Morgan Stanley
  • Research
  • Jan 23, 2015

The Economics of Solar Power Are on the Rise

Understanding solar demand requires a framework that incorporates local regulatory dynamics, installation costs and operating conditions into a global map of specific conditions and variations on the ground.

Morgan Stanley Blue Papers, a product of our Research Division, involve collaboration from analysts, economists and strategists across the globe and address long-term, structural business changes that are reshaping the fundamentals of entire economies and industries around the globe.

For the first time, the cost of generating electricity from the sun can compete with traditional sources of power in a number of key markets. Add to this equation breakthrough advances in battery technology, and sustainable, clean and dependable solar power can increasingly become a practical, cost-effective way to meet the ever-growing global demand for more energy.

Understanding that growth potential requires a nuanced model of solar energy’s fragmentation. The sector naturally favors sun-drenched regions with less volatile weather, but over the years, the biggest key to growth has been regulatory and financial incentives, such as favorable tax policies. Building a framework that incorporates local regulatory dynamics, installation costs and operating conditions into a global map of specific conditions and variations on the ground can shed light on sustainability trends, energy policies and markets, and investment strategies.

Demand for solar power is expected to grow by an average of 47 gigawatts per year from 2014 through 2020. The lion’s share of that—39 GW a year—is attributable to six markets: the U.S., Europe, China, Japan, India and Brazil. This same group saw demand grow by 36 GW in 2013, while globally, demand grew by 40 GW.

Solar Currents in Flux

China is forecast to make up 27% of that demand, not a surprise given the government’s generous backing for the solar industry in recent years. The country’s unprecedented rate of economic growth over the past two decades has come at a heavy price to its environment. Ironically, China’s current focus on pollution and emissions could slow its solar industry. “Our projected solar demand in China is below industry levels due to our view that the Chinese government will seek to grow solar at similar rates to nuclear and wind to minimize the cost of achieving emission reduction goals,” says Simon Lee, head of Morgan Stanley’s Asia Pacific utilities research team.

Indeed, the factors that affect solar power growth remain in flux from nation to nation. For example, Japan is currently reviewing its solar subsidies, with potential downside for solar, while the limited availability of suitable land for solar generation could curb growth in India. In Europe, a slowdown in Germany is expected to offset solar growth in other countries in the region.

US demand for solar power is a bright spot. “We are relatively bullish on solar demand growth in the US,” says Stephen Byrd, head of North American research for the power and utilities and clean energy industries. He cites strong and improving rooftop solar economics and the likely continuation of key tax breaks. “In the long term, we believe solar power will be economic in some US states without any form of subsidy,” Byrd says.

Rooftops and Batteries

The growth of the solar rooftop market, not just in the US, but all over the world, should become a major driver of demand and hold out the biggest promise for solar growth. Large scale “solar plantations” will continue to offer big jumps in capacity that help lower the overall cost of solar relative to other energy sources, but the small scale attraction of independent rooftop solar setups for private homeowners and small or midsize businesses could mark a shift in perception for the everyday viability and sustainability of solar power. Seeing neighbors with solar panels on their rooftops and knowing what that means to energy bills, home values and social values shifts the conversation about solar from abstract and inaccessible to concrete and practical.

Substantial advances to energy storage technology is helping to make rooftop solar that much more attractive. Fittingly, the advances have emerged from the fuel-hungry auto industry. Innovations in hybrid and electric vehicles over the past decade have had to contend with the battery problem: how to create relatively small, but long-lasting, fast-charging, durable and scalably priced batteries for vehicular workhorses? It turns out that what works for fast cars may be perfect for power-hungry homes and offices.

The power-storage solution resolves a nagging issue with many renewable energy sources: variability of output. The sun sets, and the wind doesn’t always blow. Generated power usually flows right into the grid, but when you most need it, consumers have to draw down from some upstream power plant that burns coal or natural gas.

Cheaper, more convenient, high-capacity batteries allow renewable power to go completely off-grid. This development is radical enough that it could eventually disrupt utilities in both the US and Europe, says Byrd. “In the US, Hawaii and California represent the greatest opportunity for going off-grid due to their significantly higher electricity rates and strong solar conditions,” he says.

That’s the kind of solar revolution that just might redefine the whole idea of “energy independence.”

Morgan Stanley Research has written a Blue Paper , “Solar Power & Energy Storage: Policy Factors vs. Improving Economics” (Jul 1, 2014). Explore more Ideas and Research, or contact your Morgan Stanley representative for the full report. Find a Financial Advisor to discuss your investment goals and strategy.

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