As the price of oil has tumbled to five-year lows, solar stocks have fallen with it: First Solar was trading near $72 in mid-September; now it's around $44. Solar City has around $65; now it's close to $50.
Solar energy investors seem to be running for the doors, fearing that cheap oil will erase demand for alternative energy. But it won't, say industry analysts. Oil and solar serve two different customers.
Oil dominates energy demand in transportation fuels, but solar power customers are primarily of two types: public electric utilities and large corporations. Neither of those use oil to generate electricity, and they are not about to start doing so, say analysts.
Less than 5 percent of the world's electricity comes from oil; most of it comes from coal, , nuclear and, increasingly, solar power. Public utilities sign long-term agreements with solar providers, sometimes spanning 20 years. Those deals are unaffected by oil price changes, said Jeff Osborne, an analyst with Cowen Group.
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"Even with the price of oil being lower, cheaper materials have made solar still far more practical," Osborne said. Solar arrays are fairly inexpensive to maintain once they are built, and they draw on a free and unlimited input: sunlight.
Oil may be cheap, but there's little real infrastructure in place to convert it to power. The few oil-burning power plants in existence are more than 50 years old, and prohibitively inefficient, according to Shar Pourreza, an analyst at Citi.
"There is no real relationship between oil and solar," Pourreza said.
Pourreza sees the recent solar selloff as a " 'risk-off' sentiment trade"; investors may be taking money off the table on fears that the price of oil is a portent of other bad fortune, such as a global economic slowdown. Such fears will affect any risky stock, solar stocks included.
Meanwhile, demand for solar among utilities is growing. Solar costs are nearly at parity with those coming from natural gas and other sources, even when you subtract the subsidies that have helped buoy the industry over the last several years.
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New technologies and increased competition, especially from Asia, have driven down the cost of making panels, a trend that will likely continue. Moreover, materials manufacturers over built during a recent boom in the industry, and many are stuck with excess capacity. The price of polysilicon, a basic ingredient in solar panels, dropped from $400 per kilogram a few years ago to about $20 per kilogram now, Pourreza said.
Corporate customers are also fueling growth. Walmart plans to power its stores using only renewable energy by 2020. The retailer has signed contracts with Solar City, First Solar, SunEdison and others.
Demand is growing in Latin America, where mining companies located far off the energy grid are swapping out diesel generators. SunEdison recently signed a deal to build a large solar array for a Chilean mining company, and First Solar recently acquired a solar company in Chile in order to establish business there.
Politics also matter. Roughly two-thirds of U.S. state governments now require that a significant portion of electricity comes from renewable sources. Utilities depending heavily on natural gas will look increasingly to solar to diversify their energy mix. In Japan, the government recently increased subsidies for solar power.
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To be sure, solar will not dominate the energy sector any time soon. Natural gas is a competitor; it burns far cleaner than oil and coal, bears none of the risks of nuclear, and is abundant in the United States, said Pourreza. In addition, solar technology produces energy unevenly.
"Solar is great during the day. It is great for peaking, like in the middle of summer when everyone is running air conditioners," said Michael Gaugler, managing director of Brean Capital. But to meet minimum demand at night, "you are going to need to generate a lot of energy and find a way store it overnight to get away from nuclear and natural gas."
So for the near future, the world's energy will draw from a mix, but solar will be an increasingly significant ingredient.
"Natural gas has been cheap, and it will continue to be important, but you will start to see the price inch upward as demand increases," said Gaugler, who also follows the natural gas market. "Solar still made sense when natural gas was at $2. You are not going to see $2 natural gas again."
"We have hit an inflection point," Gaugler said of solar power. "It's not just a California business anymore."
—CNBC's parent NBCUniversal is a minority investor in Kensho.
