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If you think of solar stocks as energy stocks, you know you've got to own them. All the long-term trends in the energy sector -- $130-a-barrel oil, climbing prices for natural gas, delays in nuclear power plant construction, cancellations of coal-burning power plants -- are working to push the revenues of solar companies and the price of solar stocks higher.
But to decide which stocks to own in the solar group, you've got to analyze solar stocks as technology stocks. Solar-cell companies are engaged in one of those typical technology industry races between rising sales and falling prices that have determined the winners and losers among computer-chip makers, cell-phone manufacturers and flat-screen-TV producers.
Let me tell you why I think these three makers of solar cells -- SunPower (SPWR, news, msgs), Suntech Power Holdings (STP, news, msgs) and First Solar (FSLR, news, msgs) -- are on the right side of the energy trend and technology history.
- Talk back: Buy solar stocks now, or wait?
Electricity produced by solar cells will become cost-competitive with electricity generated by conventional power plants in the sunshine-rich U.S. Southwest without any government subsidies in 2013, investment bank Jefferies & Co. projected in an October 2007 report.
Everything that's happened since that report came out makes that timeline seem pessimistic. Solar now looks like it will become cost-competitive in the Southwest before 2013. Consider:
- The spot price of oil (West Texas Intermediate grade) climbed to $131 a barrel on May 29 from $80 on Oct. 1, when the Jefferies report was published. That's a 64% increase. Oil isn't used much to generate electrical power -- some is burned in diesel generators -- but it does set the price for other forms of energy.
- The Henry Hub price of natural gas -- which is burned to produce electricity -- climbed 49% from October to May.
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- Between 2000 and 2006, U.S. utilities proposed 150 coal-fired power plants. By the end of 2007, utilities had built 10 of those, 25 were under construction, and a whopping 59 had been canceled or delayed due to everything from increased regulatory scrutiny to worries that global-warming regulations that were no more than a gleam in the eyes of some members of Congress would slap new costs on coal-burning plants. The problem got worse with the January 2008 cancellation of the federal FutureGen clean-coal pilot plant. The utility industry projects it will take 15 years to get this technology from a pilot plant to a commercial plant, and the clock isn't yet ticking. Every coal-fired plant put on hold increases the need for substitute generating capacity. That will keep natural-gas prices dancing upward and make electricity more expensive.
- Electricity prices per kilowatt-hour for residential customers climbed 3% from October to May for the U.S. as a whole. In the Pacific region, the likely market for power generated from solar installations in the Southwest, the price of electricity climbed about 9%.
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- Hundreds of nuclear reactors are in the pipeline around the world, and about 30 are actually under construction, but it's taking longer and costing more than expected to build them. Finland's Olkiluoto 3 reactor, the first of a new generation of European pressurized-water reactors from French company Areva (ARVCF, news, msgs), was supposed to start producing electricity in 2009. The project is about two years behind schedule, however. Areva and its client, Finnish utility TVO, are arguing over $2.4 billion in cost overruns.
Higher electricity prices will hasten the day that solar-generated electricity in the Southwest, at least, reaches cost parity with the average cost of power from other sources.
What could go wrong
One thing could derail the trends working in solar's favor: an early end to the government subsidies. These subsidies have been critical in producing enough sales volume to enable solar-cell producers to bring down costs. It's hard to imagine that the politicians who control the subsidies would cut or reduce them in a world of $130-a-barrel oil.But, hey, we're talking politicians here, and that is a real danger. Opposition parties in Germany, the world's No. 1 solar market, had proposed cutting subsidies by 25% to 30%. But the government now looks like it has managed to beat back Draconian cuts in favor of a relatively modest 9% reduction in that country's generous subsidies.
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The stupidity of US energy policyPoliticians say we can't afford $1.8 billion for a clean-coal pilot plant or $1.4 billion to subsidize solar power. When oil imports cost $1.3 billion a day, that's just ridiculous, Jim Jubak says.
In the U.S., the House Ways and Means Committee has passed a bill that would extend the existing tax break for residential and business solar installations for six years. The Senate version of the legislation would extend the tax credit for one year. Both bills have gotten caught up in squabbling about how much of these breaks would be paid for by new taxes. I'd still bet that even in the U.S., politicians won't let an extremely modest solar subsidy expire.
With all these trends going in solar's favor, I think solar industry revenues are set to soar. Revenues will climb by 27% compounded annually through 2012, according to a projection from Lux Research. Calyon Securities projects 17% compounded annual growth in revenues through 2016.
But revenues don't equal profits. Technology investors know this. A chip maker such as Advanced Micro Devices (AMD, news, msgs) has been in the black in just three years of the past 10 despite generating revenue growth of 137% during that period.
Continued: Hitting a profit wall
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