Unexpected events that upend an industry, known as black swans, can come out of nowhere with almost no notice. That's what makes them black swans.
Any industry is at risk of a black swan event, and there seems to be a world of momentum right now for a possible black swan event in the renewable energy industry.
The first leg of the black swan
A black swan event is rarely a single event. Instead, it is a number of occurrences that happen in unison to create an unpredicted outcome.
For a black swan event to hit the renewable energy industry, I think it would need to be led by a further decline in fossil fuel prices. Natural gas and coal are the two most direct competitors to solar electricity, but the impact of oil on the solar market shouldn't be understated.
I'll start with natural gas and coal. These are the two dominant energy sources both in the U.S. and in growing markets like China. If these energy sources actually fall in cost, it would pave the way toward convincing countries that they're cheaper than solar to build for immediate energy needs.
Oil isn't usually a direct competitor to renewable energy like wind and solar, but it's a psychological competitor. If you're suddenly hit with $4 or $5 gasoline, you're more likely to buy an electric vehicle, or even put a solar system on your roof, two changes that often come together. On the other hand, if gasoline is below $2 per gallon, and energy costs and security don't appear to be a concern, then consumers, businesses, and utilities will see less urgency in buying renewable energy.
What could break renewable energy
Lower prices from competing energy sources have to be part of the equation. But the real catalyst of a black swan event for renewable energy would be a dramatic reduction in government subsidies and mandates, particularly in the U.S., Germany, and Japan.
If you want to see just how important subsidies still are to the solar industry, for example, look at GTM Research's predictions for future installation levels. Notice that 2017's massive reduction in installed capacity coincides with a 30% investment tax credit dropping to 10% for commercial projects, and 0% for residential systems in the same year. If China's commitment to renewable energy wanes, and generous Japanese feed-in tariffs are reduced at the same time, it could be catastrophic for renewable energy.
The risk is similar across the spectrum of renewable energy sources. When the production tax credit for wind generation lapsed in 2013, the rate of installations dropped 92% from the year before.
Sources of renewable energy are becoming more cost-competitive every year, but they're still dependent on government subsidy and policies that give them access to the grid. If currently favorable policies end, the industry could be in trouble quickly.
The risk of a black swan event today
Given the progress renewable energy sources like wind and solar have made in the past few years, and the number of people employed in the industry around the world, I think the risk of a black swan is far lower than it may have been a few years ago. But that doesn't mean the industry is without risk at all.
Knowing where to look for risk and what could send the renewable energy industry tumbling down is good for investors, even if the risk of a black swan event is low today.
Travis Hoium owns shares of SunPower. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.