Elon Musk’s Tesla is looking to buy SolarCity at a moment when sector returns are under pressure.

Solar power is a paradox. It is the world’s fastest-growing energy source, but it has been anything but a one-way ticket for investors.

Tesla’s proposed takeover of SolarCity, the largest residential solar company in the US, is the latest warning that bright prospects for the industry will not necessarily be reflected in shareholder returns.

The policy framework supporting solar power in the US has “never been better”, in the words of Thomas Werner, chief executive of SunPower, one of the largest American solar companies.

The economics of solar power in the US are still heavily dependent on government support, including a federal tax credit and many state incentives. The tax credit had been scheduled to expire at the end of this year, but a budget deal agreed by Congress last December gave it a five-year extension, with a gradual phase-out lasting until 2021.

California, the largest solar market in the US and one of the largest in the world, in January agreed favourable new rules for “net metering” — the billing framework for electric utility customers who generate their own power.

And President Barack Obama’s administration has insisted it is determined to press ahead with its Clean Power Plan — the new regulations for cutting carbon dioxide emissions from power generation, which favour renewable energy — in spite of a setback in the Supreme Court.

Installations of new solar capacity in the US, which more than tripled over four years to 7.3 gigawatts in 2015, will rise a further 25 per cent to 9.6GW this year and hit 10.9GW in 2021, according to Bloomberg New Energy Finance.

At the same time, new markets have been opening up all round the world, as the falling cost of solar power makes it competitive against new fossil fuel plants in many countries even without subsidies.

Trina Solar, the Chinese manufacturer of panels and other components, says it added 20 new markets last year, including Poland, Morocco, Indonesia and Uruguay.

Yet in spite of all this good news, SunEdison, the world’s largest solar project developer, went into Chapter 11 bankruptcy protection in April. Abengoa, the Spanish renewable energy group that has a large solar business, filed for Chapter 15 protection, which covers cross-border insolvencies, in March.

Now SolarCity is in talks about being taken over at a price that would value its shares at about half of what they were worth at the end of last year.

Jeffrey Osborne, an analyst at Cowen, said in a note he thought SolarCity was worth more than Tesla has offered, but added that the company had faced “challenges and delays in raising capital”, and could benefit from Tesla’s greater ability to attract financing.

SolarCity reported a net cash outflow of $2.52bn last year, and had net debts of $2.37bn at the end of December.

Nervousness in capital markets, in part linked to the UK’s referendum on EU membership, has been causing some problems for the entire industry.

The underlying issue, however, is that solar’s attractive prospects make it difficult to make money in the industry, Mr Werner says. The inflow of capital over the past few years has enabled many companies to enter and expand in the solar industry, making the market highly competitive and making it hard for anyone to earn good returns.

 Originally posted on Financial Times

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