massive changes in power consumption. The shift in energy consumption patterns has further favoured solar producers, as the need for increased power is now at a time when solar power generation is at its highest. It has also demonstrated to the electricity companies that energy consumption behaviour is not set in stone, and can change due to circumstances
Are Governments Supporting Solar Energy?
The domestic solar panel industry and the solar power generation market are healthy without the requirement for any direct government subsidies
The drop in the cost of solar generation has meant that it is increasingly competitive on an unsubsidised basis. However, subsidies and mandates have helped encourage investment and speed up the process. In the United States, the main turning point was the federal 2006 Solar Investment Tax Credit. This tax credit allowed owners to claim a tax credit equivalent to 30% of a project’s capital cost. The Solar Investment Tax Credit largely explains why, over the past 15 years, the solar power industry in the USA has grown so much.
There have been plenty of additional actions at the local USA state level, too, with many states applying some form of solar energy subsidy. The majority of states have set their own targets for renewable energy, and as these targets are fulfilled, they are further increased, driving the demand for additional solar panel installations. The Americans are taking renewable energy targets very seriously. Seven states (California, Maine, Minnesota, Nevada, New York, Virginia, and Hawaii), Washington DC, and the territory of Puerto Rico have passed laws that obligate them to meet all their energy requirements from renewable sources by a set date.
The USA is, of course, not the only nation promoting renewable energy. There are also numerous policies helping to encourage the adoption of solar energy across the world. However, the situation in some countries is a little more complicated. In the UK, for example, in 2015, the government ditched interest-free loans for domestic solar panels, which drastically reduced the demand for solar panel installation. The UK government also consequently phased out a Renewables Obligation scheme that supported solar and other renewable energy builds.
At present, the UK solar industry receives no direct government subsidies. However, the UK government has been running a Contract for Difference scheme since 2014, where developers are paid a flat rate for the energy they produce over 15 years. This scheme, however, is more generally suited to wind farms rather than solar arrays, and de-risks investment in renewables.
The reliance on government support is not as crucial as it once was. Solar technology has advanced to such a stage that both the domestic solar panel industry and the solar power generation market are pretty healthy without the requirement for any direct government subsidies
Is Cheap Oil and Gas a Threat to Solar Companies?
Any effect of the drop in oil and gas prices is likely to be extremely mild on the solar industry
In 2020, there was some unprecedented volatility in the energy market. The price of a barrel of oil from West Texas Intermediate (WTI) oil plummeted from around $60 a barrel at the beginning of the year. The oil price even briefly turned negative (meaning it cost WTI to get rid of the oil.
Oil and gas price slumps tend to spark concern that low fossil-fuel prices will deter new investment in solar power, and incite speculation that it could even result in a shift back to oil and gas. The drop in gas prices may lead to lower marginal costs for those with existing gas-fired electricity generators, and make gas plants more attractive when it comes to installing new electricity-generating capacity. However, any effect of the drop in oil and gas prices is likely to be extremely mild on the solar industry as companies recognise that energy prices can be exceptionally unpredictable.
When determining whether to build another energy plant, investors tend to look at forwarding energy prices over the lifetime of the project. This reduces the impact of short-run fluctuations in prices, such as those in oil and gas. The International Energy Agency (IEA) has also reported that any low oil and gas prices will likely have a negligible impact on solar power and other renewable energy types (such as wind). In May 2020, the IEA updated its projections for renewable energy, and they projected that scheduled renewable energy projects with long-term contracts would be primarily protected from low natural gas prices.
The lack of effect that low natural gas prices have on solar builds is mainly due to the medium and long-term economic argument for wind and solar energy investment. These renewable energy sources remain strong thanks to expected continuing cost reductions and to the long-term price predictability over project lifetimes. In principle, modern solar energy is independently established enough not to suffer significant damage during plummeting fossil-fuel prices.
The 2020 price falls in natural gas did not prevent an increasing number of solar projects from being economically competitive, even without the support of some governments. Additionally, the low maintenance costs of domestic solar panels mean that they may provide an economic method of protection against an unexpected spike in energy rates.
No matter how cheap oil and gas may get, these forms of energy are enormous causes of pollution. Environmental damage is a cost that governments across the world will have to put a price to. Suppose governments are truly serious about meeting their stated emissions targets. In that case, they will need to implement tax inflations or carbon trading schemes to push renewable energy incentives over low-cost oil and gas.
How to Invest in Solar Energy
With so many exciting solar investment opportunities out there, it can feel a little overwhelming
Due to the recent disruption caused by Covid-19, it has meant that many solar projects have been delayed. However, in the long term, the projected output growth has not diminished. The amount of global new energy capacity accounted for by renewable energy is likely to expand from around 20% to 25% (which it is now), to 42% by 2030. Then to 57% by 2050, with solar being the most significant contributor.
The solar sector should also get a boost as the total electricity demand continues to grow parallel with the global economy. An alternative way to take part in the ‘solar boom’ is to invest in companies that manufacture the equipment related to solar power. For example, you could invest in a company that makes photoelectric cells (PV). However, as an investor, you will have to be careful going down this route, as most of the companies in this sector are still reasonably small. Investing in these small solar parts manufacturing companies means that both revenue and share price can be a bit volatile. There may also be the alternative solar investment option in “eco-living”, which are projects that incorporate solar power into their design.
Investing in PV manufacturers may be another attractive way to get into the solar market; however, it is a sector that prospective rivals can quickly enter. This can be a problem as it reduces established operators’ profitability. Instead, the real winners could be the companies that run and operate the solar plants. Existing operators of gas and coal power plants that are planning to switch to solar in the near future are projected to do well, given the mounting concern around climate change.
With so many exciting solar investment opportunities out there, it can all feel a little overwhelming. Here are some solar investment ideas to think over:
- Buy solar company stocks – This is probably one of the most obvious ways to invest in solar energy. However, purchasing stocks in a solar company is a simple process. With governments and businesses pledging to ‘go solar’ in the next ten years, companies that deliver solar power systems inevitably ought to do very well. Consequently, investing in them will potentially make a good return.
- Solar income funds – This form of investment means backing a government solar power scheme. Many governments have committed to producing a percentage of all energy by renewable sources in a set period. It takes money to do this, and with solar income funds, you can invest money to help hit this target. In return, some governments even pay you for the energy produced by the subsequent solar panels. Through this type of investment, you are helping to provide solar power, and potentially reaping a reward for doing so.
- Mini energy bonds – Some energy companies offer mini energy bonds to help support their renewable division. For example, many larger energy companies no longer rely on only coal power. They also generate energy with solar power and renewables. You may not necessarily want to invest in the entire company through general stocks. Instead, you might want to focus on green investment and only invest in their solar power division. It is now feasible to do this- with the help of mini energy bonds. Many of the large energy companies now offer this, and through your investment, you will get a share of the profits generated from their solar division.
- Renewable mutual funds – If you are unsure about which is the best solar investment choice for you, there are specialist financial advisors whose job is to identify the most appropriate opportunities for you and your potential investments. By acquiring a renewable mutual fund, you will combine your money with several other investors. The financial advisor will then take that pooled money and spread it across various renewable investments. They will then do their best to find and locate the best possible returns from energy stocks, energy bonds, and government funds. This specialist advisor should be an expert in how the solar energy market works and the industry. They will also potentially know how to manage the risks and best reap any potential rewards of renewable mutual funds.
If you are looking for a more direct way to invest, you can, of course, always buy solar panels for your home. This is a way that you can have a personal connection to solar energy and directly see it benefiting your life. You will also be having a positive effect on the planet around you while having a money-saving investment. There is an up-front cost for the panels and installation, but over time you can make money back in utility bill savings. Once the solar panels are installed, you will no longer have to pay an energy company- which is a pretty good feeling! In addition, any excess energy you may produce can be sold back to the grid.
The renewable energy sector is made up of multiple sources, which include solar, wind, and tidal power, among others. The frontrunner of all renewables in recent years has been solar energy. By 2050, solar energy is projected to supply over a third of the world’s total electricity.
The future of energy is in renewables, and more green investments should be made. With solar power and the renewable energy sector as a whole thriving, now is a great time to look into investment opportunities in this growing industry. One thing is certain: the future for solar energy is looking bright.
What is a solar energy project?
A solar energy project can include several ventures, from a large solar array, a company that manages solar energy production, to creating your very own solar-powered house. There are projects of all different sizes, making each opportunity an exciting eco-investment to get involved in.
How much money is needed to invest in solar energy?
The amount of money required for investing in solar energy varies depending on the investment opportunity. Some small community projects may require as little as £50 to invest, while the more substantial solar companies will require much higher amounts. Investor memorandums will provide you with all the most vital details concerning payments, rewards, and risks.
Is it worth investing in solar?
If you are interested in renewable energy companies, want to reduce carbon emission for the planet, and want to make a wise investment, then yes, it may be worth investing in solar. With the cost of solar energy products dropping due to new, more efficient solar technology, it is a great time to invest. Solar power is the future.
How does solar energy benefit the environment?
Solar energy is a renewable source of energy, which means, unlike coal, it will not run out. It is predominantly environmentally friendly, as it does not generate any greenhouse gases. Solar energy technology also helps you reduce your carbon footprint, meaning you will be personally doing something to benefit the environment.
Are there any risks when investing in solar projects?
As with any investment, there is a risk that you will not make your money back or earn what is projected. Solar investments have potential risks throughout the entire project’s lifetime, and they will vary depending on the type of investment. Some of the main risk areas may include construction risks, operational risks, and financial risks.