Solar Power’s Star Is Rising, but Beware the Risks

The Inflation Reduction Act—especially its 10-year guarantee of 30% tax credits for renewable energy projects—provides a level of certainty to investors in solar power generation.

But a recent RMA Journal article warns of risks to anyone investing in or banking these projects. Consider: Despite great progress, the industry would not be economically viable without government incentives and mandates that effectively reduce the price of solar power.

“Often, the sale of a solar energy system would not be profitable without incentives,” the article by Bill Walker of the Vertical IQ market research firm says. The price per installed watt of solar generating capacity fell from $8 in 2004 to $1.47 in 2020. But it still has to go below $1 per watt to be competitive without subsidies.

A high capital requirement is another factor to consider. The upfront cost to design, build, and install a solar energy system is substantial and the development process is long, making “players heavily reliant on debt financing,” Walker notes.

Other possible drawbacks:

• Production and capacity are affected by geographical and seasonal considerations, such as the average hours of direct sun per day.
• Power purchasing agreements, essential to obtaining financing, are subject to approval by state public utility commissions.
• Property considerations such as land leases and required permits can bring challenges.
• Operating margins can be tight.

The sunny side? Solar energy generation and consumption are growing, while capacity factors are stable and construction costs are falling. “Solar has become a more stable investment,” Walker says. “Growth in the investor pool…reflects an increasing level of comfort and a perception that solar has become a more stable asset.”