The Untold Truth About Solar Power Stocks

By: Money_Morning

Dr. Kent Moors writes: The price of solar energy shares has been spiking, leading to the obvious parallel questions:

Is it sustainable?...Or what prospects exist for the average individual retail investor?

Before we address these questions, it would be best to lay some groundwork.

The increase in solar share prices has been just about across the board. This is most clearly seen in the rise in solar and related exchange traded funds (ETF). Guggenheim Solar (NYSEArca: TAN) has advanced 24.8% this past month, while American Vector Solar Energy ETF (NYSEArca: KWT) is up 15.2%. The iShares S&P Global Clean Energy Index (NasadqGM: ICLN) has improved 11.8%.

However, before you rush out and buy any of these ETFs, consider the longer view.

From December 1, 2012, TAN is down 36%, KWT is off 34.9%, and ICLN is weaker by 10.7%. The recent push up has resulted in some - apparently - better solar plays. Yet the medium-term perspective indicates the run up might not last.

Here's why...

In this case, sustainability is all about market position. Solar remains a niche energy source.

By the end of 2012, it accounted for only 1% of global energy consumption. Nonetheless, there have been some important developments that do provide some reason for optimism.

To begin with, the costs of solar cells and related material have come down dramatically. There have also been improvements in inverter technology, allowing thereby a cut in the energy lost when moving from direct current, which is how the power is generated, to alternating current, which is how that power is moved onto the grid and along to consumers.

The first is a mixed blessing to many in the industry, because it results from a massive undercutting of prices by Chinese companies. While that is allowing averages to go down, it likewise has resulted in significantly strained margins, bankruptcies, and production interruptions.

Solar also has been moving out of the realm of a subsidized energy to one that could become market competitive. Last month, Deutsche Bank issued a report - the fourth of its kind - which suggested that solar may reach grid parity as early as the first quarter of next year.

If ever there was a Holy Grail in the business, this is it.

Reaching grid parity essentially means that a source of energy is at about the same price as competing sources. Solar for some time has been criticized as being too expensive relative to other energies. Without continuing government subsidies, this argument runs, it would not be able to survive in the market.

Some residential subsidies survive, but the largest for new projects expired in the U.S. and the European Union at the end of last December. The strain on share prices in the first quarter of this year was a clear reminder of the end of such support.

Then there was an unexpected development: In several parts of the world, conventional electrical generation became more expensive for a range of reasons while the effective cost of solar was coming down.

Before the end of last year, solar reached grid parity in Hawaii, and it's on track to accomplish the same before the end of this year in Italy, Australia, and Brazil.

Depending on how one reads loads and distribution, there are claims that grid parity may occur for California (or at least parts of the state) in 2014.

Additionally, proponents of solar also point out that, factoring in "external" costs - especially those to the environment - solar is already at grid parity in most of the United States.

Should we then begin to look seriously at solar as a growth area for investment profit? Are these stocks finally going to be moving up on a regular basis?

Not so fast.

I am still of the opinion that this is going to be a very rocky ride - with some significant shortfalls approaching.

The primary problem involves integrating some rather heavy multi-year capital infusions required for generation and distribution infrastructure.

And there are still noticeable problems resulting from at least a third of the power generated being lost back to the atmosphere. Furthermore, there is still a massive loss of electricity when moving harvested power from the photovoltaic cells to the feeder lines for transit.

Most importantly, however, the industry needs to move from being a residentially-focused energy provider. That market has some expansion in it, but it cannot - by itself - save the sector. Germany has been learning this lesson over the past year, as expectations for solar and wind taking over for nuclear have fallen short.

What is necessary is a transition to utility-scale projects, despite the inherent problems in project cost that initially entails. And here, the recent success of a leading company is worth mentioning.

First Solar, Inc. (NasdaqGS: FSLR) is the dominant American solar energy provider. Not too long ago, the company was almost exclusively pushing out roof panels. Then it was undercut by cheaper production from China, and suffered an extreme price contraction.

The company has now moved into the utility side of solar. A knockout quarterly report has catapulted the stock. FSLR has risen 64.4% in the past month - although it is still 56% lower that it was 18 months ago.

First Solar, and the sector as a whole, is now overheated and there is a price decline coming. In the absence of major contracts in areas other than residential, we may witness a contraction in short order.

I am not persuaded that solar will make it without continued subsidies and government support.

But this may yet be the beginning of something interesting.

Source :http://moneymorning.com/2013/05/01/the-untold-truth-about-solar-stocks/

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