A Partly Sunny Outlook for the Solar Industry
Tony Daltorio, The Investment U Research Team
The forecast for the solar power industry is rather cloudy.
On the one hand, we have governments globally trying to give the industry the impetus it needs, through subsidies and incentives, to fulfill its potential and become a mainstream energy source.
On the other hand, the fundamentals for the industry are currently far from sunny.
But just because there’s cloud cover, doesn’t mean that solar panels don’t make energy. And even though the markets conditions have changed, doesn’t mean we can’t make money here. Let’s take a closer look at the solar sector to see where the best opportunities are for investors.
The Global Solar Industry
Only last year, it was bright sunny skies for the solar industry. Demand for photovoltaic panels had been growing at 45 percent annually from 2000 to 2008.
And industry growth had actually been hampered by tight supplies of the raw material polysilicon, causing prices to soar 40-fold between 2001 and 2008.
However, the industry underwent an aggressive expansion at the wrong time – just as the credit squeeze and the global economic slowdown kicked in. Today there is plenty of polysilicon, plunging prices, and few buyers.
The supply/demand fundamentals and pricing for the industry are not good.
On the supply side, finished solar panel capacity is at about 9,000 megawatts, while demand for such panels has contracted from about 6,000 megawatts last year to 4,500 megawatts this year. And analysts at technology research firm iSuppli predict the panel glut will not end until 2012.
Much of the blame for the slowdown in demand lies in Spain. Sunny Spain accounted for nearly half of global installations last year. This year Spanish demand is expected to fall from 2,500 megawatts to only 300 megawatts as government subsidies were slashed due to the recession.
Demand for solar is still lagging in much of the rest of the world. The high cost of solar power continues to hold it back from becoming more widely used around the world as a power source. For example, electricity produced using solar energy can be four times as expensive as electricity produced using traditional power plants run on natural gas. So for the foreseeable future, solar power will continue to need government support in order to be a viable energy choice.
Solar Power in China and the United States
Despite the current problems in the solar industry, there are two countries that are attempting to play catch-up to Europe, which leads in the solar power industry – China and the United States.
China is already the world’s biggest producer of solar panels. However, China still exports 90 percent of the solar panels it produces to markets such as Germany, Spain, Japan and the United States.
China is striving to become a meaningful market for solar energy and has adopted the European model of subsidizing the industry in an attempt to get it off the ground.
The official target for total installed capacity by the end of 2011 was recently raised 15-fold to 2 gigawatts and the target for 2020 was upped from 1.8 gigawatts to 20 gigawatts. China has started moving toward these goals by breaking ground on its first commercial solar power station.
It is the United States, however, which has recently attracted the most attention globally from the solar industry. Legislation is a sure way to increase the use of solar power. Therefore, much attention followed on the heels of the Obama Administration’s stimulus package which contained grants and tax breaks for solar power.
Demand for renewable sources of energy, such as solar, is growing in the United States as utilities must comply with state (and soon federal) standards. These standards will require a double-digit percentage of power production that must come from renewable sources. Since solar only accounts for about 1 percent of current U.S. energy produced, government standards have increased demand for solar power in the United States.
The United States is already the fourth largest solar market behind Germany, Spain and Japan. However, a recent report by Pike Research, a clean technology research group, says the United States may well lead the solar industry by 2014.
Jeff Smidt, general manager of Underwriters Laboratories energy business, commented “Most manufacturers around the world see the United States as the next big thing for solar.”
The Bottom Line
Many solar power companies were profitable before the recent economic downturn. But this mainly due to government subsidies as governments globally continue to give the solar industry a push to becoming a major energy source.
But with many component prices dropping and other problems, pressure has been put on profit margins at many solar manufacturers and there is downward pressure on these companies’ stocks.
It seems that the solar industry’s gold rush mentality and over-reliance on government subsidies have come home to roost.
Owners of solar power stocks such as First Solar (FSLR), Suntech Power (STP), Sunpower (SPWR), along with the solar ETFs – Van Eck Solar Energy ETF (KWT) and the Claymore Global Solar ETF (TAN) should be very cautious.
If investors want to buy solar stocks, they need to do the research and buy only the companies that will be the major beneficiaries of government spending on solar in the United States. Otherwise, investors who hold large positions in solar stocks may want to consider scaling back their positions or at least, tighten up any trailing stops on the stocks.
Good investing,
Tony Daltorio
P.S. Our energy and infrastructure expert David Fessler is incredibly bullish on the solar sector and believes now is a perfect time to pick up some undervalued solar stocks. You can see his video commentary here.
- First Solar (Nasdaq: FSLR): Stock of the Day
- Solar Energy: A Bright Spot In The Alternative Energy Sector
- Solar Power: The Fastest Growing Energy Source In The World
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