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Has Solar Had Its Day In The Sun?
One would think that if any industry should see the silver lining of the dark cloud of oil now floating in the Gulf of Mexico, it would be alternative energy. Since the April 20th sinking of Deepwater Horizon – an event that led to what some would characterize as the worst environmental disaster in U.S. history – calls for renewable energy sources have only grown louder. So why has the Claymore/MAC Global Solar Index (TAN) – one industry benchmark – declined so dramatically in price over that time and significantly underperformed the broader market averages?
The answer lies in the fact that the solar industry is one that very much depends on government support. The unsubsidized installed retail cost of solar panels is up to five times that of traditionally generated electricity and usually requires an upfront investment of between $25,000 and $30,000, a significant sum for the average consumer. At this time, it simply would not make fiscal sense for most homeowners to purchase solar panels without government incentives. (Interestingly, on principle alone, some estimate that 5% of homeowners would be paying in the absence of subsidies.)
Economies in Europe, where this market has historically received the most support, are struggling. Governments there are finding it increasingly difficult to continue the same level of subsidization as in the recent past. Budgets are being trimmed in order to fund fiscal stimulus activities and bank lending programs. For example, on May 6th, German lawmakers said they would cut subsidies for new solar plants by as much as 16%. In Italy, the reduction may exceed 25%. In Spain, utilities may see cutbacks of up to 30%. These actions are apt to hurt revenue growth in the quarters ahead.
Further weakness in the euro would add salt to the wound for those firms based outside of Continent, as sales are translated back to local currency at lower rates. In a recent quarter, Canadian Solar (CSIQ) saw its pretax profits reduced by $20 million as a result of adverse currency shifts. On the other hand, some firms have wisely put hedging programs in place. First Solar (FSLR), the largest panel maker with 85% of its sales coming from European customers, used forward contracts to limit the damage to just $2.3 million in the recent March period.
Stiff competition has added to participants’ woes. Relatively low barriers to entry in the manufacture of solar modules have created overcapacity and, in turn, oversupply. As a result, average selling prices have plummeted and squeezed gross margins. Persistent declines in the price of silicon – a primary component – have helped soften the blow to bottom lines, but many are still struggling to stem the flow of red ink on their books.
Green technology companies also depend heavily on reliable financing. The rising uncertainties for the solar industry have made it increasingly difficult for firms to get the funding they need. Banks, venture capital, and other investment firms simply do not want to take the chance that many firms in the space will not survive. Indeed, there are other areas of green technology, such as wind turbines, that currently hold greater investment appeal. Evergreen Solar (ESLR) is one manufacturer that has experienced difficulty getting the loans it needs. Persistent losses have put the company’s future at risk. Shares are now trading below a dollar.
On the brighter side, we figure it is only a matter of a few years before technological innovation lowers the cost of modules and obviates the need for subsidization. In the past year, prices have mostly fallen as a result of oversupply and the declining price of silicon. In the future, however, newer technologies are likely to be the primary driver toward lower cost. First Solar, the largest maker of thin-film modules, employs cadmium telluride. The technology has a conversion efficiency of only 10%, versus the 20% yielded by silicon-based modules. But thin-film units are far cheaper to make, which allows the company to be the lowest-cost (and most-profitable) producer in the industry. There are few thin-film module makers at present, partly due to the technological know-how required, but that should eventually change, given how lucrative it is.
The future of the industry, though, probably will come from technologies not yet developed. Researchers from the University of Texas and the University of Minnesota reportedly have discovered a process that can be used to increase the conversion efficiency of solar cells up to an impressive 66%. This development is promising for Evolution Solar, which has signed on to commercialize the product.
In the meantime, the prospects of firms currently in the marketplace are highly varied, so discretion is advised in investment selection. Nevertheless, some rewarding opportunities exist for those investors willing to ride out the storm.