Dive Brief:
- Venture capitalists invested just $406 million in solar companies during the first quarter of 2024, compared to $2.1 billion raised in early 2023, according to Mercom Capital Group, a research and consulting firm serving the clean energy industry. Total corporate funding raised by solar companies fell 4% year-over-year to $8.1 billion in the first quarter.
- Demand for solar energy remains strong, but high interest rates are prompting investors to seek safer vehicles for their money. The solar industry, with its ongoing interconnection and supply chain woes, may seem too risky in today's market, said Raj Prabhu, CEO and co-founder of Mercom Capital Group.
- Uncertainty about interest rate cuts, the possibility of new tariffs on Chinese solar panels and the outcome of the U.S. election may cause investors to continue to avoid solar in the months to come, Prabhu said.
Dive Insight:
Demand for solar energy is as strong as ever, but investor interest is waning amid the industry's myriad of challenges, including a glut of low-priced early-stage solar projects, high interest rates, supply chain issues and the specter of renewed trade disputes, Prabhu said.
In addition to the sudden collapse of interest from venture capital, solar saw public market financing decline 39% year-over-year during the first quarter. Mergers and acquisitions fell 22%, according to Mercom. The dearth of funding may have led solar developers to seek more conventional debt financing, which rose 55% in the past quarter.
Investors may have planned to postpone dealmaking activities until March or April of this year, when many traders expected the Federal Reserve to begin cutting interest rates, Prabhu said. But venture capital interest in solar slowly declined over the course of the past year, suggesting an overall downward trend that began before the sudden Q1 drop in activity, he said.
And with the Federal Reserve now signaling that it may postpone cutting rates this year in order to curb inflation, Prabhu said there was little reason to believe investor interest in solar will rebound in the months to come.
This isn't to suggest that there is limited demand for solar energy itself, or that projects aren't moving forward, Prabhu said. Energy prices are rising, AI is set to create unprecedented demand for electricity, and nobody is looking to go back to burning coal, he said. The IRA created even greater incentive for developers to pursue clean energy projects — and, according to Prabhu, that might have contributed to what's now shaping up to be a boom-and-bust cycle in the solar industry as prices for both solar panels and solar projects collapse.
“It's confusing,” he said. “Things are so good that everyone wants to do a project because they see the future, they see the signs. But if everyone gets on the road there's going to be a traffic jam, and that's what is happening.”
Solar manufacturing, Prabhu said, started into its own version of this cycle last year. IRA incentives spurred a boom in manufacturing announcements in the U.S., but the increase in capacity simply caused solar module prices — including prices for equipment from China — to fall. Some manufacturers have already canceled plans for expansion in the U.S. as the rush to make solar panels caused module prices to fall to a point that additional manufacturing capacity is no longer viable even with the IRA incentives, Prabhu said. Falling prices have also spurred talk of restoring tariffs on imported solar panels.
Solar developers, he said, now face a similar situation with a growing number of early-stage, preconstruction projects building up in ever-longer interconnection queues. Investors may feel disinclined to spring for solar projects that face increasingly long odds of breaking ground, Prabhu said.
