Despite the environmental benefits, economic factors are the most important drivers of growing solar investment.

Solar photovoltaic (PV) energy is widely recognized as a crucial component in addressing our worldwide need for secure, affordable and renewable energy.

With many countries reliant on costly energy imports and unsustainable fossil fuels, investment in renewables is now double that of coal and gas combined. Solar PV global capacity continues to rise exponentially and has made staggering progress in the last two decades. In recent years, investment in renewables has often outperformed traditional energy stocks, and this is set to continue — with PV, alongside onshore wind, set to “win the cost race” and become our cheapest energy option by 2020.

Despite these trends, many investors still view PV as a niche investment shaped by ecological rather than financial criteria. In reality, economic and environmental factors are rapidly creating a new set of mainstream investment opportunities in renewable energy. Solar investment is advancing quickly, with more PV capacity installed between 2010 and 2014 than in the previous 40 years. A record US$329b was invested in global renewable energy in 2015, up from US$62b in 2004. Moreover, solar assets accounted for 49% (or US$161b) of 2015’s total.

The growth of solar investment seems certain to continue. Bloomberg New Energy Finance (BNEF) forecasts that renewables will account for around 65% of an estimated US$12.2t investment in all forms of energy generation between now and 2040. Over the same period, PV is expected to jump from 2% of installed global generation capacity to around 26% — more than any other source. Deutsche Bank expects PV electricity to achieve “grid parity” (when alternative energy sources can generate power at a levelized cost of electricity (LCOE) less than or equal to the price of the existing electricity grid) in up to 80% of global markets within two years.

This paper highlights the economic factors catapulting solar to the forefront of the global energy revolution. Solar investments share many features of other real assets, and boast a number of unique characteristics that make them especially attractive to capital providers. Of course, these assets are not without risks, illustrated by the underperformance of some companies and the occasionally uneven retreat of subsidies. However, these challenges have been exaggerated and solar looks poised to become one of the major investment themes of the next 10 to 20 years.

Many institutions and major investors are still only dabbling in this market, with solar assets typically representing less than 1% of total allocations. It is time for investors to revisit their attitudes to PV, engage with solar companies and other stakeholders, develop their understanding, and see solar as a distinct and growing element of mainstream asset allocation.

What about the economics?

Despite the environmental benefits, economic factors are the most important drivers of growing solar investment.

In particular, utility scale PV (the large-scale use of PV solar panels to generate electricity) is fast becoming one of the most cost-effective sources of energy in a growing range of markets.

Solar generation costs have undergone a stunning decline over the past decade, fuelled by an explosion in PV cell output. Driven by Chinese manufacturing, global cell production increased from 50MW in 2004 to 55GW in 2015 — more than a 500-fold increase. As a result, average solar PV system costs have plummeted by 82% in the last six years alone.

In some markets, average levelized costs of solar applications are already low enough to compete with conventional energy on an unsubsidized basis. Solar and onshore wind are rapidly reaching grid parity with conventional fuels (see Figure 1). Australia, Morocco, Chile, Brazil and India are just some of the countries now delivering record low unsubsidized solar tariffs that outcompete their fossil fuel equivalents. State projects supporting grid parity are also emerging in the UK, Italy, China and some US states. In June 2016, Dubai agreed to a bid for 200MW of solar at 2.99 US cents, the lowest figure ever recorded globally.

This continuing slide in costs means that solar is entering a new investment era. Instead of chasing preferential subsidies, developers and investors can now evaluate these assets on a standalone, purely commercial basis.

EY - Levelized cost of energy range by technology (US$ per MWh)

Figure 1: Levelized cost of energy range by technology (US$ per MWh)

* This assumes US$23 per MWh wind PTC (production tax credit) and 30% solar ITC (investment tax credit), given an eligibility window through to end of 2016. More detailed subsidy assumptions and alternative scenarios provided in Lazard’s levelized cost of energy analysis — version 9.0. ** Cost and installation. Source: EY analysis of Lazard data

Going forward, rising grid-based electricity prices and the likelihood of further reductions in solar PV module costs mean that many analysts expect solar to be able to outcompete conventional energy sources in most markets within a decade. A 2015 report by Deutsche Bank predicts that solar PV generation systems will be at grid parity in up to 80% of the global market within two years (see Figure 2).

Technological developments are close to creating a tipping point in the energy industry, with off-grid PV solutions set to revolutionize the utility industry, enabling residential and business consumers to install their own systems. Alongside this, utility scale installations are growing to 100MW, 800MW and further. There is no limit to the size except land area required, meaning that they will soon be comparable to conventional generation plants. Finally, the PV industry to set to go through further consolidation and changes in future — there remains a glut of panel supply, the finances of many companies are under strain, with tender prices and feed in tariff regimes decreasing, margins are getting smaller and economies of scale are increasingly important. In terms of opportunities, some markets are maturing and new ones are appearing often in different forms.

EY - Average levelized cost of solar relative to retail electricity price by country

Figure 2: Average levelized cost of solar relative to retail electricity price by country

Source: Deutsche Bank, Solar grid parity in a low oil price era, 2015. *Against the highest local rates. Solar PV LCOE: levelized costs of solar photo voltaic energy

Why should you invest in solar assets?

The rapidly increasing cost-competitiveness of solar energy is creating attractive opportunities for capital providers interested in infrastructure investment.

Alongside this cost-competitiveness solar technology has four characteristics which sets it apart from other renewable and traditional energy assets.

Similar to other renewables, solar investments are typically backed by real assets. These offer predictable, long-term, inflation-linked revenues supported by power purchase agreements. A large scale PV or onshore wind project will usually have an economic life of 20 years and a productive life of 25-35 years, with potential for repowering. Current investors include pension funds who are looking for different asset classes which can provide stable and reliable returns, companies looking at going 100% renewable and individual consumers interested in switching to green sources and installing own home systems.

Reasons to invest in solar can be categorised into the following: operational, scalability and financial:

Operational:

Solar investments have a number of unique operational characteristics, resulting in both risk and cost benefits for investors:

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