While many industries struggle to generate robust growth in a still-slow global economy, the solar power industry has become a juggernaut. Utilities, businesses and consumers deployed a combined 48.5 gigawatts of solar panel in 2014, up 20 percent from a year ago.
The quickening adoption for solar can be explained by one simple statistic: The total system cost of a solar installation is dropping at a 10 percent annual pace, according to JP Morgan analyst Paul Coster. In a recent report to clients, he noted falling costs have placed “rooftop solar firmly in-the-money versus retail electricity rates in many locations today, and puts utility-scale solar on track for grid parity well before 2020, and that is without the benefit of subsidy.”
But now that oil prices have fallen sharply, can solar still remain competitive? Judging by industry stock prices, the answer is no. Almost every solar stock has plunged 25 percent or more in recent months, as investors assume cheap oil undercuts the logic for clean energy. In that vein, both pure play solar ETFs on the market––the Guggenheim Solar ETF (TAN) and the Market Vectors Solar Energy ETF (KWT)––are down roughly one-third from their respective 52-week highs.
Yet the sell-off seems unwarranted. In a note to clients earlier this month, Deutsche Bank’s Vishal Shah noted that solar fundamentals are driven mostly by government policies and added he sees “almost no impact on near term demand environment as a result of recent oil price volatility.”
Bill Belden, managing director for Guggenheim Investments, says solar stocks often sell-off whenever oil prices pull back. “It’s a knee-jerk reaction that gets sorted out over time.”
Equating oil prices and solar demand is actually based on a faulty premise. As Lyndon Rive, CEO of SolarCity told CNBC in early December, “Oil has almost no effect on the cost of electricity in the U.S. In the U.S., almost no oil is used to create electricity.”
Comparing the contemporary cost of fossil fuel-based power to solar power ignores the fact that solar power system prices will keep on falling. Analysts at Canaccord Genuity believe the average selling price for a residential photovoltaic system will drop from $4.00 per watt in 2015 to $2.23 per watt by 2020. By then, commercial/industrial systems are forecasted to fall in price to just $1.67 per watt (from a current $3 per watt).
Utility-scale solar systems will cost just $1.11 per watt by 2020, according to these analysts (from a current $2.00 a watt). The gains are coming from improving manufacturing processes and higher sunlight-to-electricity conversion ratios for each solar panel.
Those price drops are crucial to sustain demand, as current investment tax credits––currently fixed at 30 percent of a system cost––will drop to 10 percent in 2017. The recent Congressional elections virtually ensure that the current 30 percent rate won’t be extended, as some had hoped. That factor is another source of recent selling pressure for solar stocks. Still, even without any tax subsidies, solar power is expected to be less expensive than fossil-fuel powered electricity in 34 states by 2020, according to Canaccord’s analysts.