Solar power are one of the leading sources of alternative energy that is rapidly gaining popularity around the world. Once installed, solar panels can provide a source of near-free electricity – an attractive alternative given the current environment where the price of electricity is growing. This energy is clean, does not produce emissions and is inexhaustible. Even in Latvia, where sunshine is not as prevalent, solar panels are a sound investment, able to pay for themselves in savings over a few years. However, the Baltic States are far behind the EU average in terms of use of solar panels, and Latvia's contribution to total installed capacity in the region is only 2%. I believe we are at an inflection point and the solar panel industry will soon experience the rapid growth that has been seen in other countries.

During the summer of 2013, before my final year at the University of Virginia, I had the privilege to intern at a small private equity fund focused on solar energy. It was a novel business idea to expand solar power availability to business owners that wanted to utilize solar power but lacked the capital to do so. Our company would provide the full financing for and construction of each installations in exchange for ownership of the installation and a long-term offtake agreement with the business to purchase all of the electricity the panels generate. Upfront financing in exchange for stable and extremely predictable cash flows over decades, resulting in double-digit annualized returns on investment.

While today that might seem like a no-brainer and an obvious investment to make, nine years ago this was still a relatively unproven concept. Due to the high material and construction costs, most of those early projects were not feasible without the significant tax credits and other incentives provided by state and federal government programs to alleviate some of the financial burden. This was especially true for projects in the northeastern part of the country where the company is headquartered, given that the higher latitude and cloudier weather meant that the total power output was much less than installations in sunnier locales.

Despite the challenges, it was clear to me that this had the potential to be something special. It was exciting to model potential projects and work on a team with a strong mission. There was validation that this would work – even business owners that did not necessarily care about being green realized that switching to solar power just made good economic sense.

I left that summer planning to return full-time after finishing my studies. Ultimately, I came to Latvia instead. While I was not part of the journey, I continued to follow along and see my former colleagues achieve amazing results. From eight people sitting in one big office in 2013 to becoming a publicly traded company in December 2021 with a current market capitalization of almost $950 million. They were at the right place at the right time to catch the explosion of solar power usage in the United States.

The current state of affairs

Solar power is now more affordable, accessible, and prevalent in the United States than ever before. From just 0.34 gigawatts (GW) in 2008, U.S. solar power capacity has grown to an estimated 97.2 GW today. This is enough to power the equivalent of 18 million average American homes. Today, over 3% of U.S. electricity comes from solar energy in the form of solar photovoltaics (PV) and concentrating solar-thermal power.

The United States solar energy market is expected to grow at an annualized growth rate of 17.32% during 2022-2027, reaching solar installed capacity 270 GW by 2027. This growth is driven by strong demand and falling costs. Since 2014, the average cost of solar PV panels has dropped nearly 70%. Markets for solar energy are maturing rapidly around the country since solar electricity is now economically competitive with conventional energy sources in most states. Renewable energy tax credits and other supportive government policies will also continue to incentivize further installations.

Europe is leading, but Latvia has fallen behind

In Europe, total installed capacity is even greater. The EU’s solar power generation fleet increased by 19% to 164.9 GW, from 139 GW in 2020, when growth was also in the double digits. This is despite the adverse market conditions like PV product supply shortages due to the ongoing supply chain disruptions. Going forward, installed capacity is expected to continue to grow at double-digit levels and solar power will take an increasing share of electricity generation across the EU.

The good news is that in 2021, 25 of 27 EU member states deployed more solar than the year before. The bad news is that the installed capacity is massively concentrated in just a few countries and Latvia is not one of them.

Estonia, Latvia and Lithuania have seen uneven development in PV installations to date, and the installed capacity per capita significantly lags the EU average. At the end of 2021, the three Baltic states had a cumulative installed PV capacity of 785 MW. Almost 70% of this has been installed in Estonia. Lithuania accounts for around 28%, while installations in Latvia are around 2%, approximately 19 MW. For reference, 1 MW can provide electricity for 400-600 homes.

Concrete plans are lacking

To say that we are lagging behind would be an understatement. Yet, there is no plan nor target or auctions for the installation of solar. This does not give investors enough visibility for their investments. A specific plan should be set to encourage prosumers, based on support schemes, tax exemptions, and the development of collective self-consumption.

Despite these hurdles, investment is still occurring, both big and small. A number of banks, including BluOr Bank, have started offering favoring financing to help both individual consumers and businesses install solar panels. VARAM and Altum have programs in place to provide financial support to improve energy efficiency, including solar panel installation. And just a few weeks ago, BaltCap Infrastructure Fund and AJ Power, the largest private PV developer in Latvia, signed an agreement to establish a joint venture to develop solar generation in Latvia, with a plan to install 30 MW over the next three years.

The nascent solar energy industry in Latvia is at a critical juncture. With the price of electricity having skyrocketed and the need for energy independence become abundantly clear over the past few months, solar installations will only increase in the coming years. And while solar power will never be the primary source of electricity in Latvia, it will play a role in providing affordable electricity and achieving climate goals. I am excited to see the industry grow and succeed just as my former colleagues have in the United States.

Written by Pēteris Celms, BluOr Bank investment portfolio manager