In 2017, global investment in solar energy was estimated to be a massive 161 billion dollars, an 18% increase from 2016 levels. These numbers follow a trend of increasing solar investment, led by shrinking capital costs and more efficient photovoltaic technologies (1).
Big banks like Goldman Sachs, private equity firms, and utilities alike are some of the largest investors in solar projects. These groups are particularly interested in a specific kind of solar project called utility-scale solar. Like its name implies, utility scale solar is a system where electricity is generated using solar technologies and is then fed into the grid, supplying a utility with energy (2). Typically, a system that has a generating capacity of at least 1000 kW is considered utility-scale; comparing this to the average generating of 5 kW by an average residential solar system shows the sheer size of these utility-scale systems (7). According to the Solar Energy Industries Association (SEIA), in 2017, 59% of all solar capacity installed was utility-scale and following the overall solar trend, this number is expected to rise in coming years (3). The hot market is largely driven by the belief that utility solar is a relatively stable and high-return investment.
However, while belief in project stability coupled with decreasing costs and better technologies continues to propel remarkable growth in utility-scale solar energy investment, there is also increasing fear of a bubble. The extent of these fears, which vary throughout the industry, are driven by the very same reasons that make solar to be believed as a stable investment, including operational and logistical systems, policy, and technology factors. Essentially, the systems which have been foundational in driving solar to its astounding recent growth could also be contributing to an astoundingly large bubble through attempts to generate profits faster than returns or technology advances can keep up. Looking further into such systems can shed light on if and why a bubble may be growing.
The simple predictability in solar energy generation plays a large role in how developers and investors make profits off of utility-scale solar. Operationally, solar technology offers a great deal of stability through its predictability. Compared to other renewable and nonrenewable energy sources, after installation, solar energy conversion does not depend on variable wind patterns or complex international trade agreements. In fact, even before installation, the amount of energy generated from a specific solar farm can be well-predicted: the efficiency of the solar cells are well known and the specific location of installation is often studied to know the relative amounts of sun exposure.
To help monetize predictable energy generation, profits are primarily made through a contract between the developer and utility called a power purchase agreement (PPA). The SEIA defines a solar PPA as “a financial agreement where a developer arranges for the design, permitting, financing and installation of a solar energy system on a customer’s property at little to no cost” (4). After the solar facility is functional, the developer sells the generated energy to the customer (in the case of utility-scale solar, the customer is usually a utility who distributes power to customers) for a cheaper price than the wholesale sellers who sell power from non-renewable sources. The developer makes its profits from these sales and from government programs incentivizing renewable energy development. Predictability in energy generation plays a foundational role in PPA’s because developers would naturally only pursue projects in which they know that they will generate enough power to turn a profit on their projects.
Traditionally, PPA’s are long term contracts stretching over 20-25 years, leaving a lot of time to generate revenue. Revenue is primarily generated through one of two typical power prices plans: the first, called the fixed price plan which maintains a constant price for the utility over the duration of the PPA; the second plan, called the fixed escalator plan is where the power price rises at a predetermined rate as time progresses. Both of these plans are dependent on projections of fossil fuel power prices, where the chosen price must be below that of fossil fuel price projections but also at a close enough rate where the developer can make a profit by the end of the PPA. For the longer term PPA’s described above, developers can afford to make their prices well below projected fossil fuel prices, simply because they have a long period to generate revenue. However, shorter PPA lengths require higher rates in order to generate earnings on a shorter timescale. This requires developers to craft their rates as high as possible while still remaining under fossil fuel rates. In other words, developers move rates closer to (but still under) fossil fuel power price projections. If fossil fuel prices become lower than projected, developers (who are locked in a price contract) would not be able to compete.
While longer term PPA’s are obviously more attractive because of the less risk involved, shorter-term PPA’s are becoming more popular, which is the primary reason for the fear of a growing bubble. Because of their reputation for high and stable returns, investors are flocking to utility-scale solar projects to the extent that there are a flood of developers and investors for a very limited amount of projects. Naturally, the developer offering a utility the lowest power price on the shortest lock-in contract is the developer most attractive to the utility. Because there are so many willing developers, the market has become aggressive, pushing down power prices and shortening contracts. Even further, because of the shortened contracts, developers are willing to accept deals in which they will not break even within the time-limit of the PPA and depend on returns from the post-contract period and residuals to break even. As a whole, it is clear that shorter PPA’s can drive potential investors out through making solar both less competitive and a more unstable investment, but also put investors who continue to stay in the market at a dangerously increased risk.
But riskier PPA’s are not the only elements presenting risk to the utility-scale solar market: the regulatory environment is also beginning to worry experts. Currently, there are tax and subsidy incentives that encourage renewable energy development. For example, in 2016 Congress passed a bill allowing tax credits for solar installation up until 2022 (5). Such a bill passed, in a notably Republican Congress, due to convincing positive projections about the solar industry. Its renewal depends on projections on the solar industry in 2022. In this case, a fear of a bubble could be a self-fulfilling prophecy–if projections show risk of a bubble, the tax incentives that encourage solar development risk not being renewed which will discourage capital flow in the solar market.
Negative attitudes of investors and experts are not the only trouble in Washington. The current political climate is discouraging funding towards extensive grid modernization–the smart grid has not been allocated funding ever since Obama’s 2009 stimulus package, greatly slowing the progress of expansion (6). In addition to a lack of funding for infrastructure that would support solar expansion, recent policy in permitting has largely been in favor of fossil fuel energy expansion, making it more difficult for renewable energy sources like solar to compete economically. In 2017, for example, President Trump enacted an executive order to increase the speed of infrastructure permitting, easing the development process of pipelines. Ultimately, between funding issues and policy rollbacks, crucial solar support systems in the public sector seem to be at risk, worrying experts.
Concerns regarding riskier PPAs and the regulatory environment have both contributed to an increasing worry about fallout in the solar industry. However, it would be overly pessimistic to ignore the many positive indicators surrounding the market that seem encouraging for tax credit renewals and shrinking development costs. Furthermore, many groups remain averse to short-term low rate PPA’s due to the many gambles involved and continue to undertake longer term PPA’s. Even the short term PPA’s, while having no guarantee of success, also have no guarantee to fail– if elements such as fossil fuel power prices remain accurate to the projections, these PPA projects are also on track to generate profit and encourage further growth in the industry.
Ultimately, the future solar market weighs down to long-term conditions influenced by a wealth of economic and regulatory factors, that no projection, no matter positive or negative, can guarantee. Nevertheless, the market’s heat does bring attention to one of the fastest growing industries in the United States and around the world, showing that solar, bubble or not, is becoming a larger and larger player in today’s energy industry.