The State of Solar

Today, we’re sticking with a mother nature theme, looking at the state of the solar power industry.

Solar power is taking off in the US, but Chinese manufacturers are reaping most of the profits (and even they’re struggling!)

We set out to understand why an industry with so much potential can produce so many struggling businesses.

  • Why is this industry in such high demand, yet so merciless?
  • How does China pose a threat to the US and Europe?
  • Given the tricky economics of solar manufacturing, where can investors look to get a piece of this market?

Let’s go 👇

Get your piece of the sun ☀️

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As you’ll see in this issue, investing in solar manufacturers may not be wise. But solar energy has massive opportunities downstream.

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  1. Obvious demand: Everyone wants to save money. Neighborhood Sun customers can save up to 30% on their electric bills.
  2. Revenue growth: They’ve grown revenue 318% over the past 2 years building out the Sun Engine platform
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Solar power is on fire

The sun is shining on the solar power industry.

In 2023, global renewable energy capacity grew by nearly 14%, the ​fastest growth rate​ in 20 years.

Of this growth, over 73% is attributable to solar energy additions — more than triple the capacity additions of the next runner-up, wind.

Solar has cemented itself as the dominant form of renewable energy. Data: ​International Energy Agency​

Now, China is responsible for a lot of this growth, adding as much solar capacity on its own in 2023 as the entire world did in 2022.

But solar energy is starting to take hold in the US too.

While just ​4% of US energy​ is produced by solar, things are changing fast.

Solar accounted for more than ​half of the new capacity​ added to the US grid in 2023, and ​75%​ of new capacity added in Q1 2024!

Solar is now really taking off in the US. Data: ​Solar Energy Industries Association​

Meanwhile, solar additions in Brazil and Europe also hit record highs in 2023.

And in Australia, which actually saw a ​decline in rooftop solar​ in 2022, more than ​5 gigawatts of fresh capacity​ was added last year, bringing the country’s total share of electricity from renewables to nearly ​40%​.

This is blistering growth for a technology that was, as recently as 2010, responsible for a truly minuscule amount of global energy production.

But some parts of the industry are cooling

With the global energy transition underway, solar’s growth doesn’t look to be slowing down anytime soon.

But while you’d think the industry’s rapid growth might be good for all solar businesses, something odd is happening: many solar companies are struggling to make money.

  • Last year, despite record installations, Chinese solar manufacturers saw profits drop to their ​lowest level since 2021​
  • In Germany, Meyer Burger announced plans at the start of this year to ​close​ one of Europe’s largest panel manufacturing plants, citing a deteriorating market environment.
  • And CubicPV, a US-based company, recently ​reversed plans​ to build a massive domestic manufacturing plant on a poor financial outlook.

The solar installation industry, meanwhile, isn’t doing much better. Titan Solar, a major US solar installer, ​recently went bust​ (joining more than ​100 other installers that collapsed​ in 2023)

Solar is extremely cheap now

Before going further, we need to discuss why solar energy is booming.

The answer is simple. This technology became extremely cheap in a ridiculously short period.

How cheap? Since 1976, the price of solar modules (panels) has fallen by over ​99.6%​!

Solar’s growth has been dramatically faster than anyone anticipated, thanks to prices that have fallen with unprecedented speed. Image: ​@AlecStapp​

One of the most popular ways to track the price of energy sources is the Levelized Cost of Electricity (LCOE).

LCOE answers the question: How much would customers need to pay for electricity generated by this source, for a new plant to break even over its lifetime?

While lots of energy sources have become more affordable in recent years, none have gotten cheaper as quickly as solar.

On an unsubsidized LCOE basis, utility-scale solar has fallen from $359/MWh (megawatt hour) in 2009 to $60/MWh in 2023, an 83% price decline.

In just 14 years, solar energy went from being one of the most expensive sources of electricity on earth, to one of the cheapest. Data: ​Lazard​

Historically, a popular narrative for renewable energy has been that it was better on a sustainability basis but worse on a financial basis.

But recent price improvements in solar and other renewables mean this isn’t the case anymore! In the US, the price range for solar and on-shore wind is now competitive with natural gas, even when accounting for storage costs.

Natural gas is the cheapest source of fossil fuel electricity and accounts for ​43% of US electricity generation​. Data: ​Lazard​

LCOE is far from a perfect measure. Specifically, it doesn’t account for dispatchability (can generating systems scale up or down quickly to meet demand?) or reliability (can generating systems operate at all times?), both of which solar struggles with.

Therefore, it’s naïve to think that solar’s improved LCOE makes it the ultimate energy solution.

Still, the rapid declines in LCOE are a huge part of why adoption is through the roof.

And one country in particular has contributed more to that decline than any other…

Thank China for cheap solar

It’d be nice if the story of cheap solar was simply indomitable human ingenuity, slowly figuring out ways to harness the power of the sun more efficiently. But that’s not entirely the case.

Gradual technological innovation played a big role, but massive state subsidies from China arguably played an even bigger one.

The Chinese government has been pursuing concentrated efforts to modernize the country’s export base to focus on “​new quality productive forces​,” according to a state slogan.

These forces have been popularly dubbed ​The New Three​:

  1. Electric vehicles
  2. Lithium-ion batteries, and
  3. Solar panels

Government backing for solar panels in China comes from free land, subsidized energy, and interest-free loans for private companies. All told, these incentives account for ​35-65% of the operating costs​ for panel manufacturers.

The upshot is that China now produces an incredible amount of solar panels. According to one estimate, it’s nearly ​3x as many panels as global demand​!

What happens when supply completely overwhelms demand like this? Prices collapse and demand increases, just like we’ve seen.

Solar is uniquely dependent on batteries

China’s state subsidization efforts have also helped solar in another indirect way: cheaper batteries.

Renewables are reliant on efficient storage to be viable sources of electricity. After all, the sun doesn’t always shine, the wind doesn’t always blow, and river strength varies with the seasons.

But solar is uniquely dependent on batteries. Why?

Because the times when solar energy generation is rising are the exact times when residential electricity demand is falling.

Energy demand tends to follow what’s called a duck curve, so-named because it rises in the morning, falls during the day, and rises again in the evening (which, if you squint, sort of looks like a duck.)

Like I said, sort of. Image: ​ArnoldReinhold​

Meanwhile, intensity of the sun is basically the opposite: weak in the morning and night, but strong during the day.

Can incentivizing people to work from home help flatten the duck curve? ​One study​ showed that WFH culture better matches solar generation to electricity demand. Image: ​SolarQuotes​

Storing solar energy is the most obvious solution to ameliorate this gap, allowing the grid to charge up during the day and release electricity as needed.

But the efficiency of this approach (and thus the viability of solar as a major energy source) is impacted by the cost of storage.

That’s why it’s such a big deal that lithium-ion batteries (​the most common​ storage mechanism for solar) have become significantly cheaper.

Prices per kWh have declined more than 82% in the last decade. Data: ​Statistia​

With renewables on the rise and battery prices falling, developers are expected to nearly ​double the storage capacity​ of the US energy grid this year.

China has played a big role in this trend. Lithium-ion battery manufacturing has received huge state subsidies, and China accounts for about ​77%​ of global lithium-ion battery manufacturing.

Solar tax equity

What do solar energy and movies have in common?

They both need a lot of star power to be successful! (Heyoo)

Okay, bad joke — but seriously, the two industries both have the crucial role of tax credit financing, a topic you might remember from our recent issue on ​film finance​.

In the US, solar projects can claim an investment tax credit (ITC) for ​roughly 30%​ of overall production costs. But just like in film, you can only cash the credit after completing the project.

That’s led to the development of a niche financing universe known as ​solar tax equity​ in which banks lend against the tax credit receivables of solar projects, amounting to about ​$20 billion​ in financing per year (the actual structure is a ​weird mix of debt & equity​ owing to accounting rules). But you get the idea.

More generally, demand-side subsidies like the ITC have helped grow the solar market just like supply-side subsidies from China have.

In Europe, for instance, programs range from ​residential tax incentives​ in Germany to paying ​renewable electricity generators​ a premium over the market price in France.

But these demand subsidies haven’t translated into a robust homegrown solar industry in the US or Europe – reflecting the challenges of making solar profitable.

Why solar manufacturing is such a tough business

The headline figures aren’t pretty:

And modules are just one piece of the solar supply chain. Before modules can even be assembled, polysilicon (the industry’s basic raw material) needs to be formed into ingots, wafers, and cells.

The gap between China and the West can be even wider along this supply journey. The US currently has ​no cell manufacturing in operation​, for instance, and ​ingot & wafer production​ in both the US & Europe is tiny.

China has come to have a near monopoly on almost every stage of the solar manufacturing process – eerily reminiscent of the country’s dominance of ​rare earth metals​. Data: ​International Energy Agency ​

Chinese dominance in this space shouldn’t be a surprise. The flywheel equation is pretty simple:

  1. China funnels huge sums of state money into the solar manufacturing industry.
  2. These subsidies are combined with lower labor costs
  3. Chinese companies can offer extremely low prices
  4. Global demand follows the money, leading China to dominate panel manufacturing.

Production cost estimates ​bear this out​. Chinese manufacturers cost just 16-19 cents per watt to produce solar panels, compared with around 28 cents per watt for American and European companies.

As a result, US firms are now ​importing record amounts​ of solar panels, deliberately avoiding expensive domestic ones. It’s the same story in Europe, where China accounts for ​90% of the supply​ of solar panels.

In response to Chinese competition, Western governments have taken to protectionism to defend their solar manufacturers (and, not the least, protect their energy security interests from a strategic competitor).

At the behest of ​industry pressure​, last month the Biden Administration ​doubled the tariff rate​ on imported solar panels.

And the EU ​recently launched probes​ into two Chinese panel manufacturers to determine whether they benefit from market-distorting subsidies.

If you ask why solar suppliers in the US and Europe are doing so poorly, the answer is China.

But here’s the thing: China’s solar suppliers aren’t doing great either!

Why even Chinese manufacturers are struggling

It’s an easy narrative that Chinese solar panel manufacturers are using subsidies to undercut Western companies and profit at their expense. But the data doesn’t always bear this out.

In fact, solar manufacturers in China are struggling right now.

​Profits last year were disappointing​, and stock prices continue to suffer this year.

Not everything’s rosy in China. Over the past two years, share prices at major Chinese solar manufacturers have fallen by more than 50%. Image: ​Reuters​

As it turns out, massively scaling up supply without sufficient increases in demand isn’t a great business strategy.

Why? Because you end up tanking global prices!

The struggles of China’s solar manufacturers reveal something deeper about why solar manufacturing is such a tough business: solar panels are a quasi-commodity.

Commodities like gold, wheat, or crude oil have high fungibility. Although there are different producers, they all basically sell the same exact thing.

Solar panels aren’t quite a commodity, because there’s at least some evidence of a ​quality differentiation​ between producers.

But for the most part, one solar panel really is as good as any other – leading to a highly commoditized industry. And the ugly thing about commodity markets is that they have extraordinarily high price competition.

After all, if you can’t compete on brand or quality, what else can you compete on? Price, exactly. It’s all that’s left.

This means the winners in commodity markets are almost always those with the lowest production costs (like ​Saudi Aramco​ in oil).

Here’s the bottom line: even if the West does manage to block the import of Chinese solar panels, and build up domestic solar manufacturing capacity, that doesn’t mean the situation will necessarily be any better for investors.

Whether Western firms compete with Chinese firms or simply among themselves, solar panels remain a commoditized product.

Luckily, you don’t have to invest in panel manufacturing. There are many other ways to tap into the future of this market.

Investing in the future of solar

Solar is the future of renewables. Expect it to continue outperforming other renewables, and taking market share from fossil fuels.

That means there’s a tremendous opportunity for investors to be part of this growth. But you shouldn’t just toss money into random solar companies and hope to earn a good return.

The commoditized panel manufacturing market is a tough place to earn a profit. And residential installation companies are ​struggling​ amid high interest rates and the questionable economics of residential solar.

So, where can you invest?

Investors need to be more tactical here.

Building infrastructure (physical & technological) that supports solar manufacturers & installers is a high-margin activity still tied to the industry’s growth.

There are also a bunch of startups focusing on novel solar technology.

Examples include:

  • ​GameChange Solar​, which builds tilt-tracking technology for panels to follow the sun more accurately (an IPO ​could be on the books​ in 2024).
  • ​Enstall​, which sells physical mounting solutions to make panel installation easier for solar developers.
  • And ​Solestial​, a startup building better solar panels for space (customers include the US Air Force, Boeing, and NASA).

It’s also crucial to differentiate between the different types of solar: residential, community, and utility. Each comes with its own unique economics and dynamics.

Today’s sponsor ​Neighborhood Sun​ operates in the community space, connecting people to local solar farms.

Local solar farms are solar energy generation facilities situated within a community.

Typically smaller than large, utility-scale solar farms, they’re often located close to the communities they serve, such as on unused land, rooftops, or fields.

The coolest thing about local solar farms is that they’re locally owned. Residents or local businesses collectively own the solar farm, sharing both costs and benefits.

  • A company installs and operates the solar farm, selling the electricity to the local grid (or directly to consumers)
  • Renewable energy becomes accessible to people who might not have suitable rooftops for panels (or can’t afford installations)
  • Anyone with an electricity bill can save money and support renewable energy without installing panels on their property.

Stay tuned for an upcoming deep dive on Neighborhood Sun, where we’ll explore these dynamics in depth. ☀️


That’s all for today.

Reply to this email with comments. We read everything.

See you next time,
Brian

Disclosures

  • This issue was sponsored by ​Neighborhood Sun​
  • Neither the author nor the ALTS 1 Fund, nor Altea has any holdings in any other companies mentioned in this issue.
  • This issue contains no affiliate links.

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Author

Picture of Brian Flaherty

Brian Flaherty

Brian's interest in finance started from an early age, when he used money saved from working summer jobs to purchase his first mutual fund at 15. He went on to pursue the field in school, eventually graduating from the University of Virginia with a Bachelor's degree in Economics. After graduation, Brian put his expertise to work advising institutions and high-net-worth investors as a strategist at a wealth management firm. Recently, Brian transitioned to pursue a career as a financial writer, where he leverages his writing skills and his financial knowledge to help investors uncover the best opportunities and make intelligent use of their capital.

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