Solar Energy Making Notable Inroads in U.S. Electric Grid.

Solar Energy Making Notable Inroads in U.S. Electric Grid

Equity | January 2021

Investment Opportunities Growing in Solar Power Industry

By Greg Woodhams and Scott Renze | 5 - 10 minutes

Key Takeaways

  • Renewable energy can play a significant role in combatting climate change by reducing the use of fossil fuels and lowering greenhouse gas emissions. Solar energy is particularly attractive given its ability to scale from large utility-sized installations to small individual rooftops.
  • The cost to install solar power has dropped more than 70% over the last decade, driven by market acceptance, advancements in technology and the scaling of manufacturing. The addition of battery storage makes solar power an even more compelling alternative to fossil fuel energy production.
  • We believe the solar power industry will continue to experience robust growth. Companies that build and install solar devices should benefit from rising residential and commercial use. In our view, large electric utilities with solar development programs offer a lower risk way to invest in this fast-growing industry.  

Renewable energy sources represent a growing share of U.S. generating capacity and output amid concerns about climate change and fossil fuel-related pollution. The Biden administration intends to further boost renewable energy development. While wind remains the leading renewable energy source, solar has quickly gained traction as equipment and installation costs have declined significantly in recent years. We believe solar energy has a promising future given its positive impact on the environment and the industry’s long-term growth potential.

Trends Show Rapid Growth of Renewable Energy

Renewable energy plays a key role in combatting climate change, reducing fossil fuel use and lowering greenhouse gas emissions. In recent years, renewable energy sources have boosted their share of U.S. generating capacity and output. The U.S. Energy Information Administration recently affirmed that electricity consumption from renewable sources has overtaken coal for the first time. See Figure 1

Figure 1 | Electricity Consumption From Renewable Resources Has Overtaken Coal

Primary Energy Consumption by Source (Quadrillion Btu)

Source: U.S. Energy Information Administration. Data from 1/1/1950 - 9/30/2020.

The latest federal stimulus bill includes significant support for clean energy, including extending wind and solar investment tax credits and directing funding to clean energy research. Many observers believe the Biden administration will extend renewable energy tax incentives, reduce or eliminate fossil fuel subsidies and make a general commitment to clean energy.

Solar Power Technology Is Advancing, and Costs Are Decreasing

Wind remains an important source of renewable energy, but solar energy offers an attractive advantage in that providers can scale solar energy from large utility-sized installations down to individual rooftops. Furthermore, the cost to install solar power has dropped more than 70% over the last decade, according to the Solar Energy Industries Association (SEIA). Market acceptance, advancements in technology and the scaling of manufacturing are driving the lower costs.

For these reasons, solar energy development has significant momentum. The SEIA and global natural resources research and consultancy Wood Mackenzie report U.S. solar installations have grown by an average rate of almost 50% per year over the last decade. Thanks to rapidly declining costs and increasing demand across the private and public sectors, the solar capacity installed nationwide is sufficient to power 16 million homes.

Solar energy installations typically include three complementary technologies:

  1. Photovoltaic (PV) panels to collect the sun’s energy
  2. Inverters that convert this solar energy into usable electricity
  3. Batteries to store excess solar energy

While many global manufacturers are competing to supply PV panels, makers of inverters and battery storage systems are becoming increasingly high tech and differentiated.  

Inverters play a crucial role in solar energy systems by converting direct current to appliance-friendly alternating current. Newer inverters contain advanced microelectronics that boost each solar panel’s efficiency and compensate for the impacts of shade or cloud cover. Newer hybrid inverters can combine two separate components–a solar inverter and a battery inverter–into a single piece of equipment.

With the cost of solar battery packs declining in recent years, the benefits of solar energy are becoming more compelling. Developers are pairing solar installations with battery storage at an accelerating rate, as customers realize the added value of providing power when the sun isn’t shining. Meanwhile, inverter manufacturers are seeking to vertically integrate by providing proprietary storage solutions.

Solar Energy Is a Long-Term Trend Providing Potential Investment Opportunities

We believe the solar power industry represents a dynamic, long-term growth industry due to rising numbers of residential, commercial and utility installations. Developers and installers, such as Sunrun, Sunnova and SunPower, should continue to see mounting demand, and companies with technological advantages and differentiated capabilities should be well positioned for long-term growth.

Wisconsin-based Generac is one such company. Primarily known for its whole house backup generators, Generac recently launched a unique solar solution combining its proprietary inverter, battery pack and software into one integrated system.  

California-based Enphase and Israel-based SolarEdge design and manufacture inverters and monitoring systems. These companies have leveraged technology to help gain the majority of market share for new residential solar installations in the U.S. They are also developing innovative battery storage solutions that will allow them to offer fully integrated solar energy systems.

Best known for its electric cars, Tesla is a leader in battery storage solutions that pair with new or existing solar installations with its quartz-based Solar Roof shingles.

In our view, large electric utilities with solar development programs offer a relatively low-risk way to invest in solar power. For example, Florida-based NextEra Energy, a leading clean energy provider, is poised to capitalize on the significant growth in renewable power development. The company’s current backlog of renewable energy product development is greater than its existing renewables portfolio that took more than 20 years to complete.

A Dynamic Growth Opportunity

We believe solar energy offers one of the most dynamic growth opportunities in the market today. The declining costs of solar power have narrowed the affordability gap between solar and traditional energy sources. We think the increasing deployment of solar energy and associated growth of companies operating in this space will expand meaningfully over the next several years. While many companies will likely benefit from the industry’s growth, we believe those with technological advantages and strong business models have the greatest potential to succeed. 


This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

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