Is COVID-19 Bad for Solar?
Is the COVID-19 pandemic bad for the growth of solar?
Based in Stanford, California, Terra2 Inc. launched in November 2019 mainly as an urgent response to the United Nation’s declaration for the world to decarbonize immediately to address climate change within this decade. Founded by a young team of recent Harvard graduates backed by the vast energy experience of its advisory board, Terra2 is currently developing its platform that will re-imagine green investing and build a new clean future for our shared world.
We all know that solar panels won’t catch the virus, but the hardworking people working in the solar industry can. Due to travel restrictions, quarantines and the many major disruptions to ordinary life caused by the ongoing pandemic, our entire economy has been stalled and the financial markets are showing incredibly high volatility — and the solar industry is not isolated from the market downturn. However, it can be recession resistant. Let’s see how.
Electricity is a basic need of modern society and our demand for it has consistently risen and will continue to rise over time.
Fundamentally, solar farms are in the business of producing and selling electricity. Once a solar farm is constructed and operational, there is relatively negligible marginal cost associated with generating electricity — since sunlight is free. The sales of electricity drive the economics of a solar farm and all of society is its customer. From our iPhones to the lights in our corporate offices, we are entirely dependent on electricity in our everyday lives. From homeowners to businesses, we all depend on and ultimately pay for our electricity. So while we may use slightly less of it during a pandemic or recession, we still cannot go without it.
As an example of how electricity is an inelastic good, imagine this: this summer, homeowners may use their air conditioners less to save on electricity bills and some businesses may still be closed due to the pandemic. However, giving up electricity is usually the last thing going through a consumer’s or business’s mind. Think about it — if you are on a tight budget during a recession, would you rather give up paying your electricity bill or forgo the car maintenance visit? Give up paying your electricity bill or look for other cost reductions for your business? Electricity bill or a night out at a nice restaurant? For most of us anyway, the answer is simple — electricity is just as important to us as food and water. Solar farms sell an essential product that society will always need in large amounts everyday, recession or not. That’s why we like to call it recession resistant.
However, for new solar projects currently in development, things will likely get a bit tough for a while. China is the world’s leading solar panel manufacturer by far and they were the first to be affected by the ongoing pandemic. It would be no surprise that the global supply chain for panels would temporarily be crippled, raising the price of modules as inventory levels dwindle. Furthermore, disruptions to supply chain logistics are probably no joke right now. This is true until people go back to work and the economic engine shifts back into high gear. So, we may see a temporary slowing of new construction and a short-term increase in planned projects cancellations. But once the threats of this pandemic subsides and the world gains the confidence to go back to their normal lives, the secular solar expansion will quickly get back on track. A future recovery can further be accelerated under an ambitious fiscal policy stimulus package such as a New Green Deal or an expansion of the existing solar investment tax credit. However, until this pandemic subsides, new project development and construction will remain at an elevated risk and will see a temporary contraction against previous growth forecasts.
For Terra2 Inc., our approach is to create an even more recession resistant solar portfolio for our users to invest in. We can do this in a few ways.
First, majority of operating solar farms and solar generation assets today are already under long-term fixed revenue contracts called power purchase agreements (PPAs) where the customer has agreed to pay a known price for an agreed volume of electricity over the course of 15, 20, or even 25 years! So, especially during uncertain times, it would be prudent to hold a higher proportion of stable locked-in cash flow contracts.
Sometimes, a business or consumer that pays for electricity under a long-term contract will go bankrupt or default. To hedge against that default risk, Terra2 is deliberately focusing on farms in deregulated electric grids where we will be able to sell the power from our solar farms directly to the wholesale power market in the case of our direct customer defaulting. For example, take the power grid of Texas, which is managed and operated by the Electric Reliability Council of Texas (ERCOT). Here, not only can independent power generators sell their electricity directly on the wholesale power market, but we also may be able to sell at a really high price, as high as $9,000 per MWh (about $9 per KWh) in some parts of the grid during times of intense heat waves. We can further mitigate default risk through diversification of our solar portfolio across numerous solar assets in different geographical locations and through a focus in working with customers like Walmart who are in industries that are less sensitive to an economic downturn. Our approach doesn’t guarantee a risk-free investment for our users, but it does offer a prudent strategy to de-risk our future solar portfolio in a manner that is customized to the chaotic world that we live in today.
Essentially, as long as our solar farms keep operating and selling electricity to those who need them, our users will continue to receive dividends from the sales of that electricity. That’s also the case with the other solar-related investments we will make, whether as minority investments into solar development projects or fixed cash flow instruments such as PPAs or other solar asset-backed securities. That’s because as long as the sun still rises every morning, the incremental cost of producing solar is essentially zero! Recession or not, this means that we get to keep selling electricity as we generate and continue to pass our dividends to our users every day.
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About the Author(s)
David Lim is the CEO and founder of Terra2 Inc. He received his bachelors degree in economics with honors at Harvard University where he served as the team captain for the college monetary policy team under Benjamin Friedman, the former chair of the economics department. Upon graduating in 2017, David joined Vega Energy Partners, Ltd. as a natural gas scheduler and analyst. There, he gained a deep understanding of the physical movement of energy commodities across the eastern United States. In early 2019, he transitioned to solar energy by joining Lightsource BP, a leading global solar developer backed by BP plc, as a financial modeling analyst responsible for evaluating the economics of utility-scale solar development sites across the United States before he left to launch Terra2 Inc.
Jay Qu is the president and co-founder of Terra2 Inc. He received his bachelors degree in physics with high honors at Harvard University. Upon graduating in 2017, he began his graduate studies at Stanford University. He is currently a 3rd year Ph.D. candidate and researcher in Physics, specifically studying Condensed Matter Physics — the subfield that gave rise to such technological innovations as solar panels, novel battery technologies, and quantum computers. Jay is driven to build Terra2 due to his belief that future applications of new materials — and the fundamentally new ways that they behave —may not only change our understanding of the world but also provide the key to a clean future.
At Terra2, our mission is to expand access to renewable energy investment opportunities for all people. We believe that the impact an average person can have on emissions reductions has been limited due to a lack of opportunity. Not everyone can afford to buy solar panels or has a place to put them.
Using our platform (www.terra2.com), accredited and unaccredited investors alike will be able to invest directly in a portfolio of solar farms with as little as $1,000*. Increased access to financing will help developers build more and more solar farms, thereby accelerating our transition to a completely renewable future so that we can meet our emission reduction targets. Moreover, we project that our solar assets will be attractive long-term investments that offer stable cash flows years into the future. Investing directly in solar farms can therefore offer an avenue for people to preserve and grow their wealth as well as fight climate change.
We at Terra2 believe that while governments and corporations must take drastic action, they are not alone in their responsibility. We the people must act to address the impending climate catastrophe. Together, our collective impact can make a real difference in the fight against climate change while democratizing the energy sector.
*subject to change
