Several Wall Street investors asked me at a recent conference about the effect of low oil prices on the solar industry's prospects. The investors erroneously believed that cheap oil would make solar less competitive. I wanted to correct that misunderstanding before it made its way from Wall Street to Capitol Hill, where it could affect not only solar stocks, but solar policy.
Is there a correlation between oil prices and solar stocks? The answer is no, even though you’d never know that by looking at the stock market.
Last year in Q4, solar stocks were down 16 percent and traded with a high correlation (0.74 in the second half of the year) to oil stocks, according to Goldman Sachs equity research. Oil stocks are down because the price of crude has dropped dramatically. Yet solar is growing at approximately 40 percent annually in the U.S. Confused?
The fundamentals of oil and solar in the United States are not related. The correlation between the growth of solar (Greentech Media) and oil prices (NYMEX WTI), measured quarterly since 2007, is -0.26. Furthermore, the correlation between average retail electricity prices in America (US DOE EIA) and the price of oil (NYMEX WTI), measured quarterly since 2007, is 0.24. Simply put, a correlation this low means there is none.
The data demonstrates what we know about the fundamentals: oil price today does not affect US solar growth nor value. Here’s why:
- Solar creates electricity. More than 99 percent of the electricity in the US comes from sources other than oil (US DOE EIA). Solar does not compete with oil to generate electricity in America; and
- It costs less to make electricity from solar than it does from oil at $50 per barrel. Even at $30 per barrel, solar still wins.
Public equity investors are getting this trade wrong.