Will the US solar boom give investors a heatstroke?

With the Inflation Reduction Act creating a supportive investment environment, US renewables developers are understandably bullish on solar – nevertheless, they should build out with caution.

It seems impossible in today’s climate, but in 2020 Europe was facing negative energy prices. Flushed with cheap power after a record solar buildout post-EU 2009 renewable energy directive, the European Union went from 30GW of installed solar capacity in 2010 to 141GW in 2020, according to the International Energy Agency. And thus, continental investors discovered what it means to have too much of a good thing.

The US now finds itself in a similar situation to Europe a decade back. Research from the Solar Energy Industries Association projects that by 2032, the US will have a total installed solar capacity of 700GW – a five-fold increase. The buildout will be aided by the passage of the landmark Inflation Reduction Act, which has guaranteed solar developers’ investment and production tax credits for the next 10 years, increasing solar deployment over that period by 66 percent than otherwise expected pre-IRA, according to SEIA.

The US should learn from its cousins across the pond. Should European investors have been gung-ho on solar? Of course. The future is renewable energy. However, what could they have done to future-proof against negative energy prices?

This is the question investors in the US should be asking themselves before buildout. How will a solar plant’s PPAs be structured? What role will energy storage play? And perhaps more controversially, is there a risk of a stranded asset?

Jay Rhame, chief executive of Reaves Asset Management, believes the answer to that last question is yes. “Everyone is going to build as much [wind and solar] as possible now due to the push from the IRA,” he told Infrastructure Investor. “And if these facilities are built on speculation, then there may be an excess supply when the wind blows or the sun shines, resulting in negative energy prices. Storage can only do so much. So, there may not be economic returns there in the long run.”

Is this just conjecture? Not entirely. Today, energy prices are sky-high throughout most of the world – but not everywhere. Yes Energy, a data and analytics provider, reported that wholesale energy prices went negative a total of 200 times in 2021 across the US’s seven grids, largely due to grid bottlenecks preventing said wind and solar energy from moving beyond its generation site.

And on a macro level, the crisis caused by the Russia-Ukraine war can’t last forever. As power generation capacity grows worldwide – it’s expected to double by 2050, according to research and consulting firm Enerdata – and we move towards an energy-secure future, energy prices will again decline.

The question then becomes: how will your solar assets fare when that happens?