Over the past few days you’ve heard about several different visions and ideas of how the future of energy should look, and how different policies are being constructed to get it there.
Most of the topics discussed were major efforts to reduce (or eliminate) the use of foreign oil by drastically expanding the use of electric and natural gas vehicles, using coal more wisely, and improving efficiency.
I’m a fan of an all-of-the-above approach, both for energy and investment solutions.
So, since the previous visions this week focused mainly on liquid fuels, I wanted to spend today on the electricity side of things, with particular attention to solar.
Solar Growth Trends
Here’s a chart I’ve used before*:
That’s a visual representation of installed solar capacity since the turn of the century. If the chart looks impressive, it’s because the solar market grew over 1,500% in the past eight years, from less than a gigawatt to well over 15 gigawatts.
For nearly a decade, the industry surged ahead with a compounded annual growth rate over 40%, and Green Chip investors made a lot of money on the companies making it happen.
And the solar market is set to triple in size in the next seven years!
By 2015, installed solar capacity will grow another 347% to over 72 gigawatts as utilities worldwide are incentivized and forced to adopt sustainable production assets, and as solar energy reaches price parity in a growing number of markets.
In order for those forecasts to hold true, improved policy is going to have to do battle with current economic conditions.
The Current State of the Solar Market
The solar market is currently facing rapidly falling prices, both for its raw material and its finished product. I spent some time on the subject in a recent Green Chip Review article.
A seasonal dip in demand and the related oversupply of panels coupled with the general economic slowdown and restricted lending has led to a recent ~30% decrease in selling prices for solar modules.
Of course, the operating costs of solar companies haven’t fallen as quickly, forcing companies to reduce profit margins as they sell discounted panels. In fact, in the recent price scramble, Chinese manufacturers have opened an advantage over historically dominant European companies.
Established Chinese producers are currently offering contracted prices of about €2.00 per watt, while European suppliers are struggling to break below €2.50 per watt.
As such, Chinese solar companies are poised to gain some European market share. You should see that reflected in their share prices over the next few quarters.
First Solar (NASDAQ: FSLR), of course, with their cadmium telluride thin film technology, is still the industry cost leader, able to produce panels at less than $1.00 per watt. As the industry’s continuously preferred supplier, FSLR should also be your preferred solar investment.
But even at $1.00 per watt, First Solar’s stock has taken a ~50% hit over the past six months as investors feared a continued recession and tight credit would further dampen new project starts.
Less dominant solar stocks have fared even worse, down 60% or more in the same time.
But new indicators are pointing to loosening credit for solar projects, and global government efforts to stimulate the industry are about to pay off for the solar industry and those who invest in it.
Regreasing the Solar Wheels
Even with the economy in the pits, the German solar market—the largest in the world—is still slated to grow ~30% this year, thanks to renewed lending by German state bank KfW. Funding for rooftop and small ground installations is also flowing again from large European investment banks and local savings banks.
Companies familiar with the market have indicated it will be a few more months before solar funding eases in the rest of the EU.
Point is, if you invest in solar this year, make sure the company has exposure to the German market, which will be one of the earliest to recover.
I think we’ll also begin to see some space emerge between solar companies that once moved in stride. An oversupply of panels means distributors and integrators can be highly discriminate when it comes to choosing which company they patronize.
Only the most highly-efficient panels with the best prices and best warranties will be purchased. Smaller Chinese companies are probably the most at risk.
Balance sheets for all solar companies will be off for the next few quarters as reduced demand from the recession and cyclical seasonal patterns works its way off balance sheets.
In addition to Germany, the U.S.—considered the sleeping giant of the solar industry—is also doing much to ensure a robust solar rebound.
Here’s just a bit of what our recent stimulus did for the solar industry, as I told it to Green Chip readers a few weeks ago:
Investors are now able to take a 30% federal refund on the value of a new installation before deducting any state incentives. So a theoretical $100.00 dollar solar system in North Carolina (35% state credit) now only costs the investor $35.00-because both federal and state incentives are now calculated from the full price. Best part is, those federal incentives have no cap and the project need only be finished by 2017 to qualify.
This incentive alone will rapidly increase solar demand as homeowners and investors alike rush to get discounts on solar installations on the taxpayers’ dime. But there are many more solar provisions in the stimulus that will only magnify the gains that can be taken on the right solar stocks.
There’s also $6 billion dedicated to paying the fees on guaranteed loans. This clause is aimed at encouraging banks to make loans for renewable projects. Most estimates say that $6 billion in guarantees will translate into $60 in new loans.
And Congress didn’t stop there.
They also guaranteed profits for you by setting aside $5.5 billion so federal buildings (including schools) can increase energy efficiency and their use of renewable energy. The U.S. General Services Administration (GSA) estimates that 75% of the projects that receive this funding will use solar technology.
For a full list of solar benefits included in the stimulus, click here.
Those provisions have led most analysts to forecast year-over-year solar installations to double in the U.S., from ~300 MW last year to between 600 and 700 MW this year. Another doubling by 2010 is in the cards, and by 2016 solar capacity in the U.S. could rival current worldwide capacity. . . hence the sleeping giant.
Globally, forecasts are more mixed but still positive. Q-cells (XETRA: QCE) sees 40% growth in solar installations this year to about 7 GW. First Solar’s view is more conservative, citing maximum global installations of 5.5 GW—about the same level installed in 2008.
Bottom line: the solar industry is still facing turmoil. Credit is still hard to come by, but there are opportunities for low-cost, high-quality providers. The second quarter will probably be the low point for installations, as weather in major markets begins to ease. First Solar currently has the best cost, and major Chinese producers are next in line. Changing global policy should incite a strong rebound, with the raw material side of the business remaining subdued a bit longer.
Call it like you see it,
P.S. Even with ongoing solar volatility, readers of Alternative Energy Speculator continue to profit. In March alone we’ve closed five winning positions on solar plays. And we’re going to profit from the broad solar rebound that will occur later this year as well. My new report, "Buy American: Three Solar Stocks for Profit," has helped thousands of investors prepare their portfolio. Get your copy by becoming a member of the Alternative Energy Speculator today!
*Charts provided by GlobalData