In recent years, there has been a significant push towards green energy, and solar’s advantageous prospects have blossomed as a top investment choice. As practically unlimited source of energy, the long-term prospects for capturing photovoltaic energy are bright. However, market conditions indicate that there is reason for pessimism about solar’s short-term prospects.
Primarily, over the past several months there has been a consistent downward trend in the price of oil, such that oil prices have slid almost 25 percent in the past year. This change has impacted many areas of the market, leaving many observers wondering why this downward trend has continued unabated.
On a macro level, the significant decline in the price of oil suggests that the high growth rates in emerging economies like China are beginning to slow. Oil is a relevant and accurate indicator of a Chinese slowdown because it is essential to the construction industry. Demand to build has decreased in a flooded Chinese housing market.
The United States has also contributed to the declining price of oil through increased production in western shale oil fields. Furthermore, the government’s push to become energy independent has translated to an expansion of oil drilling contracts with service companies on public lands. As oil contracts span many months and years into the future, The New York Times forecasts that “oil output will respond slowly to a drop in oil prices.” Due to increased efficiency in oil drilling machines and the production process, the price of oil does not have to be as high as it once did to generate similar profits.
This factor directly impacts the market for solar technology. In its current state, solar does not fare well in cyclical economies due to its high up-front costs. The stock market’s recent decline has thus been detrimental to alternative energies. Both American households and firms’ research and development sections will continue to use status quo products that rely on inexpensive oil rather than pursuing new means of energy.
Additionally, the solar market is heavily dependent on borrowed capital to fund its projects. In recent years, monetary policies like quantitative easing have kept interest rates artificially low. With tapering in sight, however, rates are sure to rise. This will increase the cost of capital and reduce the incentive to borrow money, thereby restricting expansion in the solar market. While the U.S. government has subsidized solar panel installations, creating an added incentive for investing, the 30 percent tax credit it offers will fall to 10 percent by 2016, raising further questions about solar’s potential for growth.
These ill omens are already reflected in the share price of solar giants First Solar (FSLR) and Solar City (SCTY), whose share prices have declined by a staggering 17 percent and 26 percent in the past three months, respectively. As solar companies adjust to decreasing oil prices and increasing interest rates, similar corrections in the solar market can be expected going forward.
—Austin Summers is a sophomore studying finance
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