A few months ago we wrote a note outlining the rapidly dropping cost of solar power generation, and observing that it was on track to reach “grid parity” in many locations even without government subsidy. (Grid parity simply means the point at which solar will cost the same to ratepayers as electricity from conventional generation.) The reason is clear: falling prices for photovoltaic cells and battery storage, driven by technological improvements.
A recent report from the Rocky Mountain Institute analyzed when grid parity will arrive for various markets -- both for residential (i.e., rooftop) solar and for commercial solar generation. Such projections need to model a variety of scenarios, since we don’t know how rapid technological improvement will be. Typically, parity arrives sooner for commercial-scale solar than for residential.
For commercial solar, the approach of grid parity in several representative regional U.S. markets looks like this:
Source: Rocky Mountain Institute
Hawaii is already at grid parity. Under a scenario which includes accelerated technological improvements, and demand-side improvements including efficiency gains, commercial scale solar will reach grid parity in New York state in 2019, in Los Angeles in 2020, in Louisville in 2026, and in San Antonio in 2027.
What this tells us is that solar will soon be in the process of passing from a volatile, high-growth industry, and settle down into something that more resembles the staid, income-producing world of utilities. We have already seen this as solar companies dealing with a glut of PV panels has set up income-generating yieldcos to hold their generating assets.
Investment implications
Ironically, the arrival of grid parity may presage not the out-performance of solar, but its maturation from growth to income. This does not mean that solar (and potentially other renewables) will not be attractive investments, but that they will find more of a place in income-oriented rather than than growth-oriented portfolios.
Some solar technology companies have already begun spinning their generation assets out into yieldcos -- Sunedison (NYSE:SUNE) has spun out TerraForm Power (NASDAQ:TERP). SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) are both mooting the creation of yieldcos. NRG Energy (NYSE:NRG) has spun out a yieldco, NRG Yield (NYSE:NYLD) that has both renewable and conventional generating assets. Investors should perform due diligence when considering these companies; the accounting is complex, and performance will be heavily influenced by the regulatory and interest-rate environments.
Market Summary
We remain bullish on Europe, where QE and a lower euro are improving corporate profits, exports, and employment. We suggest that investors add to positions at times when Greek news frightens the market.
We remain bullish on China and Hong Kong, as we've mentioned previously.
India’s Prime Minister Narendra Modi has a long and difficult struggle ahead of him, as he pursues India’s development by trying to encourage manufacturing and foreign direct investment. We read this week about very disappointing actions being taken by India’s government to raise tax demands on foreign investors; even worse, the demands may be retroactive for previous years -- a practice we had hoped was over in India. While we remain bullish on India’s long-term prospects, we are watching the progress of Modi’s reforms carefully, and will adjust our exposure to Indian markets according to the policy climate we see developing.
In our view, Japan continues to be a source of investment opportunity as QE continues and the yen falls, creating rising corporate profits and stock market appreciation.
The U.S. market is struggling with its old highs, and the question is whether it will break out. We anticipate modest appreciation in the U.S. this year, and we own stocks in sectors that are undervalued. Overall, U.S. stocks are fairly valued, with some sectors underpriced and others overpriced.
We believe that the U.S. dollar will continue to rise in coming months, so we are careful to hedge out currency risk when we buy foreign stocks.
Gold continues in a trading range, but gold companies are rationalizing operations, cutting costs and mining higher-grade areas. As a result, we believe that quality gold mining companies are a better investment than gold futures at this time. Copper is in short supply and world prices are rising.