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  1. Home
  2. / Investing
  3. / Energy

Solar Getting Its Time in the Sun

Power-plant owners, not the panel makers, are in the prime spot.
By GLENN WILLIAMS Apr 08, 2013 | 06:00 PM EDT
Stocks quotes in this article: NEE, EXC, DUK, NRG

Solar power is moving into position. It is an answer for policymakers, power markets and investors. It is a threat to traditionalists, who rely on old, inefficient and dirty methods of producing power. Widespread adoption is an issue of timing. When will the collective awakening occur?

The answer is lost in messaging. Mention the word "solar," and the first word that appears in many people's minds is "Solyndra." But solar power production is not about manufacturing solar panels any more than driving trucks is about engine factories.

It is important to draw the distinction between manufacturers of solar panels and owners of solar-power-producing assets. Solar manufactures continue to face fierce competition as the market culls out the winners and punishes the losers.

But most solar power-plant owners are different. In all likelihood, they got a solid deal from solar manufacturers, they earned healthy tax credits from the federal government, they earned renewable energy credits and subsidies from state governments, and they are selling their production into the power markets at a good price.

High-income investors are finding solar power assets to be an alternative investment. Not only do utility-grade solar farms accumulate tax equity with known returns, they also earn income for the next 25 years.

Some of the risk has been mitigated and can be monetized. Owners of new solar power facilities earn tax equity from the federal government. Specifically, investors can earn a 30% tax credit the minute the facility generates power. They also earn accelerated depreciation. The combination of tax credits and depreciation produces guaranteed returns for high-income investors such as utilities. That guaranteed return is booked well before realizing the income from power production.

Solar farms have several income streams. The first is from selling the power into the market. Because electric power is a fungible commodity, solar power producers receive the same price as all other power producers, including nuclear power, coal power or power from natural gas and wind power.

Unlike other sources, solar is uniquely profitable. Solar produces energy during the peak demand period of each day. Solar power will not produce power in the dark when power prices are their lowest. As a result, solar produces power only when the system needs it and when prices are elevated.

The second income stream comes from state renewable energy programs. Individual states offer incentives for developers to build, own and operate wind and solar facilities. Because solar power has the effect of reducing average market prices for power, the real costs paid by consumers to fund incentives is difficult to calculate. The net cost may approach zero.

The third source of revenue is from ancillary services. Solar provides the grid with other economic benefits, and solar earns a pro rata share from those benefits.

From an investor's point of view, solar has become an attractive investment. It is so attractive that large utilities and other power-consuming corporations are moving in and buying new solar facilities. Apple (AAPL), Google (GOOG), Edison International (EIX), NextEra Energy (NEE), Exelon (EXC), Duke Energy (DUK), NRG Energy (NRG), Consolidated Edison (ED) and others have already invested or plan to invest in utility-grade solar farms. Some of these utilities have their solar assets in a state rate base. Others have long-term revenue agreements.

Even some homeowners have figured it out. According to Solar Power World, seven out of 10 Massachusetts solar owners believe solar energy is a better investment than a major property renovation or buying a car, according to a recent survey by New England Clean Energy. When asked which of the three was the best investment, 70% said solar, 29% said a property renovation, and 1% said buying a car. The survey also found that 95% of solar-owners are happy they installed solar, and 54% said they "couldn't be happier" with their solar energy systems.

Owners of non-solar generating facilities are not so happy. Solar power is a threat to the traditionalists. Solar reduces steam plant earnings by producing a more competitive product. It also displaces their most profitable asset: the peaking power plant.

Not only are peaking plants the least economic, they set higher market-clearing prices for power. In addition, peaking plants are mechanically inefficient, they consume more hydrocarbons, they produce less power, and they create more pollution per unit of power.

Large integrated utilities have figured it out, including some of the nation's largest nuclear and coal utilities. Some states are figuring it out. Even homeowners have figured it out.

The question is, when will the nation figure it out? When it does, solar will change the utility landscape.

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At the time of publication, Glenn Williams had no position in any of the stocks mentioned.

TAGS: Investing | U.S. Equity | Energy

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