The Solar Industry & The Wave of Interest Behind the Sector
- What is solar energy?
- The opportunity set.
- The wave of alternative investment support coming from investors like Coatue Management, Iconiq Capital, Energize Ventures, Fifth Wall, and TPG Capital into notable solar companies.
- Risks like increasing customer acquisition costs and other considerations to be aware of.
See which institutional private equity and hedge funds on our platform are investing in the solar industry and how your clients can participate.
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What is Solar Energy?
The solar energy industry, or solar industry, builds and installs devices to capture energy from the sun and convert it into electric power. The sector encompasses a wide variety of companies that manufacture components and panels, install solar panels, and operate solar energy generating facilities.
According to the National Renewable Energy Laboratory, the solar industry is projected to add 10 gigawatts (GW) of new solar capacity annually through 2022. That could increase to an average of 18 to 20 GW per year in the 2023-2030 timeframe. Powering that surge is a dramatic decline in operating costs. Perhaps surprisingly, the solar industry is on track to be potentially the lowest-cost source of bulk power in the coming years. Although according to Bloomberg, costs in 2021 have reversed that situation. Solar module prices have reportedly increased by 18% starting in 2021, when compared to the 90% drop in prices over the last ten years.
Why the Interest in Solar Energy?
The sunlight hitting the surface of the earth in one and a half hours can easily take care of the world's energy consumption for an entire year, according to the Office of Energy Efficiency and Renewable Energy. It's no wonder, then, that the solar industry is steadily becoming one of the most coveted in the world as many companies seek to harness that power for consumers.
A switch to solar should decrease our dependence on utility energy as solar panels allow electricity to be generated with the power of the sun. The solar energy system theoretically pays for itself in 5-7 years, allowing close to free electricity for its entire 25+ year life span.
Other reasons include adding value to your home, using solar as a renewable source that will never run out, energy independence where power is maintained in a blackout, environmental impact with less of a carbon footprint, and the ease of little-to-no maintenance in most cases.
The Opportunity Set
The solar industry was already on track for significant growth. Yet now with President Biden’s pledge to put the U.S. on a path toward an emissions-free future, the new administration could supercharge the sector’s expansion. He set a bold goal for the U.S. to generate 100% carbon-free electricity by 2035 and is proposing extending tax credits and making direct investments to accelerate the shift to clean energy. If Biden’s plan passes Congress, the solar industry could grow even faster in the coming years than some projections suggest.
Significant Growth Since 2000 Sets the Stage for the Solar+ Decade
A report cited by Bloomberg on June 11, 2021 stated that over $2.7 trillion has been invested in the renewables sector in the past 10 years. During the same time frame, renewables such as solar and wind have doubled their share in the "global power mix," rising from about 5.9% in 2009 to approximately 13.4% in 2020.
Solar as an Economic Engine
According to the Solar Energy Industries Association (SEIA), the solar industry employed over 230,000 Americans in 2020 at more than 10,000 companies in all US states. Its contribution is also significant in terms of employing the global community. In 2019, the solar industry generated more than $25 billion of private investment in the American economy.
Investment in the Solar Industry
Arturas Rainys, Principal at Trivest Partners, a private equity firm, believes that with the shift towards renewables in the coming decade, private equity is also well-positioned to play a key role.
Investments in renewable capacity totaled more than $2.5 trillion between 2010-2019, according to BloombergNEF data. The solar industry alone drew in half of those funds—$1.3 trillion to be exact—and grew from just 25 GW at the beginning of 2010 to more than 660 GW by the end of 2020. That is enough energy to power 100 million homes in the U.S. each year.
The high volume of capital flowing into the renewable energy sector has increased asset prices. To counter this, some private equity firms seeking higher returns are turning to projects under development as opposed to ones already operating.
“There is enormous white space opportunity in whole-house energy efficiency, residential solar and energy storage, which are each already multi-billion-dollar categories. This market is forecasted to more than triple over the next 10 years with plenty of emerging opportunities in areas from grid services to EV charging infrastructure,” added Rainys.
INSTITUTIONAL PRIVATE EQUITY FUNDS BACK SOLAR ENERGY COMPANIES
Philippe Laffont’s Coatue Management led a $250 million funding round for software provider Aurora Solar in a bet on surging rooftop-panel installations. Other investors included Iconiq Capital, Energize Ventures, and Fifth Wall, according to a statement. Aurora is focused on using software to reduce high customer acquisition costs.
Norway’s state-owned Norfund and TPG Capital’s RISE Fund have invested $100 million and $25 million respectively in the Hyderabad-based Fourth Partner Energy (4PEL). Fourth Partner Energy is enabling decarbonization of the C&I sector in one of the most pivotal global markets.
Source: Mint, July 2021.” Fourth Partner Energy raises $125 mn from Norfund and TPG Capital’s RISE Fund.”
Matrix Renewables is a Madrid-headquartered renewable energy platform created and backed by global alternative asset manager TPG and its $5 billion impact investing platform, The Rise Fund.
Source: Business Wire, July 2020. “TPG Launches Matrix Renewables with The Rise Fund’s Acquisition of 1GW of Solar PV Projects from Trina Solar.”
Form Energy recently raised funding to scale its super-long-duration energy storage technology. Several firms joined the funding including utility-backed VC firm Energy Impact Partners, Coatue Management Temasek, and NGP Energy Technology Partners III.
Like many other industries, the solar industry has been hit hard by the COVID-19 pandemic. During the start of the pandemic, residential solar installments dropped by 23% because of the difficulty of making sales through door-to-door marketing. However, this forced major solar providers to shift their sales models to a digital interface. The ease of making installment orders online alongside rising electricity costs in the US during the pandemic—with a 9.8% increase year over year as reported in June 2020—worked together to push the average American citizen to get solar installed in their house.
According to Bloomberg, while the solar industry’s major selling point was once its low cost, 2021 has reversed that situation. Solar module prices have reportedly increased by 18% starting in 2021, when compared to the 90% drop in prices over the last ten years.
The main culprit behind these rising costs is the quadrupled cost of polysilicon, which is the main material used in solar modules. As such, demand for solar panels and the progress of large-scale projects are both being disrupted.
While interest in the residential solar industry is mounting in the U.S. and panel prices are sharply lower than a decade ago, market penetration remains low in the country.
Solar companies are working together to help transition the global economy away from fossil fuels, such as oil and natural gas, and toward renewable energy sources. However, it will take trillions of dollars and years of trial and error and implementation before making the solar industry a compelling opportunity to decrease our dependence on other energy sources.
Renewable energy, and particularly the solar industry, although experiencing an uptick in cost, are still considered lucrative investment options and are expected to grow in terms of their contribution to the global economy in the coming years.
Learn which institutional private equity and hedge funds on our platform are investing in the solar industry.