Gas Prices Are Falling, But Solar Energy Is Set to Take Over

Source: Thinkstock

2016 is going to be an incredibly pivotal year for a lot of reasons, and the future of clean, renewable energy in America is just one of them. Why 2016? That’s the year that the current tax credit on solar systems — which is now at 30 percent — is set to expire. If that tax credit is renewed or even improved upon by regulators, it could set solar energy on a path toward becoming the dominant energy source within a few decades. If not, well, it could set back America considerably.

If the tax credit is renewed, the International Energy Agency says that solar power is primed to become America’s top electricity-generating resource by 2050. The IEA, one of the energy industry’s top watchdogs, says that falling equipment costs would allow more people to adopt solar systems and rocket solar energy production above all other resources, including coal, hydroelectric, and nuclear power.

“The rapid cost decrease of photovoltaic modules and systems in the last few years has opened new perspectives for using solar energy as a major source of electricity in the coming years and decades,” said IEA Executive Director Maria van der Hoeven. “However, both technologies are very capital intensive: almost all expenditures are made upfront. Lowering the cost of capital is thus of primary importance for achieving the vision in these roadmaps.”

What makes this news particularly interesting is the amount of growth the solar industry would have to go through over the next 35 years in order to reach the lofty perch that the IEA is pegging. Consider that, as of 2013, solar energy only contributed 0.23% of all electricity production in the United States, according to the U.S. Energy Information Administration. In contrast, 39% of our electricity is generated by coal, and 67% overall comes from fossil fuels (including coal). The kind of growth the solar industry would need to experience would be unprecedented.

Yet it’s not as far-fetched as it appears on the surface. The deciding factors, it appears, will come down to policymakers.

Source: EIA

These predictions for the meteoric rise of solar-powered electricity generation come hot on the heels of one of the biggest price drops in petroleum prices in some time. The national average for a gallon of gas is hovering around $3 and could drop below that mark for the first time in years. Not only are lower gas prices convenient from a consumer standpoint, but it can also give the economy an extra boost.

“I’m expecting gasoline to be at these low levels at least through the end of the year and through the end of the winter,” Andrew Lipow, president of Lipow Oil Associates, told CNBC. “While it might be bad for the oil industry, there’s a whole lot of other segments of the economy that benefit, like the truckers, the railroads, the farmers. … Manufacturing in general benefits from lower energy costs.”

Manufacturing includes the production of new solar systems and PV panels, which customers will be able to more easily afford with some extra money in their pockets thanks to lower energy prices. The fluctuations in average energy expenditures can be seen above in a graph from the EIA, and at this point in time, that average is sitting below 5%, beating the long-term average. If solar energy systems — which do require a rather heavy amount of investment at the time of implementation — are adopted by consumers looking to reinvest their savings for the long term, these savings could spike dramatically, and energy prices on average should drop as supply begins to exceed demand.

So far, that high initial investment is what has kept most consumers from making the jump into the solar market. Since the price fluctuates so much from market to market — a homeowner in California could get a system for around $10,000 in 2011, as opposed to $25,000 in Florida, for example — and there’s generally not a lot of knowledge concerning solar systems in the first place, many people have simply decided to ignore it as a possibility for the time being.

But again, equipment prices are dropping, and policymakers can continue to allow tax credits and other incentives to resonate with average Americans, who will see solar becoming a viable and reasonably priced option over the coming decades.

A recent Bloomberg article said that the reason solar has so much promise is because it’s a technology, not just a fuel. Essentially, that means that prices should fall while efficiency goes up, as opposed to fossil fuels, which see supply go down over time and prices increase. Also, since the technology is just in the beginning stages of hitting its stride, solar energy has reached grid parity (that is, when a technology like solar costs the same or less than traditional fuel sources) in 10 states. If the tax credit is extended, or even drops to 10%, grid parity should occur in up to 36 states.

So what does that mean in a nutshell? That the fossil fuel industry’s time is up, and it is quickly going to lose any advantage it had over renewable resources like solar and wind. Another element playing into the demise of the fossil fuel industry is the growing acceptance and concern around the environment, as well as the potential costs of not addressing carbon emissions.

Again, however, this will all come down to policymakers and whether they can put together a cohesive energy plan going forward. “Where there is a record of policy incoherence, confusing signals, or stop-and-go policy cycles, investors end up paying more for their investment, consumers pay more for their energy, and some projects that are needed simply will not go ahead,” said van der Hoeven of the IEA.

And that’s likely what the future of the solar industry — and the overall direction of energy in America — will depend on: having a solid, cohesive energy policy.

More from Business Cheat Sheet: