As countries worldwide transition away from fossil fuels like oil and natural gas, renewable energy sources, such as solar power, are set to attract increased investment. According to the National Renewable Energy Laboratory (NREL), solar energy could supply 45 percent of the electricity in the United States by 2050 if the energy system is fully decarbonized, a significant rise from 3 percent in 2020.

This projected growth offers substantial potential for investors, but it’s important to be mindful of the associated risks. Here’s what you need to know before investing in solar energy.

You might think solar energy is a relatively new phenomenon, but its use dates back to the 7th century B.C., when a magnifying glass was used to concentrate the sun’s rays to create fire and burn ants. The first solar collector was invented in 1767 by Swiss scientist Horace de Saussure. About 100 years later, French mathematician Augustin Mouchot proposed solar-powered steam engines and spent the next two decades building them with his assistant.

Research on solar power surged throughout the 1900s, leading to significant advancements and discoveries. In 1993, Pacific Gas & Electric installed the first grid-supported photovoltaic system in California, marking the first distributed power installation. In 1998, a solar-powered, remote-controlled airplane set an altitude record of 80,000 feet in California.

Looking ahead, solar energy will play a crucial role in the renewable energy landscape. Future buildings will incorporate energy-efficient designs and technologies, reducing the need for non-renewable energy. An increasing portion of the U.S. electricity supply will come from solar power. Additionally, cars and airplanes may increasingly rely on solar energy for their power needs

The solar industry is comprised of various types of companies involved in different stages of the process. Here’s an overview of the main types of companies and their roles:

  • Manufacturing components and solar panels: These companies produce the solar panels and components needed to convert sunlight into electricity.
  • Installation of solar panels: These companies handle the installation of solar panels, often on a commercial scale. They may also provide financing solutions alongside their installation services.
  • Solar facilities: These companies operate facilities that generate solar energy. They may also be involved in other renewable energy sources, such as wind or hydroelectric power.

Starting to invest can be challenging, but you typically have to choose between individual stocks and funds that hold a collection of companies.

Here are a few popular options:

First Solar (FSLR): First Solar is a leading manufacturer of advanced solar modules, supplying utility companies, distributors, and commercial and industrial buildings. The company anticipates benefiting from increased solar panel capacity over the next five years and beyond.

  • Market cap: $28.9 billion
  • 2023 sales: $3.3 billion

Brookfield Renewable Partners (BEP): Brookfield Renewable Partners operates one of the largest renewable power platforms globally, with hydroelectric, wind, solar, and storage facilities in North America, South America, Europe, and Asia. The company generates strong cash flow and shares it with investors through dividends, which it aims to grow by 5 to 9 percent annually.

  • Market cap: $18.9 billion
  • 2023 sales: $5.0 billion

SolarEdge Technologies (SEDG): SolarEdge Technologies manufactures solar components such as inverters and power optimizers, which convert DC power to AC electricity and help lower system costs. The company aims to become the leading provider of inverter solutions in the solar industry.

  • Market cap: $2.8 billion
  • 2023 sales: $3.0 billion

iShares Global Clean Energy ETF (ICLN): This iShares fund aims to track the investment performance of an index composed of companies in the clean energy sector, including those producing energy from solar, wind, or other renewable sources.

  • 5-year annualized return: 9.4%
  • Expense ratio: 0.41%
  • Assets: $2.4 billion

Invesco Solar ETF (TAN): The Invesco Solar ETF is based on the MAC Global Solar Energy Index and invests at least 90% of its assets in securities that comprise the index. Top holdings include Enphase Energy (ENPH), SolarEdge, and First Solar.

  • 5-year annualized return: 12.6%
  • Expense ratio: 0.67%
  • Assets: $1.1 billion

Fidelity Clean Energy ETF (FRNW): Launched in 2021, the Fidelity Clean Energy ETF aims to track a Fidelity index of clean energy companies. The companies in this index distribute, produce, or provide technology or equipment that supports the production of energy from solar, wind, hydrogen, or other renewable sources.

  • 1-year return: -24.9%
  • Expense ratio: 0.39%
  • Assets: $27.7 million

There are numerous advantages to investing in solar energy. Here are the major ones:

Sustainability: Solar energy is renewable because sunlight is inexhaustible, unlike fossil fuels such as oil and natural gas, which have limited supplies.

Environmental Impact: Compared to fossil fuels, solar energy has a significantly lower environmental impact. It produces much less carbon emissions and avoids the land damage caused by fracking and oil drilling.

Energy Independence: The U.S. has regions with abundant sunlight, such as the Southwest, creating the potential for solar energy to reduce dependence on foreign oil. On a personal level, installing solar panels can allow individuals to become energy independent.

Growth Potential: Solar energy is still in its early stages, offering enormous potential for future growth. This attracts many investors, though it’s important to note that this growth potential comes with its risks.

Despite the potential benefits of investing in solar energy, there are some concerns to be aware of:

Inconsistent Sunlight: One of the primary challenges of solar energy is its dependency on sunlight, which is only available during the day and can be obstructed by clouds. This inconsistency underscores the importance of developing effective energy storage solutions.

Material Constraints: The materials required to manufacture solar panels can be difficult to extract and are in high demand in other technological sectors. Supply chain issues affecting these materials could pose challenges for solar manufacturers.

Land Use: Currently, significant amounts of land are needed to install solar panels to generate substantial electricity. Advances in technology that result in smaller, more efficient solar panels could mitigate this issue over time.

High Valuations: Due to the growth potential of the solar industry, companies in this sector often trade at high valuations. This can make it challenging for investors to achieve substantial returns. Paying high prices for assets carries the risk that they may underperform, leading to significant price corrections.

The solar industry has evolved significantly from the days when mirrors were used to start fires. Today, it presents substantial potential as a renewable energy source. Investors can choose between individual stocks or funds that invest across the solar industry and other renewable energy sectors. While solar energy offers promising prospects and numerous advantages, it’s crucial to be mindful of its risks. Always remember that any asset can turn into a poor investment if purchased at an excessively high price.