Japan Solar Investing Opportunities
Feasting on the Remains of Solar
Last month, the higher-ups in the Japanese government told the world they would set a date for eliminating nuclear power by 2030.
Not less than a week later, we got word that Japanese officials would not formally adopt a plan for the phase-out after it drew significant opposition from the business community.
So basically, no one really knows how this is going to play out.
Of course, whether nuclear comes back or not doesn't change the fact that Japan is desperate to further diversify its energy economy by integrating more renewables...
In fact, the Japanese government has been very bullish on solar this year, offering trillions of yen (billions of dollars) in subsidy support that is likely to last well into 2016.
Solar advocates are cheering, but many of the renewable energy analysts I know agree that if Japan isn't careful, it could be setting itself up for a very dangerous solar bubble scenario.
Bracing for a Solar Bubble
Last week we learned that while an avalanche of big money is flooding the solar space in Japan right now, the suits at Sumitomo Corp. — one of the the largest trading companies on the planet — are looking to exploit new wind power development to hedge against what management calls an inevitable solar bubble...
As reported in Bloomberg:
Sumitomo's focus is in part a response to a rush into solar projects that's pushing up land prices and salaries, as well as luring investors from gambling parlor operators to asset managers. While government data show that Japan can build wind farms at a cheaper price and with higher returns than solar, 99 percent of applications for new tariffs are for electricity generated from sunlight.
So, is Sumitomo on to something here?
While Sumitomo prefers the economics of wind, it still may not be so black and white.
Don't get me wrong; as Japan moves forward on its plan to generate 40% of its power from renewables by 2035, wind will definitely be in the mix.
But there's another thing you have to consider...
You can slap solar panels on rooftops and scale up solar farms in a matter of months. Wind, on the other hand, takes much longer due to permitting issues, transmission requirements, construction time lines, and heftier capital raises.
That being said, I actually think Sumitomo's smart for jumping on wind right now — while the space is less-crowded, reminders of Fukushima have not disappeared, and funding is still available.
Over the long term, this strategy could certainly put Sumitomo in the pole position in the wind space. After all, this isn't some little wind start-up. This is a global behemoth with some serious swagger.
Sure, over the next two to three years, solar momentum in Japan will be strong. But I agree with Sumitomo management in that Japan's aggressive solar moves look eerily similar to those moves of previous bubbles in the solar space.
So if you're looking to hitch a ride on Japan's solar push, I'd suggest you ride that wave now — and get out early — just to avoid getting sideswiped by a potential solar bubble.
Because rest assured, if evidence of such a bubble comes to light, solar critics will come out swinging...
These guys are like a bunch of turkey vultures perched on telephone poles, waiting impatiently to loudly feast on the remains of any solar casualty that comes across their path. And when the time comes, they will not hesitate.
That's when you need to be far, far away.
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Thinking Outside the Solar Box
To be honest, I'm not rushing into solar at all these days.
Even with demand growing steadily throughout the Untied States, Japan, Saudi Arabia, China, and India, the solar space remains highly volatile. Continued supply gluts and lower average selling prices have continued to crush margins for most of today's solar players.
Now, that's not to say all will go gently into that good night...
We do expect to see even more consolidation in 2013, while more of the laggards go belly-up and make more room for those that remain competitive — even in these volatile times.
Truth be told, the result will actually be a leaner, meaner solar industry.
By the end of this decade, we're going to see production and installation costs fall so low that solar pricing will be competitive with conventional forms of power generation throughout most of the world. Interestingly, it's already competitive in many island nations, huge sections of Africa, and in quite a few emerging economies where a lack of fossil fuel infrastructure actually makes solar economically superior.
So if the outlook is good, certainly there's got to be a way to make a few bucks in the solar space today, right?
Well there is. But these opportunities are very difficult to pinpoint. Most will require you to think outside the box.
You see, instead of focusing on panel and cell producers, we're focusing on things like small tech firms that are licensing technology that can help solar producers increase efficiencies while cutting costs.
We're also eagerly awaiting an opportunity to play a new round of solar installers that are going gangbusters with new solar leasing plans that allow consumers to go solar without having to pay those high upfront costs...
SolarCity is one of the leaders in this space, and it's actually expected to go public before the end of the year. The company launched less than six years ago — and today controls about 15% of the U.S. solar installation market.
I should mention that while we've been looking forward to this IPO since it was first announced earlier this year, there has been little follow-up since then. I asked around at the Solar Power International Conference last month, and was unable to get much more than what's already been announced.
The IPO is scheduled to happen before the end of this year. We're now less than three months away, so at this point, it's anyone's guess...
But even if SolarCity does fail to go public this year, rest assured a little patience will allow you to find plenty of bargains in the solar space sometime around the second half of 2013.
To a new way of life and a new generation of wealth...
@JeffSiegel on Twitter
Jeff is the managing editor of Energy and Capital and contributing analyst for the Energy Investor, an independent investment research service focusing primarily on stocks in the oil & gas, modern energy and infrastructure markets. He has been a featured guest on Fox, CNBC, and Bloomberg Asia, and is the author of the best-selling book, Investing in Renewable Energy: Making Money on Green Chip Stocks. For more on Jeff, go to his editor''s page.