The global solar industry has been booming, even as Asian manufacturers oversupplied the market in 2009 and 2010 as they bet on expanding global demand, causing a glut, and knocking prices and stock values down hard.
After European countries cut subsidies, the solar-panel market ended up with huge production overcapacity, hurting manufacturers and sending stocks into a tailspin. Since then, however, stocks have rebounded, with companies like SunPower, First Solar and SolarCity enjoying sizable gains between 60 percent and more than 100 percent year-to-date.
But the combination of overheated stock prices and the threat of subsidies winding down could shake the industry once again.
Recently there has been a shift for American solar businesses away from simply supplying components to a focus on providing complete systems for projects. The most attractive area of growth has been the rooftop solar market, in which companies are having solar panel systems installed as the panels have become more affordable. In fact, U.S. rooftop solar produced 50 percent more energy in 2012 than in 2011, and is projected to grow 25 percent to 30 percent annually through 2020, according to Boston Consulting Group.
For smaller, solar rooftop companies, accessing financing has been a challenge. Crowdfunding sources have become a new conduit for accessing capital to fund solar systems, and increasingly companies looking for funding, and smaller investors looking for opportunities to invest small amounts in solar projects, are finding crowdfunding websites to be a good solution. Sites such as Mosaic and Kickstarter currently offer access to solar projects for investors who want to gain exposure to this niche market. To date, this type of platform has appealed to smaller investors, but increasingly is attracting larger investors, including accredited investors and institutional investors. Kickstarter offers equity investment funding opportunities, while Mosaic offers investors the chance to make loans to companies looking to complete solar projects.
Despite all of this interest and excitement surrounding the solar industry, and the impressive recent performance of key solar stocks, one undeniable challenge for the industry is the threat of losing key subsidies. Just as has happened in Europe, largely due to the economic challenges most countries there are facing, many U.S. states are winding down many of the subsidies that have to-date made solar systems economically viable. Even here in California there are state and local subsidies that have an uncertain future, the loss of which could drastically alter the affordability of solar panel systems for consumers.
Depending on the location and design of the solar system, the typical home installation ranges from 3 to 7 kilowatts and costs between $18,000 to $40,000 to purchase. But the cost of the equipment represents only about 45 percent of the total cost of a solar system. The solar panels themselves cost about one-third of the total cost of a residential photovoltaic system, with the solar panels for the average home system costing between $4,500 and $12,000. The power inverter, which converts DC to AC so the house can be connected to the grid, will cost $1,000 to $3,000. The mounting hardware — depending on the home, the system may require standoffs, rails, clips, etc. — will cost between $800 and $2,000. Wires and wiring boxes, disconnects, conduit and other electrical components can total between $1,000 and $2,000.
The installation of the system and permitting will amount to approximately 25 percent of the total cost of a typical system. Installation usually costs between $2,000 and $4,000. Permits and inspection fees can add more than $2,500 to total solar costs. Other solar permitting fees and costs can total between $3,000 and $6,000. Sales, marketing and operational costs amount to another 30 percent of the total cost of a system. Monitoring equipment and/or services can cost up to a couple thousand dollars. Maintenance and repair costs will vary, depending on the situation, and include the cost of replacing the power inverter. Inverters typically need to be replaced one or two times during the life of a system. Additional operational and overhead costs can total between $4,000 and $9,000 per installation.
Incentives — including federal, state and local subsidies — can lower the cost of solar power system dramatically. Currently, federal subsidies provide for 30 percent of the total cost of a solar system, including all equipment and installation costs. For a typical system for a home that costs $25,000 all-in, the 30 percent federal subsidy (Federal Solar Tax Credit) would apply to equipment and installation costs, or about 75 percent of the total. This subsidy would reduce the cost to the consumer by $5,625, or down to $19,375. (The consumer may wait up to 16 months to receive the benefit of the tax credit.) The federal energy Investment Tax Credit (ITC), due to the Energy Improvement and Extension Act of 2008, remains available through 2016.
California offers, through utilities, around 10 percent to 15 percent of the cost of a system, or perhaps another $3,000 or so on a $25,000 system, bringing the cost of the system down to about $16,000. There can be additional local rebates or incentives, including reduced or eliminated permitting costs and fees, further reducing total solar system costs.
State and local incentives are less certain in terms of how long they will remain in effect. Many state and local governments (and California is certainly no exception) are suffering with sizable budget deficits and, as a result, have been cutting back on all kinds of programs.
Payback period and ROI (return on investment) calculations can vary widely, depending on the amount of sunlight, the homeowner’s electricity usage, etc. Most solar panel companies claim payback periods of 10 years when incentives are included, but many industry experts counter that payback periods can be much longer. Certainly if incentives are removed, payback periods will be significantly longer, regardless of any other variables.
With the current cost of solar panels at more than 80 percent below where they were five years ago, it is clear that overall system costs have come down significantly. Even so, it is not clear that payback periods and, more important, ROI over the life of the system, makes purchasing a solar system a good investment — even with incentives taken into account. Without any incentives, it is more likely that ROIs, with efficiency losses over the life of the system, are not compelling. With this stated, most people who purchase solar systems are not motivated strictly by the economic viability of the system.
Historically, the solar industry has experienced violent swings, with boom and bust periods driving as much as 90 percent of the companies in the industry out of business in bust periods. Is there another bust looming? If incentives are trimmed or ended, as was the case when European countries cut subsidies, we could see a significant contraction within the industry. In the shorter term, if the stock market corrects, solar stocks are certainly at levels that would warrant concern.
As costs continue to decline, especially for solar panels, and efficiency gains are realized, we can hope the eventually ROIs and payback periods will be such that incentives are no longer needed to make solar systems economically viable. It would be a fantastic win-win for everyone if we could use solar power and save money, instead of having to subsidize the industry to make it economically viable as we do today.
— Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at craig@craigdallen.com or 805.898.1400. Click here to read previous columns or follow him on Twitter: @MPAMCraig. The opinions expressed are his own.
