Solar Energy & Solar ETFs Are Here To Stay

Solar energy has long held the promise of delivering clean kilowatts and a cleaner world, but for the longest time, it didn’t quite deliver on its promise. Those days are over.

We now inhabit a world where demand for solar energy—photovoltaic (PV) panels that create electricity out of photons from sun, to be specific—continues apace even as oil and gas prices have collapsed by about half in the past year.

Gone are the days when the viability of solar energy was linked to a spike in oil or gas prices. And what a relief to investors in funds such as the two cheap pure-play solar funds, the Guggenheim Solar ETF (TAN | B-37) and the Market Vectors Solar Energy ETF (KWT | D-31). These ETFs are securities that investors might actually want to hold onto for the long haul as the solar industry unfolds and blossoms.

It hasn’t been that way so far. Those who are old enough or have a sense of history will recall a number of energy-related events in the past four decades that each, in their way, had a huge effect on the economics of alternative energy. A look at the chart below provides several talking points.

It’s really the very right of the chart that shows crude prices dropping by about half that’s of interest here.

Source: MacroTrends using U.S. EIA and BLS data. Prices are adjusted for inflation and expressed in today’s dollars.

Because up until then—whether we’re talking about the sixfold increase in oil prices in the 1970s that put solar energy on the map in the first place, or every price collapse and price spike since—alternative energy entrepreneurs and investors have been prisoners to the vagaries of oil and gas prices forever and ever.

Until now.

China Flooded The Market

That monster spike in crude oil prices to $147.50 a barrel in July 2008 on the eve of the Lehman Brothers bankruptcy definitely brought alternative energy back from the brink. The spike probably helped bring on the Great Recession as well, as every recession since World War II was preceded by a sharp increase in energy prices.

But to hear industry sources, the real corner wasn’t turned for solar energy until around 2011, when Chinese suppliers flooded the U.S. market with solar panels. That flushed out a number of manufacturers, including some from China, but also dropped prices of solar-generated electricity, stimulating demand.

And in the intervening period, installations of solar panels have soared, increasingly at the residential level, as companies such as SolarCity offer free installations, leaving homeowners to lease the panels that are producing electricity. Also, big companies like Apple and Google are installing solar panels, lifting the profile and credibility of the entire industry.

In 2014, U.S. PV installation rose 30 percent to 6.2 gigawatts (GW)—the largest year ever, a third of all new electricity-generating capacity installed last year, according to a report by MACSolar Index, the firm that created the index for the Guggenheim solar ETF “TAN.”

To put those 6.2 GW of PV capacity installed last year in perspective, the U.S. now boasts of 20 GW of solar-generated electricity capacity, or enough to power 4 million homes, according to the Solar Energy Industries Association, a trade group.

The MACSolar report also said GTM Research foresees growth of 31 percent this year, or 8.1 GW of new generating capacity, most of it coming from the expanding residential market. Still, the 20 GW of installed solar-generating capacity is less than 1 percent of all U.S. electricity-generating capacity.

Importantly, this growth is just in the U.S., which is No. 5 in terms of total installed solar capacity, behind Germany, China, Italy and Japan, according to the MACSolar report.

A Picture Is Worth A Thousand Words

Bottom line: There’s a growing sense that a societal shift may now be manifesting here in the U.S. as it has already in places like Germany. What happens in the oil and natural gas market is having less and less effect on the outlook for solar energy.

A look at the three-year chart below makes the emerging de-linking clear. Solar ETFs did track gas prices in particular along the way, but that link began to break down last year. And to be clear, 2014 was the year that solar PV installations reached a record.

Chart courtesy of StockCharts.com

No Guarantees

While the linkage between gas and oil and solar ETFs isn’t direct, it is real. A pronounced and sustained decline in gas prices, in particular, would almost certainly hurt demand for solar energy.

That said, something does seem to be changing in the mindset of the public and among companies that are making and marketing solar PV panels.

For investors—alpha seekers in particular—that means paying closer attention to a young industry that seems increasingly to have a bright future, irrespective of the nearer-term twists and turns.

At the time this article was written, the author held no positions in the securities mentioned. Contact Olly Ludwig at [email protected] or follow him on Twitter @OllyLudwig.