How To Invest in Solar Farms in 2022 (Without Starting Your Own Farm)
Solar energy is one of the favored climate change solutions. Although nearly everyone has seen a rooftop solar panel, most solar power is actually generated by large solar panel installations, aka solar farms. Besides being environmentally friendly, solar farms can provide consistent returns to investors. Learn how you can invest in solar farms.
Anna Ng Updated April 8th, 2022
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Are solar farms a good investment?
Solar energy is the fastest-growing source of renewable energy in the U.S., representing 46% of new capacity added in 2021. Today, solar accounts for 3.9% of U.S. electricity generation. It is also becoming one of the cheapest sources of energy in many places. And it should grow. Wood Mackenzie, an energy consultancy, expects solar to almost triple over the next decade.
What are solar farms?
Solar farms are large installations of solar – also known as photovoltaic (PV) – panels that harness the sun’s energy and send it to the power grid. Unlike rooftop solar, solar farms consist of ground-mounted panels deployed over large areas of land. Large-scale installations benefit from economies of scale because their owners can buy PV panels and other equipment cheaper and amortize fixed costs such as legal fees.
The U.S. has 121 GW of solar capacity installed, enough to power over 23 million American homes. The vast majority of it comes from utility-scale solar installations, followed by commercial, community and residential solar.
Solar farm pros and cons
Renewable energy sources like solar don’t emit greenhouse gases and clearly benefit the environment. But they could also be interesting to investors. Here is why.
The advantages of solar farm investments
Stable income generation
Although large solar farms cost a lot to develop, once they are built and contracts with utilities are signed, investors can earn a stable yield, such as 6-8% a year. Although solar projects have to keep paying maintenance expenses and rent to the landowner, they don’t need expensive inputs like fuels. This lets them produce a consistent stream of dividends.
Solar farms try to contract with utilities to sell the energy they produce. Utility contracts can be long, generally 10+ years. Most utilities have high credit ratings and are unlikely to stop paying, especially when they are providing a service critical to the daily lives of thousands or millions of people.
In times of market volatility, solar farm investments can offer predictable, low-risk revenues underpinned by contracts from utility companies.
Revenues from solar farms are uncorrelated with the stock market, letting you diversify your income streams. (Of course, this will not apply if you choose to invest in solar farms through solar stocks.)
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The disadvantages of solar farms
Despite their benefits, solar farms – and solar power generally – are not the miraculous solution to climate change. Here is why.
Solar power is intermittent
A major issue with solar (and wind power) is that it’s intermittent, which is not the case with oil and gas-derived energy. The sun doesn’t shine at night. However, this problem is being solved as solar is increasingly paired with energy storage, both in homes and at utility-scale installations. The SEIA expects that by 2025 one-third of new solar systems will be paired with storage.
Solar farms require an abundance of sunshine
There is no point in putting PV panels in places where the sun doesn’t shine very often. In the U.S., sunny states like California, Florida, and Texas are leading new solar capacity additions, which makes sense. But solar panels aren’t as great in less sunny locations.
Solar farms need open land
Although solar farms are supposed to be good for the environment, the amount of open land they need is drawing opposition from environmentalists and locals. Opponents are concerned about spoiled views and damage to local species, even when they claim to be pro-renewables. Local residents want clean energy, but not if it spoils their view. Floating solar farms have been proposed as a solution in places like Singapore, but not everywhere lives next to open water, either.
The industry is facing rising costs
Although solar installation costs have dropped 60% over the past decade, they are now rising again due to inflation, tariffs, shipping constraints and Covid-related supply chain bottlenecks. The cost of utility-scale solar projects increased by 18% in 2021, defying the trend. Obviously, installation costs are a problem for solar farms developers, not farms that are already built and generating income.
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Solar farm return on investment
There is no single return on investment you can expect to earn from solar farms. Different factors are at play, including:
- The amount of land. Larger, utility-scale projects can be expected to generate larger returns due to economies of scale
- The location of the farm. It is obvious that solar farms need to be in sunny locations to generate the most power, amortizing the development cost
- Utility contracts. Solar farms need to sell electricity back to the grid at a profit. They usually sign agreements with local utilities, agreeing on the terms ahead of time. Any state or local incentives may provide extra money to the developers
- Proximity to the grid. A solar farm can make more money if it’s already located next to the power grid. Otherwise, the extra investment in transmission lines may become a problem. Local residents may also protest if they don’t want the works near their homes
How to invest in solar farms
There are several ways you can invest in solar farms.
1. Direct solar farm investment
If you are a large landowner, you can hire a developer and start your own solar farm or you can lease your land to a solar farm. Platforms like Wunder Capital offer institutional investors solar farm opportunities. These options are not applicable to most everyday investors, though.
2. Solar farm stocks
If you want to invest in solar farms through stocks, that is possible, but you are then subject to the vagaries of the stock market. Also, there aren’t that many “pure-play” solar farm options. Major renewable energy players like NextEra Energy (NEE) operate solar farms, but most of them are also big in wind, hydro, or natural gas. Some smaller companies like Atlantica Sustainable Infrastructure Plc (AY) are more tied to solar farms.
The London, UK-based Atlantica Sustainable Infrastructure Plc (AY) manages a portfolio of renewable energy assets in solar and wind. They have also invested in water desalination infrastructure and transmission lines. But most of their assets are in solar, including solar farms in Arizona, California, Chile, Colombia, South Africa, Italy and Spain. To sell energy from the farms, Atlantica contracts with utilities like PG&E in California.
Their portfolio includes 39 assets with over 2GW in renewable energy capacity, of which 71% is in solar. Atlantica sells energy under long-term contracts, with an average remaining term of 15 years as of December 2021. Nasdaq-listed Atlantica generated over $1.2 billion in 2021 sales and boasts a market cap of nearly $4 billion.
🔔 Learn more about investing in solar stocks.
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3. Solar farm ETFs
There are two exchange-traded funds (ETFs) that let U.S. investors participate in the transition to solar. The largest solar fund, the Invesco Solar ETF (TAN), tracks an index of global solar energy companies and owns around 50 solar stocks. However, most of their investments are in solar technology companies, such as PV manufacturers like First Solar. Solar farm investments like Atlantica Sustainable Infrastructure Plc (AY) are present, but utilities are only one-fifth of the fund’s assets.
The smaller and newer solar power ETF, the Global X Wind Global X Solar ETF (RAYS), has the same problem. The top investments are solar technology companies. Utilities are less than 10% of the fund’s assets.
As a result, TAN and RAYS ETF are a good way of investing in solar energy generally, but not really in solar farms. Unlike solar farm investments, solar energy stocks include unprofitable companies with volatile earnings. Both ETFs have been highly volatile as a result.
🔔 Learn more about investing in solar ETFs.
Climate change is not going away and the war in Ukraine makes the switch to renewables even more topical. Solar farms are just one of the countless ways you can invest in the climate transition.
NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.