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The U.S. solar industry hit another milestone this year: There are now more than 20 gigawatts of solar capacity installed across the country, enough electricity to power 4.6 million households. The solar market continues to heat up, and bit by bit the technology is becoming a go-to source of new electricity capacity.
In the second quarter of 2015, the U.S. installed 1,393 megawatts of new solar capacity, according to a new report from the Solar Energy Industries Association (SEIA) and GTM Research, the third highest quarterly total on record. That puts the country on track to install over 7,700 megawatts for 2015, which would break a new record for the most capacity ever installed in a single year.
Driving the expansion for solar are ongoing cost savings. System costs fell by an additional 6 to 11 percent year over year for the second quarter. In fact, solar costs are falling by an average of 2 to 6 percent each quarter.
The bulk of the installations came from utility-scale solar. As a key tax credit expires at the end of 2016, the solar Investment Tax Credit (ITC), large-scale solar projects under development are at a record high. There are more than 5,000 megawatts currently under construction as developers rush to take advantage of the tax incentive before it lapses.
Of the 1,393 megawatts installed in the second quarter, 473 megawatts came from the residential market, a record high for that segment and 70 percent higher than the second quarter in 2014. As solar panels become cheaper, and financing becomes much more accessible -- such as no up-front costs -- more and more homeowners are choosing to go solar.
And it is not just the sunniest states like California and Arizona. In the second quarter, 10 states installed at least 10 megawatts each, up from just four states in 2013. In other words, solar is starting to spread beyond its traditional stronghold in the southwest.
One particularly interesting avenue for recent growth in the solar market is the "community solar" option. This allows people interested in solar to invest in projects that are not necessarily installed on site. For example, if your roof is shaded by trees, it doesn't make sense to purchase or lease solar panels. However, community solar, a relatively new concept, allows such a person to invest in a solar project elsewhere, and receive credit on their utility bills.
Community solar is on the verge of a breakthrough -- it could grow fivefold this year as it becomes an increasingly attractive option for renters, businesses, or other rate-payers that are unable (for a variety of reasons) to put solar panels on their own roofs. The community solar segment is still small, and dominated by just a handful of states, but it is starting to spread elsewhere.
(Full disclosure: I recently signed up for community solar where I live in Vermont. As a renter, I was unable to install solar on my home. I signed up for a small share of a community solar project that is located 60 miles from me. There were no up front costs, and I will save 7 percent on my monthly electric bill.)
Still small, but most preferred option
Although these numbers are impressive, an often repeated argument for dismissing the significance of the growth in the solar industry is that it is growing from a small base and still only represents a small slice of the entire electricity market. For example, solar accounted for less than 1 percent of total U.S. electricity generation in 2014.
While those arguments are all true, they ignore the fact that solar is increasingly becoming the preferred source of new power generation. According to the SEIA/GTM report, in the first half of 2015, solar alone accounted for 40 percent of all new electric capacity additions. That is because in many cases, solar is actually beating out fossil fuels on price.
In other words, while it is true that solar is still a small segment, we are witnessing a pivotal moment for electricity markets. After more than a century of fossil fuel dominance, in just a few short years solar has become one of the top choices for utilities when building new capacity. Having already beaten out coal and nuclear power, and even natural gas in some places, it is not hard to imagine solar becoming the de facto choice for new electricity in the near future.
With that said, the solar industry could hit a rough patch post-2016. After the expiration of the ITC, and the potential for an interest rate increase (which will increase the cost of capital), new solar additions could hit a lull. Furthermore, the EPA's Clean Power Plan, which sets limits on greenhouse gas emissions, will ultimately benefit the solar industry, but perhaps not until 2020-2021 when regulations kick in. Costs for solar will continue to decline with each passing year, but between 2017 and 2019, there is quite a bit of uncertainty for the sector as macroeconomic conditions and policies could create some headwinds.
However, SEIA and GTM are extremely bullish on solar power beyond 2020. The Clean Power Plan will take effect, accelerating the transition to solar. Most important, solar project costs will be far below where they are now, allowing solar to compete in all 50 states. Add to that the fact that energy storage will be much more competitive in the years ahead, which will allow solar to address its Achilles' heel.
The solar industry still has a long way to go in the U.S. It still only accounts for a fraction of the country's electricity generation. However, with costs declining and installations expanding, it is hard to see how solar will not be the technology of choice for the electric power sector over the long term.
By Nick Cunningham of Oilprice.com. 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.