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Growth of Solar as an Attractive Asset Class

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Investment in the Renewable energy sector is steadily increasing each year. Fossil fuel dependency is unsustainable in all ways, especially from an environmental standpoint. Private equity is following the pattern and has shifted to renewable investment. It currently stands at 80% in 2021. Of the renewable energy options, Solar and On-shore wind have shown the most promise. This is especially true in emerging markets.

This article highlights why Solar might just be the most attractive asset class for private investors.

In the last decade, the investment trends have shifted from fossil fuels to renewable source. When compared to 2018, there have been significant increase in Renewable energy infrastructure deals across the world. Solar and Wind dominate the energy landscape of these deals.

There is also a significant change in the global energy consumption. Renewable energy consumption has outperformed conventional sources.

The move towards ESG investing has brought out the untapped potential of Solar Power. Between now and 2040, the global installed capacity of PV will shift from around 2% to 26%. Alternate energy sources will reach grid parity in terms of technology and cost-effectiveness. Solar shares the features of other popular assets. It is poised to be a major investment opportunity in the next 10-20 years. This is also a new market, where solar assets represent less than 1% of the total allocations. It is the most opportune time for investors to step into emerging markets in the solar infrastructure development program.

Economic Drivers for Solar Power

Utility-scale PV Solar panels for generation of electricity is being adopted as the most viable option. Solar generation costs have also come down drastically. This is following China’s massive investment in developing PV Tech. In just the last 6 years, PV system costs have plummeted 82%.

In some of the markets, costs of solar application are already low enough to compete with fossil fuels, even when unsubsidized. The labour force in emerging markets is also available at cheaper rates. The governments have also introduced various incentives to encourage private equity in Solar. The asset is being evaluated on a purely commercial basis for its cost-competitiveness by potential investors.

Operational Investment

Solar poses a reduced resource risk. It is more predictable compared to other alternate sources. The technology risk is also lowered with fewer mechanical components. It also relies less on component inputs, and thus has reduced maintenance. They have relatively lower operational and maintenance costs. Their manufacturing and installation is readily accessible. The construction lead times are in months rather than years as required for Wind or hydroelectric power.

Scalability Investment

Solar assets are in small or large scale ranging from commercial buildings to a private residence. They can be located right on site where the power is required. This brings down the cost of transmission and distribution infrastructure. There are fewer planning restrictions as you can retrofit existing facilities with solar power. These factors present numerous opportunities in off-grid investment. This is especially to power large industries and commercial zones. This also stimulates development of smart infra like Micro-grids and energy management solutions. Solar is no longer a niche market as private firms are already pumping a lot of money into it.

Financial Investment

Solar’s performance metrics have proven that it will deliver high returns. It will even outperform traditional energy stocks in the near future. Over the next 35 years solar investment is expected to have an ROI of 6.6% – 10.1%, based on climate mitigation actions.

Post installation, solar infrastructure can be refinanced with debt backed by future revenue-generation. Secured debt is the preferred investment model for most establishments. Not only does it have a low-risk yield profile, it is also easier to market.

On the other hand, major investors including pension and sovereign funds are opting to fund projects. This ensures smooth transition in the development and construction phases. Another popular funding option for corporates are labelled and unlabelled Green bonds. For higher returns one can invest in the listed stock of utilities that are shifting towards Solar assets. As these individual players build their solar assets, their common equity promotes global solar adoption.

Securitization is offering the opportunity to invest in small scale solar projects. Firms that offer installation services for rooftop Solar PV assets in individual residences are going to thrive in the long-term.

Challenges in Solar Investment

Labels like Green or Alternate in energy stocks has created apprehension among investors. They are unsure of how to add them to their long-term investment strategies. But then, Solar investment opportunities offer a wide range of macro-economic exposure.

The variability in solar deployment can cause some transmission issues. But there is intense research being done to address the same. Battery-based storage and other methods help stabilise the supply and demand. Smart infrastructure is enhancing the Grid resilience in places that are not accessible. Scalable generation and storage of Solar power will help replace conventional energy sources.

Few firms have in-house expertise to educate them on the technology and its deployment. There are also local variations in the regulations and markets that need to be addressed. But firms are well on their way to build their knowledge with the help of third-party experts. But many of these issues will get naturally resolved as Solar becomes more mainstream over the next 10 years.

Advantages of Solar Investment

Solar is rapidly growing and has minimal operational requirements. It is scalable and has proven financial returns making it an attractive asset for short and long terms. The additional benefit is the environmental impact it would have. Companies who are looking for investment are also offering packages that meet the needs of the investors. It will take some time for this to reflect in the energy portfolios of the investors.

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