A Sea Change in Solar

 | Oct 05, 2013 | 1:30 PM EDT
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The solar power industry is expanding rapidly -- and for reasons of economics rather than subsidies. This trend can be illustrated by three observations.

First, the installation rate reported for new solar panels -- among businesses as well as consumers -- is at record levels, and it is accelerating. Two-thirds of all solar photovoltaic capacity in place worldwide has been installed two and a half years, according to the Web site greentechsolar. And the industry is on track to double capacity in the next two and a half years. Media pundits have been invoking Moore's Law in discussing the growth of solar installations -- a not entirely accurate analogy, according to greentechsolar, but positive nonetheless.

It's not dumb money behind this expansion. For the last two years, careful, thoughtful and tightly managed utilities, like NextEra Energy (NEE), Duke Energy (DUK), Dominion (D), Exelon (EXC) and Consolidated Edison (ED), have been investing hundreds of millions of shareholders' dollars in new solar power generating facilities. Apple (AAPL), Google (GOOG) and Microsoft (MSFT) have spent hundreds of millions of dollars to build huge solar farms to power new data centers. Even Warren Buffet's Berkshire Hathaway (BRK.A) committed more than $2 billion for new solar power facilities.

Second, the cost to buy and own solar power generating facilities is competitive with other sources. David Eves, CEO of Public Service Co. of Colorado, a unit of Xcel Energy (XEL), told the Denver Business Journal that this is the first time his utility has seen solar projects as being cost-competitive with natural gas-generated power. And this is "...without considering carbon costs or the need to comply with a renewable energy standard -- strictly on an economic basis," he added.

A Business Insider article compared the overnight capital and fixed operating costs for solar power facilities with similar costs for nuclear, coal and natural gas. The match was not even close. Solar power generating facilities appear to have a significant cost advantage.

Investors have figured this out and are buying solar panels at a record rate. In addition, it appears that investors of all types are seeking to own solar assets -- as an alternative investment, and also an interesting income investment. Since solar facilities have almost no production costs, they yield strong cash flows.

These advantages must be due to huge federal incentives, right?

Here is the third observation, and a big surprise: While there may be benefits in some states, there are no federal incentives for businesses.

The industry has operated without any federal incentives, whether tax benefit or subsidy,  for the last two years. Nor do the Obama Administration or Congress have plans to add them in the future. Not a single dime is offered to owners of solar power generating facilities.

It is true the Internal Revenue Service offers solar equipment owners a 30% investment tax credit. However, if investors take that credit, they forfeit 50% of the normal depreciation expense. The combination of the ITC and reduced depreciation amounts to 85% of the normal depreciation schedule. Therefore, if investors take the bait by claiming the ITC, they actually leave 15% of the normal depreciation expense on the table.

In the end, operators of solar power facilities are no different from any other American business. Like the cobbler, plumber, building owner and manufacturer, they are entitled to deduct depreciation expenses, though clearly they would be foolish to claim the ITC.

All told, these three trends suggest that a sea change is underway for solar power. This business is exploding. And it will continue to grow as other power sources become less attractive investments.

Among companies in the sector, the winners are SunPower (SPWR) and First Solar (FSLR), both of which have a firm foothold in the American solar business.

The key to their success is the systems business. First Solar and SunPower are not only equipment manufacturers; they are also system integration companies. Their revenues and margins span the full spectrum of the value chain, from manufacturing to installation.

SunPower has an additional advantage: Its panels produce more power per square meter than most other off-the-shelf products. As such, it is in a good position to become the leading supplier to satisfy the growing demand.

Because the federal government and most regulators have minimal involvement in solar power production, the industry is immune to national energy policymaking and regulatory overreach. And unlike nuclear and natural gas industries, the solar power industry does not depend on Congress to stimulate its business.

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