Solar Stocks: Will They Go Up or Down in 2007?
The following report was recently published on the Alternative Energy Investor website: www.altenergyinvestor.org.
Last year, the solar sector as a group outperformed the NASDAQ by more than hundredfold, increasing in average value by 134%. As we near the end of 2006, however, the solar stock performance data is anything but bright. In fact, the average loss through the first three quarters is – 11.98%, while the average gain from the leading US Indexes was up + 6.13%, according to independent Wall Street analyst Peter Lynch.
Solar PV industry revenues in 2005 were up 50% and profits up 149% compared to 2004, according to Photon Consulting. (Figures for 2006 are not yet available.) Photon projects total global new solar capacity to be 2,400 MW in 2006 with an average global module price of $4.50 per watt and an average installation price of $7.93 per watt.
Why is there such a large disconnect between solar stock performance this year versus last year? After all, 2006 boasts plenty of good news. California launched a ten-year commitment to 3,000 Megawatts (MW) of new solar photovoltaic (PV) capacity over the next ten years. Elsewhere, demand for solar continues to radically outstrip supply.
The short answer: solar stocks are victims of their own success. The phenomenal gains of 2005 were simply unsustainable. Like the dot.com bust, unrealistic expectations about solar fueled a buying frenzy, and silicon shortages and less tangible factors drove values back down.
Unlike the dot.com phenomenon, which was based on high turnover of a product that might cost $2,000, the solar market is far more complex, relying upon a maze of market participants (including federal, state and local governments) and equipment that – even with subsidies – often costs end-users around $24,000 and is a one-time purchase that lasts 25 years.
One unnamed solar enthusiast (with tens of millions of dollars from a family trust at his disposal) still has not invested in any solar stocks. Why? “My cost for installing solar panels was $2.70 per watt in 2002; now, its $4.00 per watt,” he said. “The cost of money has risen as has the cost of solar panels, insurance, labor, gasoline for service vehicles, etc. In short, the days of fat margins have vanished.”
One has to remember, nevertheless, that the fundamentals underlying optimism about solar remain sound. One could argue that on “big picture” basis, the solar market looks brighter today than in 2005 given the increase in voluntary and regulatory attention to reducing carbon in the atmosphere due to global climate change.
“PV is the most popular and promising of the renewable technologies because it can be applied and used anywhere in the world without an infrastructure,” states Solar Outlook, a Navigant Consulting study released in June 2006. This aspect is both appealing and alarming. “With PV, private ownership of the means of electricity production is possible, and this represents an unsettling revolution to the current electricity structure and to the politicians,” notes Navigant.
Recent growth in solar PV remains largely driven by subsidies. Grid-connected systems accounted for 85% of total sales demand in 2005. Navigant sees slow growth in solar through mid-2008. Thin-film solar (which use less silicon) is ramping up in capacity, but cannot yet fill the gap. Between 2000 and 2005, thin film technologies grew at a compound annual growth rate of 27% (compared to 42% for the dominant crystalline technology), states Navigant.
According to the federal Energy Information Administration domestic solar PV shipments reached a record high of 134.5 Megawatts (MW) in 2005, a 72% increase over 2004 shipment figures. And a report released this past October by the Prometheus Institute for Sustainable Development of Cambridge, Massachusetts (and entitled Polysilicon: Supply, Demand & Implications for the PV Industry) claims that the silicon supply bottleneck should ease by 2008.
The report forecast sufficient supplies of silicon – currently the feedstock for 95% of the world’s solar PV panels – to allow the solar PV industry to grow to 8,000 MW by 2010. The authors of this silicon supply report – Hilary Flynn and Travis Bradford – go so far as to say that along with seven major polysilicon producers, nearly 20 emerging new producers are entering the fray, and there is even the possibility of a silicon glut before the end of the decade.
The silicon shortage has prompted several new innovations:
· In June 2006, Palo Alto-based Nanosolar, Inc. raised $100 million in funding from the likes of new solar industry players such as Swiss Re, the insurance sector leader of the Dow Jones Sustainability Index. Nanosolar Inc. relies upon proprietary nanoparticle ink and fast roll-printing techniques, offering the advantage of less materials cost and more versatile product forms. The firm’s new Palo Alto factory is capable of manufacturing 430 MW of solar cell capacity per year
· The silicon shortage has also sparked renewed interest “concentrating” solar PV products, also known as CPV. CPV relies upon lenses to concentrate sunlight onto solar PV cells, a technique that reduces PV cell size and, therefore, raw materials such as silicon. CPV could cut silicon needs by 85%. CPV players include Practical Instruments, Stellaris Corporation and SpectroLab.
· SunPower Corporation’s latest solar panel boasts 22% efficiency in its conversion of sunlight to solar-generated electricity. Planned for commercial availability in spring of next year, the SPR-315 can produce 50% more electricity per square foot of roof area when compared to the average performance of the competition.
What does Piper Jaffray have to say? They first spotted the silicon supply issue in the fall of 2005.
In a report this past July (PJC Solar Industry Note (Volume II, Issue 5): Is The Solar Bloom Off The Rose?), Piper Jaffrey projects 10% growth in 2006, doubling to 20% growth in 2007, largely driven by thin-film and other technologies less dependent upon silicon (or firms that are vertically integrated with silicon suppliers).
According to Piper Jaffrey, Germany is giving us clear evidence of market dynamics. The rising prices of solar have had severe consequences. For the first time, banks have declined to finance large-scale solar projects due to poor internal rate of returns. The largest installers there have also shifted to thin-film technologies once ridiculed due to their inefficiency.
The bottom line? The problem is supply, not demand. Expect more of the same in 2007 as in 2006, but less losses and modest gains; setting the stage for a more realistic valuation of solar companies and products by the end of 2008.