The cost of solar power has fallen 90% in the last decade, making solar the cheapest form of energy production per kilowatt-hour (kWh). This opens the gateway for solar power to expand significantly over the next decade, with the investment opportunity in the industry still early. No longer is there a cost/benefit trade-off between "green" renewable energy and energy produced by fossil fuels. Nonetheless, governments worldwide are still planning for subsidies and incentives to expand the use of solar to obtain mass adoption.
The importance of rapidly growing the production of renewable energy sources has never been greater, and the apparent need will increase every year. Sustainability and clean energy generation are driving government and corporate decision-making worldwide due to cataclysmic weather events and worst-case scenario climate-related damage moving to baseline forecasts.
In recent events, the United Nations global conference on climate change yielded emission targets and continued recognition of the significance of transitioning away from fossil fuel. Also, provisions in the Build Back Better Act that passed in the House two weeks ago would be a massive win for solar, especially domestic solar companies. However, the bill's fate in the Senate, including the extent of solar subsidies, is still uncertain.
Domestic manufacturers of thin film solar modules, such as First Solar Inc. (FSLR) , can receive a potential subsidy of up to $0.11/watt on their cost base of $0.25/watt, according to GLJ Research. First Solar already has plans to increase its U.S.-based annual production capacity to 6 gigawatts from 2.6 gigawatts.
The Department of Energy has set a goal for solar to compose 40% of domestic electricity production by 2035, up from about 3% currently. The electrification of transportation also will ramp up electric use in coming years. Significantly investments in solar capacity and grid upgrades will be necessary as the nation attempts to speed toward these targets. Plans to make vast tracts of federal land available for solar will facilitate additional utility-size projects that could make this possible.
In another plus for the industry, rural communities have found a symbiotic relationship with solar. Large-scale developments of solar arrays, often on existing farmland, have drawn in development from energy-intensive businesses desiring clean energy, such as operators of data centers and Bitcoin miners. Top tech companies, including Apple (AAPL) , Microsoft (MSFT) and Facebook (FB) , have pledged carbon neutrality by 2030 and have been keen to develop data centers near large-scale solar developments to power them entirely with renewable energy.
The combination of extreme weather and falling solar energy costs, paired with battery backup, has led to a rush of residential solar in areas hard hit with power outages. No longer are generators the only affordable option. In Texas, homeowner demand for rooftop solar surged after storm-related grid failure caused a widespread power outage. California and Oregon have also seen outsize increases in demand for residential solar due to outages caused by wildfires.
Like many industries, solar faces a near-term overhang from high shipping costs, commodity cost inflation and supply chain bottlenecks. These issues have delayed projects and sliced into profit margins. In addition, the back and forth rulings over solar tariffs and import restrictions in Washington, D.C., and with the World Trade Organization have clouded particular industry players' near-term outlooks while impacting their stock prices. Overall, tariff rulings have caused investor uncertainly, which tends to obscure the overall progress and demand the industry is experiencing.
To avoid individual company pitfalls, investing in the solar industry might be best achieved via an ETF that represents the industry. The Invesco Solar ETF (TAN) is a good proxy for the industry, representing domestic and international solar companies. Considering the vast amounts that will continue to be allocated to ESG (environmental, social and governance) investing, TAN, trading on the open markets since 2008, has a paltry $4 billion of holdings. Morgan Stanley expects "impact investing" asset under management to be the fastest-growing sustainability strategy over the next five years, rising from $123 billion in 2020 to nearly $700 billion by 2025. Solar is a holding to tuck away as industry demand accelerates and investing in renewable energy grows.