How to invest in solar power: Adding clean energy to your portfolio
Solar energy has been heralded as the next big alternative energy source for decades. As prices for raw materials have come down, businesses and homeowners have plenty of options for buying solar panels and battery storage equipment. The government has also provided incentives for Americans to switch to solar power for their electricity use, which could help to reduce reliance on the power grid. Such measures can translate into growing revenue for solar panel manufacturers and other solar-related companies.
What is solar energy?
Solar energy is energy generated by the sun that can be converted into power, typically electricity. Solar is one of the most popular forms of renewable energy due to low purchasing costs for equipment, low maintenance, and its abundant source.
As electricity demand continues to rise amid climate change concerns, consumers are looking at alternative, clean energy sources to power their homes, businesses, and vehicles, and solar is a popular option.
Solar energy accounts for more than 3% of the electricity produced in the U.S.
How is solar energy produced and stored?
In the U.S. in 2020, the typical residential home used an average of 893 kWh per month, and usage is expected to increase as more homeowners switch to electric-powered vehicles and charge vehicle batteries at home. As of 2021, more than 3% of the total electricity produced in America came from solar. Some states, though, reported even higher percentages than the national average. Still, the overwhelming majority of electricity produced today comes from fossil fuels.
Solar power plants
Solar energy produced in the U.S. primarily comes in two forms: solar photovoltaics (PV) and concentrating solar-thermal power (CSP). Photovoltaics are the common type that is found on the rooftops of homes and commercial buildings and on arrays at solar farms.
Solar-thermal power comes from a facility in which mirrors direct sunlight onto the top of a tower, where water is heated to produce steam. That steam then powers turbines to produce electricity.
Solar storage
While the sun’s energy is almost limitless, the hours of sunlight are not. Solar power can immediately be converted into electricity during the day, but nighttime is problematic. Storing power generated by solar energy in batteries creates a supply of electricity available for homes and businesses at night. Tesla’s (TSLA) lithium-ion Powerwall battery storage device, for example, has an energy capacity of 13.5 kWh, which can meet about half of a typical American household’s daily electricity usage.
Where are the best places to collect solar energy?
Generally, areas closer to the equator are ideal, while the polar extremities are the least productive. Additionally, drier climates are better than areas with more frequent rainfall.
Global Solar Atlas’s map details areas where the sun’s rays are the strongest, and these could be among the best places for solar capture. The warmest places may not always be ideal because solar panels may not function as efficiently when the temperature is very hot in comparison to areas with moderate temperatures.
In the U.S., California and the southwestern states are ideal locations to collect solar energy.
What are solar mandates?
While there is no federal mandate on solar installation for homes, some states are taking the initiative. California, for example, requires the construction of any new homes to include solar panels.
Other states are trying to include solar as part of their future legislation and are offering incentives as well. Some states, such as New York, Arizona, and Florida, offer rebates to households that install solar panels onto their homes.
Still, every household can benefit from the federal solar tax credit. Rebates and tax credits have spurred demand for electric vehicles, and the same could happen for solar products and services.
How to invest in solar energy
There is no open market to trade in solar power directly. Residents may make some money from electricity generated from their panels by putting that power back into the grid, but it typically takes many such transfers to recoup the cost of solar panel installation.
The stock market provides ways to invest in solar via indexes, exchange-traded funds, and shares of companies involved in the renewable form of energy — ranging from production and installation to technology and materials.
Indexes that track solar
The MAC Global Solar Energy Index (SUNIDX) , by S&P Dow Jones Indices, is among the oldest benchmark indexes tracking solar, stretching back to December 2002.
Below is a graph of the index, showing that long-term investment in solar remains volatile, with enthusiasm peaking in 2007. Expectations tempered in the decade or so that followed. Solar investment saw a resurgence during the first two years of the COVID-19 pandemic in 2020 and 2021 as demand picked up due in part to government incentives and the affordability of home installation.
The MAC Global Solar Energy Index shows that long-term investment in the solar market has been volatile.
ETFs, on solar power equipment makers
Various money-management firms have started to provide ETFs focused on solar energy. The Invesco Solar ETF (TAN) was started in 2012 and tracks the MAC Global Solar Energy Index. Its largest holdings include companies such as Enphase Energy (ENPH) and SolarEdge Technologies (SEDG) , both of which manufacture equipment that transfers the power produced from solar panels to batteries for energy storage.
Stocks, from solar products and services to utilities
Some companies are starting to make a profit on solar products and services, including installations and battery storage devices. But still, for a few, the focus is on growth, and they may be unprofitable as they continue to spend and invest on expanding their operations. Sunrun (RUN) has been expanding its services and product offerings into states beyond its California headquarters.
Tesla, while famous for its electric cars, is also investing heavily in solar energy — from the manufacturing of solar panels to installation and energy storage with its Powerwall batteries. Still, the company’s solar operations remain a small business in terms of sales relative to its electric vehicles, accounting for 6.2% of total revenue in 2023.
Utilities such as PG&E (PCG) and Con Edison (ED) are diversifying their sources of energy to include solar, but capacity remains too small to differentiate revenue on electricity production by type.
The bottom line: why invest in solar energy?
In the U.S., the government—at both the federal and state levels—is helping to facilitate the growth of solar energy use by offering tax credits and rebates. These types of incentives are encouraging Americans to switch to solar for their electricity needs.
In August 2022, President Joe Biden passed the Inflation Reduction Act, and one of the provisions in the government’s vision for a clean energy economy included setting aside almost $400 billion, including tax credits, for spending on solar and other forms of renewable energy. That’s a significant boost for the solar industry and may provide support for companies and consumers alike. One of its clean energy initiatives is to have 950 million solar panels installed by 2030. More solar panels could translate into more power generation for electrolysis to produce hydrogen, another clean source of energy.
Overall, affordability—spurred on by lower costs for production and installation—should encourage Americans to place solar energy systems in their homes.
Proponents such as Tesla founder Elon Musk, who helped pave the way for the electric vehicle market, could help to popularize the use of solar energy. Yet, much like the electric vehicle industry, government is a force for investment, and as long as legislation is enacted to promote the use of solar, demand for solar services and products should continue to rise.