Investing in solar — What could further boost the adoption of solar energy?

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Vectors Angel

8 min readNov 5, 2020

As technology costs fall and environmental concerns grow, the transition to renewable energy is happening. Just looking at solar — it took 25 years for solar energy to reach a 1% share of the world’s electricity, but only 2.5 years to grow to 2%. [1] Thanks to the Sunshot Initiative launched in 2011, it’s now clear that the cost of solar can be as cheap as fossil fuels. This trend is continuing, and we may stand at an inflection point of higher solar adoption. In 2019, solar accounted for 40% of the new capacity added to the electric grid, the highest share it’s ever been. [2]

Simply put, investors who are ignoring or avoiding solar companies are missing out on a generational opportunity to invest in one of the most significant disruptions in the world’s energy industry.

A unique mix of opportunities within solar

A broad swathe of startups is involved in solar, with roles across manufacturing, installation, operations, and the maintenance of solar panel systems. Solar manufacturers are companies that produce solar cells and specialized components that are then assembled into solar panels. Solar installers are essentially sales and distribution businesses that convert commercial and retail customers into solar consumers. The operations and maintenance (O&M) companies provide unique services to solar operators, such as solar PV inspection, monitoring, and reporting, in order to optimize power efficiency and improve resiliency.[3]

In terms of market segments, utility PV maintains the largest share of the install capacity owing to its massive manufacturing scale. Residential PV has experienced high growth in the emerging markets such as Florida, Texas, and Nevada, and a slowdown in the relatively maturing Northeast region. Meanwhile, reduced government incentive has also slowed down non-residential PV installations in recent years. [4]

Investors have also poured money into battery storage startups as the storage demand from solar and other renewable energy has kept rising. Many solar companies view storage as a business growth opportunity since cheap storage can solve the limitations of solar power. [5] For instance, the solar-plus-storage system is a creative solution to address the temporal mismatch between PV output and customer load.

Cost reduction is the key

In 2011, Solar Energy Technologies Office (SETO) announced the Sunshot Initiative with an ambitious goal to reduce solar prices by 75% by the end of 2020. By 2017, utility-scale PV achieved the target of a Levelized cost of electricity (LCOE) of $0.06/kWh. Residential- and commercial-scale solar costs have dropped to $0.16/kWh and $0.11/kWh, respectively. Eyeing the next decade, the LCOE target for utility in 2030 is $0.03/kWh, another 50% reduction. The market share of solar-generated electricity is estimated to reach a 20% share, given the target cost achieved.[6]

Steadily improving price competitiveness has made solar the backbone of the clean energy transformation. However, energy is a fungible resource, and most people will buy the cheapest version of it. A sustained trend in cost reduction is vital to the future of solar adoption.

Technology Pathways Towards Cost-efficiency

Discovering that solar investment opportunity exists is easy. The challenging part is identifying what in the solar value chain can drive cost reduction and improve energy efficiency. To help you get your footing in the solar industry, let’s dive into these startups and understand how they are adding value by improving capacity, reducing O&M costs, and smart-grid system integrations.

NEXTracker offers the most advanced single-axis solar tracker system for solar power plants to solar operators. These trackers can change their orientation throughout the day and direct solar panels or modules toward the sun. Since such technology can deliver 20–30% more energy without the added cost and complexities, the industry started to migrate from fixed-tilt racking structures to trackers in the past few years.

Raptor Maps combines drones and AI-powered software to help plan, monitor, and track solar construction projects, and perform efficient PV system inspections. The drone will take aerial images which then feed into their software for outlier detection utilizing aerial thermography. The software can provide the exact onsite location for each anomaly and have them prioritized. This allows the solar asset owners to automate O&M processes and reduce costs.

Arcadia is a free platform that helps consumers save on the energy bill with community solar. Community solar refers to local solar facilities shared by community subscribers who receive energy credits by sharing the power their solar system produced. This model expands solar access to everyone and has been rapidly adopted. Arcadia integrates with users’ electric utility accounts and connects them to clean energy, and they take a small percentage of the money saved.

Innowatts collects energy consumption data from utility-scale smart meters, which allows utility companies to use the data to predict potential outages and dispatch resources when needed. Their analytics platform not only has access to data from 21 million consumers globally but also hundreds of attributes on weather, delivering actionable energy intelligence to utility businesses. They aspire to be an essential building block in the software-driven and smarter grid system.

Leap is an online marketplace and API platform that enables cloud-connected sources of energy load to participate in demand response programs. The bidders in the energy market have access to their real-time pricing, and the program participants can help balance the grid by reducing their energy load and get paid for it. Leap announced its partnership with Google Nest in 2019 and raised 8.2 million Series A funding led by Union Square Ventures earlier this year.

Icarus RT is developing power boosting and hybrid energy storage systems for solar installations. When installed, it can output 25% higher energy by cooling off solar panels to enhance performance and salvaging waste heat into additional energy power, which then saved into their thermal battery. They recently joined the Shell GameChanger Accelerator program (powered by NREL) to accelerate their product commercialization.

Why are investors wary of investing in solar?

Let us go back to 2005, a time when VC investments in cleantech measured in the hundreds of millions of dollars. In merely three years, it had leaped to $4.1 billion. From 2009 to 2011, the federal government injected $44.5 billion into the industry through a mix of loans, subsidies, and tax breaks. [7] The hype stalled when Solyndra, a solar PV manufacturer, went bankrupt after raising over a billion dollars due to a lack of financial viability. By 2015, these investment firms altogether lost about $25 billion. [8]

Besides a few macro factors such as the 2008 financial crisis, low natural gas prices, and increasing competition from the Chinese manufacturers, these failed cleantech investments provided us many valuable lessons.

Cleantech investments, in general, have a long time horizon, with substantial upfront costs. This characteristic is mostly a result of the need to develop hardware prototypes to start the sales process. It is much safer to invest in commercial-ready solar products.
It requires additional capital, infrastructure, and experience to scale. New materials and processes companies faced significant execution and production challenges. Most founders in the space, however, had little experience in manufacturing and operating a business, despite intensive research background.[9]
Regulatory reforms matter. Governments play a central role in incentivizing actors in the industry, such as tax credits, energy rebates, net-metering arrangements, and power purchase agreements. The stepdown of subsidies can add lots of uncertainty, while the recent tariff on solar panels could affect the entire solar industry [10]

Tech-savvy Cleantech Investors

The last wave of renewable energy investments came from Silicon Valley investors who made their fortune in semiconductors and internet startups. Many lack an understanding of the energy industry and its long investment cycle. Nevertheless, over time investors betting on cleantech have developed a broader knowledge of the technologies and the landscape. Clean Energy Ventures, for example, raised $110 million in 2019 to fund seed and early-stage startups. Their core strategy is to invest in promising startups that can disrupt the value chain of existing incumbents, rather than the entire industry. Breakthrough Energy Ventures, established by Bill Gates and other influential private investors in 2015, builds on the public-private partnership model to transform the energy industry. According to Pitchbook, other active cleantech investors include Kleiner Perkins’ spin-out fund G2VP, Khosla Ventures, NEA, DFJ, E8, VantagePoint Capital Partners, to name a few.

COVID-19 headwind in 2020

Due to COVID-19 pandemic, the overall solar industry has experienced severe job losses. Solar Energy Industries Association (SEIA) recently released some concrete numbers. As of June of 2020, the industry employs 188,000 workers, 38% less than the 302,000 forecasted number. Staff reductions have caused supply chain delays, which will lead to a further decline in solar installing. Q2 deployment loss will exceed 1,700 megawatts, which is equivalent to 288,000 homes’ electricity usage.[11]

On the demand side, with over 40 million Americans out of work, a significant contraction of consumer interest in residential solar installations and storage platforms is likely this year. Same as other industries, we are unsure whether the slowdown is temporary and the nature of its long-term impact.

In Conclusion…

Solar investments can be intricate, as the investors have to understand the solar value chain, bet on successful commercialization, predict policy changes, and navigate the COVID-19 disruptions. However, the solar industry has shown significant trends and opportunities. Investing in solar can improve our health, environment, and economy and steer the world towards a cleaner energy future.