By Whitney Voûte, Head of Investor Relations for US Solar Fund (USF)
“At this moment of profound crisis, we have the opportunity to build a more resilient, sustainable economy – one that will put the United States on an irreversible path to achieve net-zero emissions, economy-wide.”
US President Joe Biden’s intentions to tackle climate change have been clear ever since he announced his candidacy for the White House. Eight months on from assuming the office, what are the prospects for the US solar space?
Momentum is mounting
Almost immediately upon arriving in the White House, President Biden turned his attention to climate change, signing a series of orders and encouraging federal agencies to speed up the transition to clean energy generation.
The Biden administration intends to combat climate change by bringing the US economy to net-zero by 2050, first by eliminating fossil fuel pollution in the power sector by 2035.
While ambitious, these targets are aligned with a growing number of globally recognised companies committed to 100% renewable power, collectively known as the RE100 initiative. Constituents include American Express, Google, Facebook, Apple and other household names. Historically, the RE100 has classified the US as a challenging market, but with Biden’s new climate policies, this may be about to change.
Solar set to benefit
The Bipartisan Infrastructure Investment and Jobs Act, passed through the Senate in August, allocates over $60bn to power infrastructure – with a focus on new, resilient transmission lines to facilitate the expansion of renewable energy. A second related package includes an extension and expansion of investment and production tax credits for clean energy generation and storage – giving the option of ‘direct pay’, or cash payments, for taxpayers. If passed, solar is likely to be a major beneficiary of the initiatives.
Solar is the most cost-competitive source of electricity generation across much of the US. With more than 100 gigawatts of solar photovoltaic (PV) capacity, approximately 3% of American electricity was generated by solar power in 2020 – with solar’s share of total net electricity generation growing at an average rate of 66% since 2010.
Biden’s goal is for this to increase tenfold to 30% by 2030. Already, the first quarter of 2021 set a record in terms of deployment and instalment – up 46% on the same period in 2020. Energy consultancy Wood Mackenzie forecasts the industry will break installation records every year for the next three years.
With this level of government support, the US solar market – which is the largest outside China – represents an attractive investment opportunity, particularly in the current low interest rate environment. With COP26 less than two months away, current momentum is unlikely to wane, and we expect continued strong investment in areas aligned to sustainability. As the solar sector draws in more capital, this will further facilitate the implementation and installation of utility-scale solar power.
One of the key benefits for investors of the US solar market, compared to other countries, is the well-established use of long-term power purchase agreements (PPA).
These agreements, often established with investment grade corporates, typically require the offtaker to buy 100% of the electricity generated by a solar plant at a fixed or escalating price. By hedging against power price risk in this way, investors can mitigate the volatility of wholesale market power prices and day-to-day demand fluctuations. PPAs allow us to reduce the risks to income and future cashflow, and ultimately underpin our 5.5% cash-covered dividend target.
In sunny California, we recently invested in a 25% stake in Mount Signal 2 – one of the largest solar facilities in the US. This 200 MW site is situated in a desert area of Southern California, approximately 175km east of San Diego. The site has a 20-year PPA with Southern California Edison (SCE), which commenced in mid-2020. SCE serves a population of more than 15 million people and is the primary electricity provider for the central, southern and coastal areas of California.
For UK investors looking to gain exposure to an environmentally focused income-generating asset, the US solar market offers one of the largest opportunities, with secure income, and a long runway for growth. In addition, by investing in US solar, investors can play a key part in powering Biden’s plans for a seismic shift in energy generation.