Is Solar Losing Its Shine?

December 05, 2008

There are more clouds over the industry than just falling oil.
  • Basking in solar's glow
  • Rogue's gallery of under-performers
  • Credit crunch casting a shadow


When it comes to the now-past-its-prime bull market in alternative energy, one of the leading roles was played by solar energy. Solar had all of the boxes marked on the clean tech checklist. The energy from the Earth's sun is clean, plentiful and is (relatively) easy to harvest and distribute. Like many other clean energy sources, solar was a viable alternative to heating oil and other fossil fuels. Better yet, solar had a track record, with measurable energy savings for homes and businesses.

Investors were basking in solar's glow, and put lots of money to work in solar companies. In the first half of 2007 alone, according to audit firm Ernst & Young, solar was the dominant clean tech investment segment in the U.S., accounting for 15 of 26 deals and $305 million of the $458 million invested in energy generation. Wall Street was also captivated by solar energy. Morgan Stanley issued a major report in 2007 on clean tech in which they reserved special optimism for solar power, which they said will take more market share as costs decline for panels that convert the sun's rays into power.


Casting A Pall...

Now solar energy seems to have slipped into the shadows, the most telling indicator of which is how fast investors are jumping off the solar bandwagon. Solar energy stocks represent a rogue's gallery of under-performers, even relative to the under-performing broad equity indices. First Solar (NasdaqGS: FSLR), which on May 16, 2008, traded as high as $311 a share, plummeted to $92 in mid-November, a 70% drop in market cap, before recovering to the $116 level in early December. Suntech Power Holdings (NYSE: STP), a leading developer of photovoltaic solar cells, has a 2008 stock chart that resembles a water park slide - long, meandering and down. STP stock went from a high of $88 per share on January 3 to $5 per share on November 20.

Solar ETFs are also feeling sunburned. As of November 20, Market Vectors Solar Energy (NYSEArca: KWT) and Claymore/MAC Global Solar Energy (NYSEArca: TAN) tumbled 73% and 74%, respectively, from their May highs. By comparison, the S&P 500 fell 45% over the same time frame. Part of the problem is that the solar companies, along with most other alternative energy companies, justified so much of their potential growth on the sustained high price of oil. Once oil retreated from its highs of $140/barrel, that growth driver immediately went out the window.

But investors shouldn't become fixated on oil as the source of the investor doom and gloom in solar energy. There are many clouds over the industry, not just falling oil. JP Morgan Securities issued a recent report that blames the swoon in solar on reduced solar subsidies in Europe next year, higher borrowing costs, increased competition, and pricing pressure at all levels of the solar photovoltaic industry. Solar isn't immune to the global credit crunch, as lack of financing for solar projects and capital to fund manufacturing capacity expansion casts a shadow on the industry. Solar energy companies are also dealing with rocketing prices for silicon, the basic substance for photovoltaic technology and a material that until recently was experiencing a worldwide shortage and major price increases.

Despite the solar sunset, it's helpful to point out that we've been through this before. Solar energy technologies have experienced periods of heightened interest, notably during and just after the 1970s oil crisis when the nascent solar industry was born. However, the solar energy technologies of that era never approached cost competitiveness with conventional technologies, and once oil prices fell, both policy support and investor interest in the sector waned.


Sunnier News

The news isn't all bad for solar energy. In late October, First Solar raised its fiscal 2008 revenue projections. Solar will also rebound as the credit markets reopen, as more governments look to push cost-effective renewable energy mandates, and if we see a reversal in the prices of fossil fuels, such as oil and natural gas. Other potential catalysts include an uptick in utility-scale projects in the U.S. and global economic stability. If all this comes about, the sector is poised for a nice turnaround in coming quarters in anticipation of a return to high growth rates later in 2009 and into 2010.

Finally, there appear to be strong fundamental factors driving the interest in solar and in clean tech in general. Increased energy prices, peak oil concerns and climate-motivated legislation are just a few of the factors. There remains widespread anticipation that an Obama administration will push for an expansion of the use of alternative energy generally and solar in particular. There are hopes that the new president will go beyond the recently approved extension of the solar investment tax credit and provide even more lucrative support for alternative energy. While not all the present solar players may survive, the market is set for sustained growth into the long term, as the rate of technological advancement increases and solar energy becomes a much bigger slice of the U.S. energy pie.


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