Solar energy has emerged as one of the best options to meet growing power demand while cutting emissions, but has it also become one of the best options to generate investor returns without volatile financial risk?
The answer is a resounding yes, according to Mercom Capital Group, which tallied $26.5 billion in solar project investment from corporate funding sources during 2014.
That’s an astounding 175% increase over 2013, when Mercom counted just $9.6 billion. “The solar sector has come a long way from being perceived as a speculative high risk investment to attracting investors based on low risk attractive dividend yields,” said Raj Prabhu, Mercom CEO.
Solar Investment Surges, Led By Venture Capital
Venture capital funding was far and away the biggest contributor to solar’s financing surge. Developers secured more than $1.3 billion in 85 deals, more than twice the $612 million raised in 98 deals during 2013, and the highest amount since 2011.
Downstream solar companies (i.e. solar installers and direct consumer distributors) attracted the largest chunk of VC dollars by pulling in $1.1 billion across 44 deals. Sunnova Energy netted nearly half this amount with $505 million, followed by Sunrun with $150 million, Renewable Energy Trust Capital with $125 million, Sungevity with $72.5 million, and GlassPoint Solar with $53 million.
The remaining investments were split between solar photovoltaic (PV) technology companies ($75 million in 12 deals), balance of system companies ($73 million in 7 deals), concentrated solar power companies ($59 million in three deals), and thin film solar companies ($52 million in nine deals). “The big story coming out of 2014 was the revival of capital markets,” said Prabhu.
Indeed, this growing variety of funding sources is an important trend. Beyond the VC increase, financing activity increased in nearly every other sector:
- Public markets set a record with $5.2 billion across 52 deals in 2014, nearly twice 2013’s $2.8 billion in 39 deals.
- Debt financing more than tripled to $20 billion in 58 deals, compared to $6.2 billion across 38 deals in 2013.
- 34 residential/commercial solar project funds worth $4 billion were announced in 2014, 21% higher than 2013’s $3.3 billion.
- More solar mergers and acquisition transactions were completed last year than any year since 2011, with 116 transactions involving 96 companies.
- 4 gigawatts of large-scale solar projects changed hands in 2014, up 38% year-over-year from 2013.
“Solar companies were able to access funding through multiple avenues like venture capital, public markets, IPOs and debt in record numbers while the quest for lower cost of capital continued with Yieldcos and securitization deals,” said Prabhu.
Stable Returns, Or Volatile Investment Risk?
Beyond merely increasing returns by expanding installed renewable energy capacity, solar funding’s surge underlines the growing allure of clean energy to hedge investments against volatile fossil fuels.
By their very nature, renewables are a safer investment than fossil fuels. Once a solar project is built, it generates consistent revenue to pay down defined costs over time, especially if the project is selling power through long-term power purchase agreements. The commodity used to generate power – sunlight – is free and investors can bank on stable returns.
Now compare renewables to fossil fuels. While the same long-term payback equation is similar, in that total project costs are known once it’s completed, the commodities used to generate power (and thus ongoing revenue) are wildly volatile and subject to market forces.
The United Nations recently said falling oil prices show the “high risk” of fossil fuels compared to renewable energy. Consider the nearly $200 billion in debt U.S. oil and gas producers have racked up during the shale boom now at risk of default as oil prices plunge – an estimated $11.6 billion potential loss from junk bonds alone.
Don’t Forget About The Carbon Bubble
Price volatility doesn’t even get to the long-term risk of fossil fuel investments, namely climate change. A new study shows 82% of the world’s coal reserves must stay in the ground to prevent dangerous climate change, while financial analysts HSBC say 40-60% of total oil and gas market capitalization is at risk from the carbon bubble. As a result, major institutions are starting to shift toward fossil fuel divestment to minimize exposure.
Renewables have faced misperceptions about financial viability for years, and investment risk is one of the biggest criticisms facing the divestment movement. But neither of these themes can persist if we’re truly going to transition to a clean energy economy. Good thing then, that Mercom just highlighted more than 26 billion reasons both are wrong.