Residential solar makes little sense

Residential solar makes little sense compared to larger forms of solar energy such as utility-scale solar (building solar farms in non-urban areas) and commercial solar (solar panels on the roof of commercial buildings).  The economics are inferior for various reasons:

  1. Economies of scale in labour costs (engineering, installation) and in equipment costs.
  2. Larger scale solar tends to place solar panels in areas with the best sunlight conditions and other economic factors.  Some residential roofs are obscured by trees or are not strong enough to support solar panels.  There are some frictional costs when people waste time figuring out that a particular residential roof is not a good place to place solar panels on (e.g. customer service, engineering).

Larger scale solar projects have inherent advantages over residential solar.

Residential solar exists because of subsidies.  Residential consumers of electricity do not pay directly for the cost of the power distribution infrastructure.  The cost of this infrastructure comes from the higher rate that residential consumers pay for electricity versus other users.  Residential solar is viable only because consumers can sell electricity back to the grid at the residential rate versus what the utility would pay for solar at utility rates.

The way I see it, the publicly-traded residential solar stocks are completely dependent on subsidies.  The question comes down to what will happen to subsidies in the future.  I think that the growth of the residential solar industry will be difficult.  If more consumers adopt residential solar, one of two things must happen:

  1. Residential electricity rates keep going higher and higher.  Non-solar residential customers are basically subsidizing the solar customers.  Critics of residential solar point out that these subsidies take money from the poor and give it to rich people with big suburban homes with large roofs.  The subsidies are a regressive tax on the poor.
  2. Subsidies for residential solar are reduced.  There may be fixed fees to cover the cost of distribution infrastructure and/or lower rates for electricity sold back to the grid.

Politically, my guess is that politicians will keep residential solar alive but lower the subsidies in a way that slows down the growth of residential solar.  My guess is that extremely expensive electricity will be politically unpopular.  Getting rid of residential solar entirely may also be unpopular.  Many jurisdictions in the US have moved towards reducing residential solar subsidies without eliminating them altogether.

On the other hand, there is a small possibility that solar subsidies continue to grow.  If the glut of natural gas in the US continues, the cost of electricity generation can potentially be low.  Cheap electricity would make it easier to fund residential solar subsidies.  Without growing electricity bills, consumers likely will not realize the pitfalls and true cost of residential solar subsidies.    I’m not highly certain as to what the subsidy situation will look like in the future.

From an investing perspective, I would definitely stay away from residential solar stocks like SCTY, RUN, VSLR and to a lesser degree ENPH.

Commercial politics

First Solar, helped to fund a study showing the superiority of utility-scale solar over residential solar.  The Brattle Group, the authors of the study, has put together a good infographic summarizing their arguments.

Comparing Benefits and Generation Costs of PV Utility- and Residential-Scale Solar (PRNewsFoto/The Brattle Group)

However, I would point out that First Solar has a vested interest in promoting utility-scale solar over residential.

  1. First Solar manufactures solar panels.  Its unique Cadmium telluride panels contain toxic chemicals.  Ideally at the end of the panels’ life, they should be disposed of safely.  This makes them less suitable for residential use.
  2. First Solar develops utility-scale solar projects.

Utilities would like to see more utility-scale solar because it would grow the size of their market.  If a utility develops utility-scale solar projects, it can earn a regulated return on capital on that solar project.  Utilities cannot do this for residential solar.

Analysts

Many of the residential solar stocks are burning through money and will need to raise equity capital.  Investment banks will continue to make a lot of money on underwriting fees if they were to continue raising equity for the residential solar stocks.  The analysts who work at the investment banks are incentivized to promote residential solar stocks in the hopes that their investment bank will be chosen to participate in underwriting efforts to raise capital.  (Technically investment bank analysts aren’t supposed to do this.  But they do it anyways.  Otherwise the investment bank’s business model for paying its analysts millions of dollars does not work.)

Basically, what I’m trying to point out is to be careful about the politics behind information on solar.  The politics can make it difficult to figure out the truth.

*Disclosure:  No position in the stocks mentioned.

Interesting links

Gridlocked by the power grid: Why Hawaii’s solar energy industry is at a crossroads

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One thought on “Residential solar makes little sense

  1. Pingback: Aren’t cars supposed to be flying by now? – Glenn Chan's Random Notes on Investing

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