When most people talk about wind and solar energy it's a safe bet that the topic of climate change isn't far behind. Scientists have roundly concluded that high carbon dioxide levels in the atmosphere are changing the world's climate, and the predicted consequences are anywhere from bad to terrible if the trend continues.
But not everyone believes in the scientific evidence of climate change and, even among those that do, there are varying opinions of the role of fossil fuels and how much renewable energy could help. Worse yet, the entire issue has become politicized, making it even harder to have a rational conversation about climate change and renewable energy.
Stuck in the middle are wind and solar energy, which should have a bright future but have become hot-button issues simply because of the political debate around climate science. While I believe in the benefits of wind and solar for our environment, I think invoking climate change in the discussion today clouds a debate that should be had over the growing economic viability of these energy sources. Instead of talking about climate science, wind and solar players should be talking about dollars and cents, where they're winning the battle against fossil fuels.
Preaching to the choir
In the early days of the wind and solar industries raising the environmental angle was necessary for solar companies and environmentalists pushing for more renewable energy. Wind and solar, in particular, had this clear advantage over burning fossil fuels when it came to the environment, but they couldn't compete with fossil fuels on cost alone. According to analysis by Lazard, as recently as 2009 it was twice as expensive per kW-hr to build a solar plant than it was to build a natural gas plant and wind was only cost competitive with natural gas in very windy locations.
For those who didn't believe in climate change or had a vested interest in the fossil fuel industry it was hard to argue that higher energy costs were justified because of environmental benefits alone. The entire debate became political, making it divisive for either side to make a logical argument. But the debate may be changing faster than you realize.
The renewable energy debate has changed
In the last few years, the debate in wind and solar energy has become less about climate change -- although that's often heralded as a benefit of each industry -- and more about economics. When SolarCity (NASDAQ:SCTY.DL), Vivint Solar (NYSE:VSLR), or SunPower (NASDAQ:SPWR) try to sell you a solar system for your home the first thing they point to isn't the impact on climate change, it's how you can save money. And they're focused on cutting costs continuously to stay competitive. For example, SolarCity has cut its installation costs by 40% in the last two years alone with plans to cut costs another 13% by 2017.
According to Lazard's annual analysis of the levelized cost of energy, it now costs about the same on a per kW-hr basis to build a utility-scale power plant as it does to build a natural gas plant. You can see below that the cost of solar energy has dropped dramatically in recent years while natural gas costs have remained flat.
The next chart shows that wind energy is even cheaper than solar and has also been reducing costs over the past five years. In many locations, wind is actually the cheapest new energy source today. Texas, for example, has been the heart of the country's wind boom and in 2014 the state installed 1.1 GW of new wind capacity and got 10.6% of its electricity from the wind.
Another analysis by GTM Research and the Solar Energy Industries Association found the cost of residential solar systems has dropped by 50% in the past five years; large-scale system costs have dropped by 62% over the same time frame. Both are winning business today because they're the lowest-cost energy options for homeowners and utilities, respectively.
As an investor, I'm not invested in solar energy because of its environmental benefits; I'm invested in solar energy because it's an abundant resource that is cost competitive today and is reducing costs more quickly than any other major energy source. Those factors should drive the discussion, not climate change.
Investors should forget politics and follow the money
The irony of Wall Street today is that its often still blinded by the political debate about wind and solar and has lost sight of the fact that these are now economically competitive energy sources. But the renewable energy industries could help that discussion by transitioning the focus to the financial benefits they offer over fossil fuels.
On the economic front, they're winning the battle against fossil fuels, and anything that obscures that fact only distracts from the progress being made. I think the entire renewable energy industry would be better served by using concrete economic arguments to persuade skeptics into becoming believers in the long-term benefits offered by wind and solar. Trying to convince climate change deniers that wind or solar is good for them because of the very climate change they don't believe in is a losing argument. It only politicizes energy sources that could stand on their own on economics alone.
At the end of the day, wind, solar, biofuels, or any other renewable source of energy will have to be cheaper than fossil fuels to win over America and the rest of the world, so impacting climate change is just an added bonus. I think the entire renewable energy industry and its investors would be better off having an honest discussion about why renewable energy is winning on the basis of dollars and cents; because there are millions of people (and investors) who still don't understand that even something as crazy as solar energy could save them money today. Educating people on that fact should be priority No. 1.