For more than a decade, solar has been one of the highest-potential growth opportunities in the energy sector. That's worked out well for some companies and ended badly for others, but amid the turbulence, this industry has gone from a nascent technology to a true powerhouse in energy.
When I'm looking at solar energy stocks, I like to keep in mind the scale of the industry and the trajectory of where its costs are headed. Here are seven facts that tell a lot about where solar energy is going. They may even change your opinion of the industry's long-term potential.
Seven facts about solar energy
Every hour there's enough solar energy hitting the Earth to replace all other energy sources humans use. All natural gas, coal, oil, wind, and biomass energy consumption could be replaced in just one hour. Put another way, if we could capture just 0.01% of all solar energy hitting the Earth's surface each year, we could replace all other fuel sources.
According to the International Renewable Energy Agency, there were 586.4 gigawatts (GW) of grid-connected solar in the world at the end of 2019, enough to power 111.4 million U.S. homes.
A levelized cost of energy analysis by Lazard estimates that the unsubsidized cost of electricity from utility-scale solar energy is now between 3.2 cents and 4.2 cents per kilowatt-hour (kW-hr). For comparison sake, natural gas is 4.4-6.8 cents per kW-hr, coal is 6.6-15.2 cents per kW-hr, and nuclear energy is 11.8-19.2 cents per kW-hr. There's no question solar energy is cost-effective on a large scale.
According to the U.S. Energy Information Administration, solar electricity generation has grown 1,046% since 2010 to 1,043 trillion BTUs in 2019. And this figure may actually understate the industry's growth because the EIA has not until recently accounted for rooftop solar, only utility-scale solar.
The average cost per watt of residential rooftop solar after tax credits is $2.91 in the U.S., according to Energy Sage. That's down 20% in the last five years. Not surprisingly, costs can be significantly lower in some states, with Arizona leading the way at about $2.50 per watt.
According to Wood Mackenzie, a commodity multicrystalline silicon solar panel costs just $0.20 per watt globally, or $0.21 per watt in the U.S. Higher-efficiency mono-PERC modules cost a bit more ($0.41 per watt in the U.S.). That's down over 99% from about $30 per watt in 1980.
Where does the solar industry go from here?
You can see above that solar energy is cost-competitive with fossil fuel electricity generation on the utility-scale and can provide cost savings for homeowners in the U.S. as well. This is what should drive solar manufacturers like First Solar (FSLR -4.06%), SolarEdge, and Canadian Solar (CSIQ -6.21%), as well as installers like Sunrun (RUN -7.39%) and SunPower (SPWR -6.40%).
Not all companies are guaranteed to be winners for investors, but in a disruptive business like solar energy, there should be some standouts long-term.
What stocks should you buy in solar energy today?
I don't think every company in solar will outperform long term, but a few are set up for success. In residential solar, I like SunPower's value versus Sunrun (which I outlined in detail here) and its asset-light model of working with dealers all around the world. That will allow SunPower to focus on technology advancements without the burden of spending hundreds of millions of dollars on manufacturing year after year.
In solar manufacturing, I think Canadian Solar is well positioned with more scale than competitors at 16 GW of module capacity planned by the end of 2020. And it has lower costs and better margins than most solar manufacturers, including First Solar. That bodes well for the company long-term and should drive further market share and technology gains.
Asset owners shouldn't be left out of your investing mix either. Brookfield Renewable (BEP -2.18%) (BEPC -2.91%) is one of the largest renewable energy asset owners in the world and is growing its solar presence, including the acquisition of TerraForm Power. Owning solar energy assets are a great way to play the industry without the risk of manufacturing and technology companies and Brookfield Renewable Partners has a long history of adding value for investors through organic growth.