Empires of the Sun: Expensive Investments, Cheap Oil, and the Future of Solar Power

In 2007, in response to widespread discontent over Apple’s refusal to divulge any details about the company’s carbon footprint, Steve Jobs penned a letter promising greater transparency and a shift to more sustainable practices across the corporation.

 

 

In the years since, Apple has rapidly transitioned from dragging its feet on environmentalism to leading the pack in sustainability efforts, with strict energy usage guidelines, data centers entirely powered by renewable energy, and the removal of toxic materials from its products. Even with this impressive pedigree, the tech giant’s announcement in February of the largest private investment in solar power in history was unprecedented in its scope and ambition.

 

Spearheaded by CEO Tim Cook, Apple finalized a contract to purchase $850 million of solar energy from the Arizona-based company First Solar. Out of this agreement, Apple will receive 130 megawatts of power, tripling its current solar intake and providing enough renewable energy to power all of its stores and offices in California. Just two weeks after Apple’s statement, Google announced a $300 million investment in Solar City—more than doubling its previous investment of $280 million—to help subsidize residential solar panel projects. While some might cynically view these twin investments as just efforts to cash in on a lucrative tax credit, the moves by Apple and Google are just the latest indicators of a trend that energy analysts have been tracking for years: solar power, once the single most expensive source of renewable energy in the world, has become increasingly better, cheaper, and profitable.

 

 

The Cost of Sunshine

 

For an energy source that draws its power from the most constant and reliable source imaginable, solar power has historically been wildly expensive, but in recent years the cost of solar has dropped dramatically. The price of solar plummeted a stunning 90% from 2006 to 2012, its meteoric descent captured in a graph which AllianceBernstein analysts Michael Parker and Flora Chang have dubbed “the Terrordome”. Where it was once patently unaffordable, solar power is now poised to become the cheapest source of renewable energy as well as achieve price parity with conventional energy sources like coal and natural gas. Unlike its competitors, solar power is purely a technology, not a resource. As such, the cost of solar drops as the underlying technology matures, and the issues that traditionally hounded the solar industry, such as inefficient solar panels and high production costs, have been improved through years of research and development. While extracting various sources of fossil fuels, such as shale oil, have also been made affordable through technological development, they are still a finite resource and thus subject to the vagaries of supply and demand. And while solar panels are themselves dependent upon a natural resource, polycrystalline silicon, the raw silicon from which it is produced is, by mass, the eighth most common element in the universe.

 

The availability of solar power is thus limited by just the number and efficiency of solar panels; its cost, therefore, is completely reflective of the development of the underlying technology. Solar panels in 2000 achieved a conversion efficiency of 11%, while the comparable figure today is roughly 20% and is projected to grow at an average rate of 0.3% per year. Manufacturing costs for solar panels have also diminished as supply chains have been made more efficient and the cost of inputs such as silicon have decreased.

 

Even so, the biggest impediment to large-scale adoption of solar panel has historically been the very high up-front costs of purchase and installation. To avoid these issues, Google’s investment will subsidize the installation on individual homes in return for maintaining ownership of the panels and collecting a monthly rent. Google’s expanded presence in the market could encourage further investment by firms and banks, providing attractive financing to offset the steep initial capital requirements.

 

Additionally, there are large tax benefits in place for investing in solar energy. Currently, there is a 30% solar investment tax credit (ITC) from the federal government; however, this is slated to expire in 2016. Energy analysts at Deutsche Bank have projected that, with the current subsidy in place, solar power will achieve grid parity (in other words, be at least as cheap as competing energy sources) in 47 states by the end of next year. While it is unlikely that the credit will be renewed by the current Republican-controlled Congress, even if the credit drops to pre-extension levels of 10%, the same Deutsche Bank analysis concluded that solar will still achieve grid parity in 36 states.

 

 

The End of Oil?

 

The recent crash in oil prices has led to renewed scrutiny of the future of renewable energy, and has led some to question whether the return of cheap oil will undo the gains made in sustainable energy. While a long-term plunge in oil prices is desirable to many, the unavoidable fact is that the current plunge will eventually be reversed. As the United States quietly became the world’s largest oil producer, its need for oil imports dropped significantly and left crude oil exporters with their characteristically huge supply and newly shrinking demand. The supply shock that followed sent prices plummeting, but OPEC’s decision, led by Saudi Arabia, to maintain existing output levels rather than give up market share allowed prices to continue to fall. In turn, American producers have curtailed or even suspended operations, but even so, American oil stockpiles have nearly reached maximum storage capacity.

 

Even if the ongoing oil crash was permanent, it’s important to realize that oil and solar do not quite compete in the same market. Oil cannot be used to effectively power cities, but electricity can be used to power cars, and, now that its effectiveness has been proven, solar is increasingly becoming an attractive energy source, whether to supply an urban power grid or an electric vehicle charging station. With the present rates of adoption and investment in solar power, oil, no matter how cheap it may be, cannot kill or even blunt its momentum. Moreover, the greatest existential threat to the American solar industry didn’t come out of an OPEC refinery, but rather from solar panel factories in China. Bolstered by immense subsidies from the Chinese government, manufacturers flooded the market with solar panels sold at rock-bottom prices below the cost of manufacturing, undercutting American manufacturers and contributing to the spectacular failure of the government-subsidized solar company Solyndra in 2011. In the ensuing trade war, the Department of Commerce began imposing tariffs on Chinese panels, culminating with the imposition of additional anti-dumping and anti-subsidy duties on Chinese panels in December 2014, as well as anti-dumping duties on Taiwanese panels. Protected from the threat of foreign undercutting, the American solar industry remained competitive and continues to grow at historic rates.

 

 

An Industry’s Future

 

According to projections by the International Energy Agency, by 2050 solar could be the dominant single source of energy on Earth, providing up to 27% of the world’s electricity. However, IEA Executive Director Maria van der Hoeven acknowledged in the same report that solar power is “very capital intensive: almost all expenditures are made upfront [and] lowering the cost of capital is thus of primary importance for achieving the vision in these roadmaps.” The bright future of solar power depends on the cooperation of governments and businesses maintaining policies favorable to the industry, and current or similar incentives need to be kept in place in order to fully realize solar’s potential. The existing trend, though, bends in the direction of support for the solar industry, through capital investment, such as Google’s move with Solar City, or the increasing adoption of solar arrays as meaningful sources of power.

 

Looking at the industry as a whole, thanks to increased efficiency and lower up-front costs investment in solar has increased as the energy savings, pollution reduction, and overall ROI are deemed increasingly attractive and cost-effective. Apple and Google realized the potential of solar power and made investments that were unprecedented, even by the high existing standards set by these leaders of corporate sustainability. While other companies may not have the resources to make large-scale investments in solar power, the moves by Apple and Google set an example showing the attractiveness of solar power: renewable energy isn’t just responsible business anymore—it’s good business overall. Apple and Google may have been among the first movers in the new solar environment, but the industry’s continued maturation will draw increased investment and adoption and will come out of the fringes of the energy market and be cemented as a mainstream source of energy in the future.