Solar power may no longer need the training wheels.

Spurred by tax breaks, as well as venture funds pouring billions into startups, solar is going mainstream. Despite sun power generating only about 2% of total U.S. energy output, signs of market growth have convinced many — including Bill Gates — to call for the government to end subsidies, and shift them to energy technologies that need a boost. 

“The economics have steadily surprised people,” Mike Jacobs, a senior analyst at the Union of Concerned Scientists, told Karma. “The adoption of solar is no longer being driven by state requirements, because it makes economic sense.”

Falling panel prices mean that now more than 2 million are installed in the U.S., a total that doubled in only the past three years, according to Wood Mackenzie Power & Renewables and the Solar Energy Industries Association. Reaching 1 million panels took 40 years.

Solar should surpass 2% of total U.S. generation next year, the U.S. Energy Information Administration said earlier this year. Over this year and next, another 10 gigawatts of capacity are expected to be installed, the EIA said.

Social-impact investors see plenty of opportunities in the growth of the sector. Not so much in making and installing panels — those areas are well-established — but in energy storage, data and financing. 

“The adoption of solar is no longer being driven by state requirements, because it makes economic sense.”

Venture investments in so-called cleantech, which includes solar, nearly doubled to $15.1 billion last year, from $7.65 billion in 2017, according to PitchBook. So far this year, $8.9 billion has been raised. Investments in green bonds that fund projects including solar are also soaring, heading for a record $200 billion this year.

VC firm Congruent Ventures looks to invest in startups that share one trait — they develop products and ideas that work toward sustainability. Clean Energy Ventures, which backs early stage, clean energy startups, announced on Oct. 15 that it raised $110 million — $35 million more than anticipated — to invest in climate-friendly energy startups.

“Some segments like residential and utility scale development are healthy,” Joshua Posamentier, Congruent’s co-founder and managing partner, told Karma. “In the small business sector there isn’t the same access to financing. There’s a real opportunity to do something to open up this sector.”

Tax Credits: Kill ‘em or keep ‘em?

The planned reduction of U.S. government tax credits, which the industry is fighting to extend, has brought the sustainability of the sector to the fore. The Investment Tax Credit allows the owners of new residential and commercial solar systems to deduct 30% of the cost from their federal taxes. The deduction is scheduled to drop to 26% next year and 22% in 2021. From 2022, the deduction will be 10%, and only apply to commercial buyers.

Extending the tax credit would stimulate an additional $87 billion in private sector spending and add 113,000 more American jobs than baseline estimates by 2030, according to a report the Solar Energy Industries Association and Wood Mackenzie Power & Renewables released on Sept. 24. U.S. solar capacity is still projected to double in the next five years even if the tax credit is tapered off, according to Wood Mackenzie.

“We will see growth in solar, even after the 30% tax credit expires,” Chris Namovicz, the team leader for renewable electricity analysis at the U.S. Energy Information Administration, told Karma. “Solar costs have fallen. Battery costs appear to be going down as well.”

U.S. solar installations are expected to increase by 14% this year to more than 12 gigawatts of new panels being put in place, Wood Mackenzie said. Annual installations will climb to 15.8 gigawatts in 2021 before the residential tax credit expires. Installations will dip to just below 14 gigawatts in 2022 and top 15 gigawatts again by 2025, according to estimates by Cowen Inc., a financial services company.

“If the tax rebates are allowed to expire as planned, solar costs will go down more,” Namovicz said. 

Trade War Slowdown

The surge in investment activity could also be stymied by political and regulatory changes. The solar sector was upset in January 2018 when President Donald Trump slapped a 30% tariff on solar imports. The industry was buffeted again later that year when China announced a large cut of solar subsidies to ease pressures on the country’s transmission system and reduce a subsidy payment backlog.

Some U.S. makers of solar cells and panels, manufacturers such as including SolarWorld Americas and Suniva, were asking for the government to limit imports because domestic manufacturers were losing market share.

“The uncertainty caused by the trade war has had a cost,” Nathanael Greene, a senior renewable energy policy analyst at the Natural Resources Defense Council, told Karma. “It’s slowed the speed of the transition to clean energy. Once the trade war ends the pace will pick up again.”

The industry has adjusted to the tariffs and installation jobs are growing again. The sector employed 242,000 Americans at the start of 2019, and that will rise to 259,400 by the end of the year, according to the Solar Foundation. The number of U.S. solar installer jobs is projected to grow 63% between 2018 and 2028, according to the Bureau of Labor Statistics.

VC, Billionaires Invest

Breakthrough Energy Ventures is probably the best known investor in solar and other renewables. Breakthrough, with high-powered and deep-pocketed backers such as Gates, Michael Bloomberg and Hasso Plattner, funds entrepreneurs with ideas that provide affordable power without contributing to climate change.

Breakthrough is backing three startups that focus on batteries, or storage in industry parlance: Form Energy Inc., Malta Inc. and KoBold Metals. The fluctuations of solar power require massive amounts of battery capacity. Lithium-ion batteries are the primary method of storage, something the the Royal Swedish Academy of Sciences recognized when it awarded the 2019 Nobel Prize in Chemistry to three scientists who developed the technology.

Form Energy is developing a sulfur-based battery that can store renewable energy for long periods at a fraction of today’s cost. Its technology aims to guarantee cheap power delivery for weeks and months. The company also has funds from Eni Next LLC, the venture capital vehicle of Italian oil giant Eni S.p.A, venture capital firm Prelude Ventures, Macquarie Capital and MIT offshoot The Engine. 

“The uncertainty caused by the trade war has had a cost. It’s slowed the speed of the transition to clean energy.”

Malta has developed an electro-thermal energy storage system that collects and stores energy for long durations. Its investors include Alfa Laval amd Concord New Energy.

KoBold Metals, meanwhile, combines big data and scientific computing with geochemical, geophysical, and geological information to identify prospective deposits of battery materials. Andreessen Horowitz, a private venture capital firm in Silicon Valley, has joined Breakthrough in backing KoBold Materials.

“Every part of the energy storage and battery space is exponentially tougher than solar itself,” Posamentier said. “When it comes to storage there are a menu of options of how and when to use them. With solar, it’s just on or off.”

Breakthrough also is backing Arnergy Solar Ltd., a Nigerian distributed utility company. Arnergy has systems that combine solar power, storage and management experience to provide reliable and reasonably priced energy in areas where power can be intermittent.

Congruent has backed a wide variety of solar startups, such as Omnidian, which takes care of operations and maintenance of residential and small commercial solar, while Raptor Maps use drones to identify and diagnose issues on large-scale solar projects. They both are all about making solar more cost effective.

Energetic Insurance focuses on solving a problem that’s arisen with commercial solar financing — counterparty credit risk. They have a product that satisfies both lender and tax equity underwriting needs. Wunder Capital is working in another area of solar financing. Wunder manages the process from solar opportunities, to the underwriting, contracting and construction of each project. The company then manages billing and distribution of earnings of the complete system.

Swanson’s Law

The price of solar photovoltaic modules tends to decline by 20% each time the cumulative shipped volume doubles, according to Swanson’s Law. Panel prices plunged 88% between 2010 and 2018 mostly because of excess supply, according to Cowen. The efficiency of panels has also increased at a steady pace.

“Solar builds are very active and we expect this to continue,” Namovicz said. “If the tax rebates are allowed to expire as planned, solar costs will go down more.” 

Renewable Portfolio Standards, requiring increased production of renewable electricity had been adopted by 29 states and the District of Columbia by the start of this year. California, Washington, Oregon, Hawaii, New Mexico, Idaho and Nevada are going a step further and mandating 100% carbon-free electricity by 2045.

“In Hawaii you see the future,” Jacobs said. “On Oahu, the most populated island, about 50% of homes have solar panels on their roof, and the utility and solar industry have learned how to make that work.”