The Solar Energy Sector: Profit From the "Solar Shift" With These Five Firms

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

The Solar Energy Sector: Profit From the "Solar Shift" With These Five Firms

by David Fessler, Energy and Infrastructure Expert

Thursday, January 21, 2010: Issue #1180

"Skill to do comes of doing." - Ralph Waldo Emerson

This simple statement fits the progress of the solar energy sector over the past 50 years.

In terms of that filtering down to solar stocks, however, the progress is more intermittent. The solar energy sector was one of the bright investment spots in 2007 and 2008, but was conspicuously absent from the big rally of 2009.

A closer look reveals that there isn't actually too much holding the sector back in the United States. And I've got five companies aiming to take advantage of this up-and-coming area...

From Science Project to Mainstream Power Source... Almost

Back in 1954, Daryl Chapin and Calvin Fuller created the first photovoltaic (PV) solar cells, based on polysilicon technology. Despite the breakthrough, early PV cells were expensive and progress stalled before it ever really got going.

But through technological advances, panel efficiency (the amount of solar energy that is converted into electrical energy) has risen steadily. There are at least a dozen new panel technologies manufactured commercially - all with an eye toward lowering the cost-per-watt. Polysilicon panels and CIGS panels (Copper, Indium, Gallium, Selenide) are currently the two largest technologies in commercial use.

Commercial PV solar panels now capture 10-20% of the sun's energy - a number that is expected to climb to about 30% over the next 10 years or so. But what about the nitty-gritty - the cost?

Wanted: Parity In the Solar Energy Sector

One of the drawbacks of a burgeoning technology like solar power is the high cost. And make no mistake... cost is the important issue here.

In order for solar power to reach widespread price-convergence with conventional power sources (a term referred to as grid-parity), the cost of silicon-based panels has to hit about $1 per watt.

However, the price currently stands at $4 per watt. That number is falling fast, though - it dropped by 20% in 2009 alone. For less-efficient thin-film panels, the cost is about half that number.

And thanks to a large dose of federal and state government stimulus money, plus the recently renewed Solar Investment Tax Credit, a few high-demand locations like California and New Jersey are already there.

According to solar research firm GTM Research, 11 states will have likely surpassed grid convergence in the commercial sector by 2012, while 10 will have reached it on the residential side.

For consumers and investors alike, here's why grid-parity is so important: once it's achieved on a widespread basis, commercial utility projects will soar, particularly given the growing dislike for fossil fuel power plants. Residential demand will explode, too - a development expected to fuel an estimated 40% of the sector's future growth.

And if you don't believe it can work, just take a look at one of Europe's big boys...

The German Example: A Model of Solar Energy Success

Germany is a great example of how the shift to increased solar power can work.

In 2000, the German government passed "The Renewable Energy Sources Act" (known as EEG in Germany). It was a paradigm-shifting event for Germany. Citizens knew they could all become energy producers. And grid systems operators are committed to not only accepting the power they produce, but paying fixed fees for it.

Today, with those fees declining every year, the EEG's benefits are powerful...

  • Germany is on track to become the leading solar market in the world. It currently produces nearly half of all the world's solar electricity and fulfills nearly 15% of Germany's total electricity needs. The EEG plan has them on track to increase that to 27% by 2020.
  • The German solar energy sector now employs over 230,000 people.
  • Thanks to solar power, Germany has reduced its CO2 greenhouse gas emissions by over 100 million tons per year.

It should be easy to replicate a model in the United States, right?

The Solar Energy Sector's Biggest Problem...

The solar energy sector's biggest problem here is a lack of promotion and marketing. For example, when was the last time you saw a TV commercial promoting the idea of putting solar panels on your home?

Despite that and the recession, however, we're still forging ahead with solar ambitions - and enjoying success. Consider these figures...

  • Industry research group, Solarbuzz, predicts that 6.37 Gigawatts of solar panels were installed worldwide in 2009. In revenue dollars, that's worth about $50 billion.
  • Installed watts are forecast to increase by 5% globally this year. But U.S. growth is set to explode by as much as 48% annually, according to GTM Research.
  • GTM says the United States could become the global leader for PV panel demand by 2012. I think that's a bit premature, but it certainly could happen a year or two after that.

And here are the firms poised to take advantage...

Five Leaders of the Solar Energy Sector

As panel prices continue to erode in 2010, this will ultimately increase demand for the firms that manufacture them. However, not all will churn out profits for investors.

The biggest players - and those most likely to survive and thrive - are:

  • First Solar (Nasdaq: FSLR)
  • SunPower (Nasdaq: SPWRA)
  • Suntech Power Holdings (NYSE: STP)
  • Yingli Green Energy Holdings (NYSE: YGE)
  • Trina Solar (NYSE: TSL)

And stay tuned for another solar company set to go public early this year - Solyndra. The firm has already received a lot of attention for its unusual panel designs, based on CIGS technology.

Instead of being flat, Solyndra's panels contain tubes that allow the solar cells to absorb both direct and reflected light. As you can imagine, this potentially creates panels that are more efficient than those from other manufacturers. Solyndra claims to have nearly one Gigawatt of panels on back order, mostly from commercial power producers.

This is going to be an exciting year for the solar sector. With a population more than four times the size of Germany's, the United States could potentially create over one million new jobs in the solar sector alone, by simply following the German model.

I'll be watching it closely and reporting on developments as they unfold.

Good investing,

David Fessler

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