If cheap gasoline at the pump is here to stay, is the solar industry in trouble?
The market certainly thinks so. You can see in the chart below that solar stock prices have tumbled in unison with gas prices. But gas and solar may not have as much in common as you think, and the market may be getting this energy trade wrong.
Not all energy is created equal
The first difference between solar energy and energy from gasoline is that they serve different markets. Gasoline primarily serves the transportation market, and solar panels produce electricity that flows into the electric grid. Unless you're charging an electric vehicle with your solar panels, there's little crossover between the two.
The big exception is on islands like Hawaii and in the Caribbean, or in the Middle East, where oil is an export. These places use oil to produce electricity, and that may compete with solar electricity. But there's one important distinction in those regions. They have some of the most expensive electricity in the world. Hawaii's electricity from the grid costs about triple the national average, so even if oil and gasoline costs fall 50%, they're still not cheaper than solar energy in that market.
The gas and solar markets are structurally different
Another big difference between gasoline and solar energy is how they're priced. Gas prices change daily at the pump, and even stations a mile or two away may have different prices.
When First Solar (NASDAQ:FSLR) or SunPower (NASDAQ:SPWR) build a large solar plant, they get a guaranteed price for 20 years or more. Even residential systems are built based on net metering, which is offsetting steadily growing electricity prices. Unless the system doesn't perform up to plan, the rate of return is very predictable for solar power plants.
In fact, as gas prices were plunging during the second half of 2014, the solar industry was having its best year ever in the U.S. Gas and solar certainly aren't tied at the hip.
The one energy source that could hurt solar stocks is natural gas, but even there, the risk of falling prices is fairly low.
Where solar could be hurt by energy prices
The one energy source that competes with solar energy on a heat to head basis is natural gas. When utilities are deciding what kind of energy to add to the grid each year, it's often solar and natural gas that are the lowest-cost options today. But you can see in the chart above that growth hasn't been hampered by low natural gas prices.
In fact, solar energy and natural gas are often complimentary. Solar Energy is an intermittent source of electricity, and natural gas plants often fill the gap in energy production for the grid. Until energy storage becomes truly cost effective, these two energy sources will be tied at the hip.
Next time you see oil, gasoline, or natural gas prices falling, don't think it's the end of the solar revolution. Solar energy has less to do with those energy sources than you think, and at the rate the industry is cutting costs, it's only a matter of time before it's cost-effective to go solar in most of the country.
There's still a lot of growth potential for getting energy from the sun, and investors shouldn't miss out.