A key element in the adoption of renewable energy sources, including solar and wind, is declining costs. Specific to solar, previously high production costs made the idea of widespread adoption a difficult proposition to envision.
Put simply, why would utility companies adopt pricier renewables and pass those higher costs along to consumers if fossil fuels, such as coal, were more cost-effective? The cost scenario is rapidly reversing in favor of renewables. Late last year, Lazard published a research report noting the cost of producing one megawatt hour of solar electricity decline to $50, well below the $102 per megawatt hour for coal.1
Data confirm that declining costs for renewables are in fact coupled with increased adoption. Last year, renewables, including solar, wind and other sources, accounted for 12% of all power generated around the world. Solar capacity grew at a faster rate than any other fuel source, including fossil fuels, according to the United Nations Environment Programme (UNEP).2
Source: Business Insider, as of Dec. 31, 2018
Solar Growth Drivers
The UNEP report also notes that solar garnered $160.8 billion in investments last year on a global basis, with China accounting for a significant percentage of that sum. China’s economic boom has come with significant pollution costs, but policymakers there are taking a proactive approach to reducing the country’s pollution burden.
More than 60% of the world’s solar panels are manufactured in China, but the country still generates two-thirds of its electricity needs from coal3, indicating the China solar opportunity set is potentially massive. China is taking the move to renewables from carbon fuels seriously. The country had a solar adoption goal for the year 2020. “Had” is the word to use because the China met that solar adoption target last year.
Here in the U.S., declining solar prices are facilitating increased adoption around the country.
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“The cost to install solar has dropped by more than 70% since 2010, leading the industry to expand into new markets and deploy thousands of systems nationwide,” said the Solar Energy Industries Association (SEIA). “Prices as of Q2 2018 are at or near their lowest historical level across all market segments. An average-sized residential system has dropped from more than $40,000 in 2010 to nearly $17,000 today.”4
California, the most populous U.S. state, is leading the way when it comes to domestic adoption of renewable energy sources. The state likes to boast its clean energy industry employs half a million workers, or more than 10 times the total of coal jobs in the U.S.
More importantly for investors mulling the alternative energy space, California walks the walk when it comes to clean energy adoption. The state recently signed into a law a new $800 million fund for clean energy technologies. After factoring in federal and state tax credits combining for $5,500, Californians can expect to pay about $4,500 for residential solar battery systems.5
Globally speaking, solar and wind are well on their way to becoming more cost-competitive with fossil fuels.
“Wind and solar PV will become competitive with marginal fuel costs of gas- and coal-fired plants by 2040 in many markets,” said IHS Markit. “Renewables have already emerged as the most cost-competitive source of new generation in numerous markets across Latin America, the Middle East, Europe, and Australia. Upward pressure on the cost of conventional fuels will continue to drive the cost competitiveness of renewables.”6
Falling Costs, Rising Opportunity
The ALPS Clean Energy ETF (ACES) offers exposure to seven thematic areas of the renewable energy investment landscape, including solar and wind. At the end of the second quarter, the index ACES targets allocated 48.72% of its combined weight to solar and wind companies.
1 Source: Lazard Nov. 2, 2017 https://www.lazard.com/perspective/levelized-cost-of-energy-2017/
2 Source: UNEP https://www.unenvironment.org/
3 Source: BBC Sept. 4, 2018 http://www.bbc.com/future/story/20180822-why-china-is-transforming-the-worlds-solar-energy?ocid=twert
4 Source: SEIA https://www.seia.org/solar-industry-research-data
5 Source: New York Times Oct. 2, 2018 https://www.nytimes.com/2018/10/02/us/california-today-solar-power-fund.html
6 Source: IHS Markit Oct. 2, 2018 https://ihsmarkit.com/research-analysis/unpacking-the-cost-of-renewables.html
Important Disclosures & Definitions
Investors should consider investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information. For a prospectus for the above listed fund, please click here. Please read the prospectus carefully before investing. For additional information on the above listed fund, please click the respective link.
Standardized performance for the ALPS Clean Energy ETF (ACES) can be found here. Current holdings for ACES can be found here.
Shares are not individually redeemable and the owners of shares may purchase or redeem shares from a fund in creation units (blocks of 50,000 shares) only.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of ALPS Advisors, Inc. In addition, ALPS Advisors, Inc. assumes no responsibility to ensure the accuracy of the content written by the author.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus.
NACEX Index – The CIBC Atlas Clean Energy Index is an adjusted market cap weighted index designed to provide exposure to a diverse set of U.S. or Canadian based companies involved in the clean energy sector including renewables and clean technology.
One cannot invest directly in an index.
The fund is new and has limited operating history.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Clean Energy ETF.
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