Why invest in solar energy?
Just as Lebanon was plunged into darkness after two power plants were shut down due to lack of fuel, the problems related to traditional energies have been multiplying for some time. The megatrends point towards a drastic reduction of fossil fuels such as coal, oil or natural gas. In China, the share of coal in energy production has dropped from 75% in 1990 to 52% in 2021. The objective defined by the CCP is to reduce this production to only 5% by 2060. This is an ambitious goal that would be possible thanks to a very significant development of solar energy. The objective of the Chinese State is to go from 3% of solar energy at present to 23% in 2060.
Like any sector in strong growth, finding the future leader is an extremely complex affair if not impossible for the moment. The best solution is to gain exposure to the sector via a very strong diversification in order to take advantage of both the overall growth of the sector and the significant flow effect.
As you can see, solar energy is the fastest growing source of new energy capacity. According to BNEF forecasts, solar PV will produce 25% of the world's electricity by 2050, up from 2% today. The levelized cost of solar electricity has already fallen by 83% since 2010 due to dramatic technological advances and economies of scale. The cost of solar power will drop another 71% by 2050 (BNEF), making it by far the cheapest source of electricity.
How to simply invest in this industry?
In order to track the performance of this industry, we recommend the Invesco Solar ETF, which replicates the MAC Global Solar Energy as its underlying index.
The MAC Global Solar Energy Index focuses on companies that derive significant revenues from solar energy-related business activities, including the manufacture of solar cells and systems, producers of solar power equipment and components, and other companies that produce solar energy. These include the manufacture of solar cells and systems, producers of solar power generation equipment and components, providers of solar power system installation, development and financing, and/or the manufacture of solar energy charging and storage systems.
However, there are some risks to the industry. The solar energy industry can be significantly affected by fluctuations in energy prices, the supply and demand for alternative fuels, energy conservation, the success of exploration projects, tax incentives and subsidies, and other government regulations and policies. Moreover, let's not fool ourselves: while electricity generated by photovoltaics does not emit pollution in the process of converting solar energy into electrical energy, manufacturing, transportation, installation and recycling still have a very significant impact on the environment. In particular, the production of silicon, the primary component of photovoltaic cells, is highly criticized. But like any industry, technological advances are underway to hopefully minimise these effects.
Invesco Solar Energy has been tracking the MAC Global Solar Energy Index since April 2008. Over 10 years, the index has returned 255% or an annualized return of around 13.5%. Nevertheless, as with any fast-growing sector, volatility is a must, as evidenced by the 10-year high of 31 January 2021 at +349%.
Furthermore, if we take into account the management fee, the ETF has performed at around 10% per annum over the last 10 years
Invesco Solar Energy - Dist (-22.20% YTD)
- Ticker: TAN - ISIN: US46138G7060 - Price: $78.53 - PEA Eligibility: No - Expense Ratio: 0.69% - Currency: USD - Distribution policy: Distribution - Reset frequency: Quarterly - Assets under management: $2881M - Company: 54
About the Invesco Solar ETF:
At least 90% of its total assets are in securities, American Depository Receipts (ADRs) and Global Depositary Receipts (GDRs) that comprise the index. Market capitalization must be at least $150 million to be included in the index. In addition, the average daily trading value must be at least $750,000. Stocks are weighted according to the percentage of their revenue that comes from their solar operations. Thus, companies with "solar revenue" above 66% will weigh twice as much as companies with solar revenue below that amount.
- Enphase Energy Inc - 10.39% - SolarEdge Technologies Inc - 10.38% - First Solar Inc - 7.26% - Xinyi Solar Holdings Ltd - 6.83% - Sunrun Inc - 6.78% - Daqo New Energy Corp ADR - 3.52% - Shoals Technologies Group Inc - 3.49% - Hannon Armstrong Sustainable Infrastructure Capital Inc - 3.09% - Sunnova Energy International Inc - 3.03% - Array Technologies Inc - 2.94%
- United States - 52% - China - 19% - Spain - 7% - Taiwan - 4% - Germany - 4% - Israel - 4% - South Korea - 3% - Canada - 2% - Norway - 2% - Japan - 2%
P/E Ratio: 54 Forward P/E: 34 ROE: 13% Average Market Cap. Average Market Cap: $7.895MM