Is one of the fastest-growing elements of the clean energy revolution in danger?
In a new report published this year, The Conference Board investigated this question, taking an in-depth look at the solar energy industry and the problems posed by growing overreliance on solar technology in the United States and beyond.
Given the relatively low cost of solar energy, it makes sense that both individual households and entire companies would be drawn to it as a power source. The combination of solar’s cost effectiveness and the mounting threat of climate change has led to an economy in which solar technology seems to offer the best of both worlds. This should be good for the planet and for investors in clean energy stocks, right?
Well, as The Conference Board warns, this growing emphasis on the clean low-cost energy source could create significant volatility across energy markets, leading to “a continued reliance on nonrenewables.”
That is because solar companies currently face a unique challenge: Power grids aren’t in alignment with current use and demand. Too much energy produced leads to wasted resources while too little can mean blackouts. This system can put both solar producers and consumers at risk. In the worst-case scenario, it could mean severe consequences that span beyond the U.S.
The World Bank notes that historically, when energy prices have surged to dangerously high levels, it has made food and other essential goods unaffordable. This is due to rising transportation costs and factory outages. Other consequences include a lack of electricity, stopping children from studying and business from being conducted.
According to experts, though, there are ways to help this problem. Conference Board Senior Economist Alex Heil, author of the report, told InvestorPlace that there are two key things that will address supply-demand imbalances with solar power. First, U.S. energy grids need diversification. Second, the U.S. needs more adequate energy storage solutions.
This means that, for investors, there’s ample opportunity not just in solar stocks but in their energy storage peers. Heil told InvestorPlace:
“Solar is going to need other technologies that work with it […] I think there’s going to be a lot of research, development [and] implementation of storage in particular. That might be storage on a distributed grid basis, as well as on a more utility level. And I think that we’re just in the early stages of seeing storage being discussed as the necessary investment that it’s going to be.”
Energy Storage: Why It Matters
It has become increasingly clear that power grids must be handled carefully by policymakers who seek to increase the nation’s reliance on renewable energy sources. A 2024 academic study argues that the 2021 Texas power grid failure — which led to over 200 deaths across the state — highlighted the need for rebalancing. This suggests that if the state had prioritized rebalancing its grid prior to the meltdown, the crisis could have potentially been avoided, or at least made less severe.
Like many economic matters, grid rebalancing centers around supply and demand. In this case, the objective is to consistently balance the energy supply generated by clean sources such as solar with demand from consumers.
One of the primary challenges in grid balancing is the ability to store the excess energy. AZO Cleantech defines grid balancing as being “the task utility companies have of supplying the correct amount of electricity to the grid.”
Keeping the generation and consumption of renewable energy sources perfectly balanced is difficult and, sometimes, simply not feasible. In these instances, storing excess energy is critical to prevent blackouts and for keeping grids operational. Energy storage refers to the process of accumulating energy in a specific system of equipment with the purpose of deploying it at a later time when it is needed.
For solar, the technology helps keep energy flowing in times of darkness and helps make the flow of energy to the grid consistent. Recent reports show that this is true on both the consumer side — referred to as “behind the meter” (BTM) — and the utility side, or “in front of the meter.” For businesses that depend on solar energy, this means less reliance on the power grid as well as on fossil fuels. Deloitte noted in a 2023 report:
“Technological breakthroughs and evolving market dynamics have triggered a remarkable surge in energy storage deployment across the electric grid in front of and behind-the-meter (BTM) […] Battery-based energy storage capacity installations soared more than 1200% between 2018 and 1H2023, reflecting its rapid ascent as a game changer for the electric power sector.”
If the current clean energy transition is to continue, solar energy will continue to be at the forefront. But scaling solar energy’s growth cannot happen unless the energy storage industry keeps pace with solar firms, allowing energy producers to store the clean energy and thus help rebalance power grids at a crucial time.
Patrick Knight, National Vice President for Solar and ESS strategy at Rexel USA, told InvestorPlace:
“The addition of battery storage in both the commercial and utility space will allow solar power to exist as a net positive for longer hours, help reduce excess demand on the grid, and allow businesses to take control of their energy costs […] Ultimately, the advancement of battery storage technology allows the solar market to vastly increase its viability.”
This means savvy investors may want to consider leading energy storage providers like Fluence Energy (NASDAQ:FLNC) and Enphase Energy (NASDAQ:ENPH). These companies will likely benefit from a surge in demand as the need for energy storage solutions intensifies. As evidence of this, French utility giant Engie (OTCMKTS:ENGIY) selected Fluence as its partner on a large-scale energy storage project at a power generation plant in the Netherlands.
If the energy storage industry can continue to grow and innovate, it can significantly benefit not just solar energy stocks but the entire clean energy sector.
Beyond Storage: Solar Stocks Are Still Worth Investment
The potential for energy storage developments is why experts remain bullish on solar stocks.
After 20 years of investing in solar energy, Esplanade Capital President and Chief Investment Officer Shawn Kravetz sees the industry as being in an interesting and overall promising situation, even with the problems it faces regarding overreliance and grid disruptions.
At the time of our conversation, Esplanade held positions in several solar stocks, including names like First Solar (NASDAQ:FSLR) and Sunnova (NYSE:NOVA), which have both actually outperformed the S&P 500 in the past month. It makes sense that investment firms would be bullish on these stocks. Both companies maintain consensus strong buy ratings from Wall Street. Fellow solar energy stocks NextEra Energy (NYSE:NEE) and Brookfield Renewable Partners (NYSE:BEP) also hold consensus buy ratings.
Wall Street’s interest in solar energy investing makes sense. Early in 2024, a report from the U.S. Energy Information Administration (EIA) showed that solar and wind technology would likely lead the growth of power generation in the U.S. for the coming two years. Specifically, the report forecast that “U.S. solar power generation will grow 75% from 163 billion kilowatthours (kWh) in 2023 to 286 billion kWh in 2025.”
If that is true, those invested in solar energy now will be in an excellent position.
One Final Thing: November Could Bring a Solar Storm
The upcoming 2024 U.S. presidential election will likely generate some uncertainty for solar stocks. That’s because former President Donald Trump is significantly more likely to prioritize policies that favor the fossil fuel industry, home to many of his campaign donors. Recently, the former president promised fossil fuel executives that he will roll back President Joe Biden’s environmental policies in exchange for $1 billion in campaign contributions. As The New York Times reports, this would likely mean the elimination of solar and wind power tax credits. Trump’s plan would also likely include major changes to the Inflation Reduction Act (IRA), which has various clean energy incentives for Americans.
This could certainly give some investors pause regarding solar energy stocks. However, the stock market’s current performance suggests that victory will be likely for incumbent Biden, especially as the U.S. economy continues to grow. Biden has made it clear that he believes in prioritizing clean energy development, including solar. In this vein, the White House recently announced plans to raise import tariffs on solar panels, which will likely provide a boost for domestic solar manufacturers.
As long as the White House remains under Democrat leadership, solar energy stocks are likely to benefit. And energy storage companies will have plentiful opportunities to grow as the U.S. keeps transitioning toward a solar-powered future.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.