Future of Solar: Innovation in Financing is Just as Important as Innovation in Technology

Ever since I started writing about solar investments, I’ve had an uneasy feeling about the sky-high valuations on some of the solar stocks covered in this blog. When considering that the solar industry is growing at 30-40% annually, it would appear that some of the valuations are justified. It is an unrealistic assumption that we’re going to keep growing at 40% forever, and valuations will be hurt if investors have to get nervous about growth slowing down sooner than expected.
Future of Solar
Photo: dshot, Creative Commons, Flickr

Bulls talk enthusiastically about the convergence of social and technological forces that paint a rosy outlook for the industry, but what are the obstacles to mass adoption of solar technology?

Optimists are placing big bets on new technologies boosting the industry, and these bets seem to be paying off for now. Scientists from Spectrolab, a subsidiary of Boeing, have recently published their research on the fabrication of solar cells that surpass the 40% efficiency milestone. This is the highest efficiency ever achieved for any photovoltaic device.

Spectrolab experimented with concentrator multi-junction solar cells that use high intensities of sunlight (the equivalent of 100s of suns), concentrated by lenses or mirrors. This is an improvement on conventional solar cells that are one-sun, single-junction silicon cells that use only the light intensity that the sun produces naturally. While Spectrolab’s primary business is supplying PV cells and panels to the aerospace industry, the company envisions that this breakthrough will also have commercial applications.

With all the advances in technology, investors should try to contain their optimism and look at the bigger picture. Consider the costs of installing a solar system for your home: Installers face a maze of government incentive programs and big up-front costs. A typical situation would be a 1,500-2,000 square-foot house with $100-$150 electric bills per month, and the cost for solar panels would probably be in the region of $25,000-30,000 before rebates. For somebody who has $200-300 electric bills, it’s going to be a six- or seven-year payback.

And this is my point: For mass adoption of solar to be realized, innovation in financing is just as important as innovation in technology. The solar industry’s future isn’t necessarily riding on some groundbreaking technical breakthrough from the likes of Spectrolab, what’s needed is the right business model to make solar work cost effectively and at scale.

For this reason, I’m very interested in solar service provider Tioga Energy, a company that recently received $10 million in initial funding. Tioga Energy works with partners to install panels on commercial and government buildings. Once the panels are installed, the company owns them and handles the ongoing maintenance. The idea behind these contracts, called "purchased power agreements" (PPAs), is that the customer pays for the energy generated by solar panels at a prearranged price, while the service provider owns and operates the panels. Some experts suggest that this financing model is critical to the mass adoption of solar energy because of the large up-front costs. Other companies active in this space include SunEdison and MMA Renewable Ventures.

If growth in the solar services sector lags growth in solar technology, the large-scale adoption of solar technology may be delayed. Solar valuations could be hurt if solar technology isn’t adopted as fast as solar technology improves. Continued innovation in financing is crucial in dealing with large up-front costs. Advancing technology is great news for the industry, but we also need to reduce the barriers to the large-scale adoption of solar technology.

Disclosure: I don’t own any stocks mentioned above. I do not own a solar panel.

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