Why Solar Energy Has Explosive Potential for Investors

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The rise in average global temperature over the past 50 years has occurred at a higher rate than ever before, and solar photovoltaic power (PV) appears poised to help tackle the issue.

According to the International Renewable Energy Agency (IREA), the amount of global energy generated from PV is expected to grow from 2% in 2016 to 13% in 2030, over six times higher. The expansion of the solar industry is guided by cost reductions, including expected reductions of about 60% over the course of the next decade.

Having accounted for 20% of new power generation capacity in 2015, PV is becoming cheaper, more prominent, and an increasingly logical alternative to fossil fuels. Let's take a look at why solar power matters and how it will have an impact sooner than you may think.

Significance of Solar Energy

As it stands, PV costs roughly 5 to 10 cents per kilowatt-hour (kWh). According to statistics from the U.S. Energy Information Administration (EIA), the price of electricity varies significantly between states in the U.S., with Louisiana at 9.2 cents per kWh, whereas Hawaii is on the higher end at 27 cents per kWh for residential properties.

Global warming is very much a relevant issue. As per NASA's climate division , April and May set new global temperature records, a trend that has now continued for six straight months. Furthermore, it is estimated that there is an over 99% probability that 2016 will set new high temperature records.

Now more than ever, there is a clear and present need for a transition to clean energy. The demand is there, and we are beginning to see a response. The basic principles of supply and demand indicate that an advance in technology will result in an increase in supply, and decrease prices in the process.

With the rate of technological advancements greater than at any point in human history, the stage is set for PV's rise to prominence, of which we are already beginning to see major signs.

Perhaps Tesla Isn't as Crazy as Investors Thought

The market was quick to react to the proposed Tesla TSLA and SolarCity SCTY merger, which was first announced on June 21 st . As our team reported , TSLA dropped more than 11% after hours and has yet to rebound.

However, when taking into account the massive potential in solar energy, it's a good idea to take a step back and look at this deal under a different lens. Tesla CEO Elon musk stated that he wishes to create the "world's only vertically integrated company offering end-to-end clean energy products to our customers."

Musk's vision involves consumers using their electric cars, home batteries and solar panels in complete synergy. As Vox points out, much of the doubt from the market stems from the fact that this is uncharted territory.

SolarCity aims to create micro grids that allow homes to link together and share power and energy services, all with the help of Tesla's lithium ion batteries. These batteries are able to store and discharge energy, as well as form a grid-like service with other batteries.

With a growing need and framework for renewable energy, this deal would allow consumers to essentially meet their energy needs in a clean and efficient manner while minimizing pollution. Although our team highlights concerns that the deal creates, the gamble does have a lot of potential and could pay off significantly.

Solar Power Outlook

Many signs point to a positive outlook on the future of solar energy. Oxford University researchers had an even more optimistic view than the IREA, estimating that PV's share of global energy could reach as high as 20% by 2027. Businesses around the world are building power plants, increasing output and making more and more use of PV.

On Monday, a group led by Masdar, the renewable energy firm based in the United Arab Emirates, won the bidding to build a solar-power plant in Dubai. This plant is significant because it plans to generate electricity at 2.99 cents per kWh, which would set a benchmark for the cheapest PV-generated electricity thus far.

A study by the Frankfurt school indicates that developing countries have increased investment in renewable energy by 6% from 2014 to 2015, with China, India, and Brazil specifically increasing investments by 16% to $120.2B. South Africa, Mexico, and Chile are new players in the market, significantly boosting their investments as well. Growing economies are allocating more resources towards renewable energy and PV in specific, and for good reason.

Of the investment growth in renewable energy, PV takes the throne with growth of 12% compared to second place wind's growth of 4%, a clear margin. For all intents and purposes, solar energy's future is bright, pun intended.

How to Play

Solar energy is a comparatively young enterprise. The first solar cells were available for sale in 1956, and plenty has changed since then. From their advent to today, costs have consistently decreased and the technology has continuously improved. There is no reason to believe that PV's growth trend will cease, meaning that it should not be counted out moving forward.

For these reasons, investors should definitely consider Hanwha Q Cells Co. HQCL and Renesola Ltd. SOL which both currently sit at a Zacks Rank #1 (Strong Buy). Both have received upward earnings estimate revisions for Q1 as well as this fiscal year, and are worth looking into.

Bottom Line

Although still experiencing growing pains, PV shows plenty of promise. In a world with increased reliance on electronics, renewable sources of energy represent a more sustainable model to meet increased needs. Although vocal doubters may serve as a cause for concern, investors should keep an open mind towards PV, and the stocks in the solar industry, for the not-so distant future.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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