Solar power market
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Solar has become one of the most cost-competitive and fastest-growing energies in the world writes Invictus Capital, which has launched a solar fund, the Emerging Markets Solar Fund (EMS).

The solar power market is developing so rapidly that installations in the last decade have exceeded even the most aggressive projections.

Far removed from the days when solar was viewed primarily as a niche for the environmentally conscious, top investors (such as Warren Buffet) are betting big on the sector given the strong growth forecasts and reliable returns.

In 2018, EY claimed that “solar looks poised to become one of the major investment themes of the next 10 to 20 years”.

In this article, we outline 5 reasons why solar power makes a great investment.

1. A stable, reliable return linked to inflation

The solar power market is a lower-risk investment that is 100% asset-backed and offers investors predictable, long-term, inflation-linked returns contracted through power purchase agreements (PPAs). PPAs are a financial agreement entered into between a solar developer and a customer whereby the customer purchases the energy output of the panels over their economic life (generally 20 years).

In addition to long-term stable returns, solar investments provide direct exposure to the substantial potential upside from increasing power prices. These prices are forecast to increase both in developed (8–12% in North America and the EU) and developing markets (20% in India and China) by 2030.

“Recent research suggests that solar investments have the potential to generate average annual expected returns on investment of between 6.6% and 10.1% over the next 35 years,” EY 2018.

2. Global growing demand for energy

Solar energy is fast becoming a primary source of global power. The International Energy Agency (IEA) predicts that installed solar will overtake other forms of energy, apart from gas, by 2040.

Even in the short term, the IEA forecasts that renewable energy will grow at 50% per annum over the next five years, of which 60% is attributed to solar. To put this in perspective, this increase in energy generation is equivalent to the total current power capacity of the United States.

Global power generation mix. Source: Bloomberg NEF

3. Technology is improving, driving lower prices & improving returns

Solar power is already cheaper than most renewable energy sources and in many countries has already achieved grid parity (meaning the levelised cost of producing power is equal to or less than the price of power from the grid). China, one of the world’s largest consumers of energy, achieved solar grid parity earlier this year according to research in Nature magazine.

Tracking Power: Solar PV. Source: IEA

A key driver in achieving solar grid parity is declining capital costs. Since 2010, the cost of solar has declined 75%; the greatest of all alternative energy sources. The IEA forecasts that the costs will decline by a further 15% to 35% in the next 5 years.

4. Environmental & social impact of the solar power market

Solar power has a significant impact on reducing both carbon emissions and pollution. Fossil fuels, such as coal, produce a large amount of carbon dioxide and methane that contribute to climate change and lower air quality.

Extreme air pollution is a growing problem, notably in emerging markets such as India. According to UN estimates, deaths from air pollution in India are expected to rise from 1.1 million in 2015 to 1.7 million in 2030 if nothing is done to combat the current crisis.

Solar power also has a social impact through job creation. According to a recent National Solar Jobs Census, the solar industry creates jobs substantially faster than the overall economy in the United States.

5. Portfolio diversification

Energy infrastructure investments (such as solar) are attractive to investors due to the diversification benefits they bring to an investment portfolio.

Typically energy investments exhibit low correlation to traditional assets such as stocks and bonds and provide a hedge against inflation since the revenue generated from the underlying contracts is linked to inflation.

While solar investments currently comprise less than 1% of total allocations in institutional investor portfolios, this is expected to change significantly in the next 20 years whereby over $10 trillion in new investments will pour into the sector.

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