Monday, April 8, 2013

Why Solar Power Stocks Are Still Earthbound

Article published on The New York Times on April 6, 2013
By Norm Alster

Long-suffering investors in solar energy stocks had reason to enjoy the first six weeks of 2013. After several years of poor performance while the overall market advanced, solar and other “green” energy technologies were market leaders early this year.

But by the end of the quarter, most of these stocks had fallen again. Was the strong performance of early this year simply a dead-cat bounce? What are the prospects for an emerging, relatively expensive technology that seeks to displace dirty — but cheap — hydrocarbons?
Source: Qilai Shen/European Pressphoto Agency
At the core of solar’s sorry market performance lies an enigma: solar sells, but it’s tough to turn a profit.
Global demand for clean, renewable energy is not the issue. “Demand has exceeded by far the projections of even two years ago,” Ben Schuman, an analyst at Pacific Crest Securities, said.
At the end of last year, installed global solar capacity stood at 96.4 gigawatts, up 43 percent from 2011 and roughly the equivalent capacity of 115 typical nuclear plants, according to Shayle Kann, vice president for research at GTM Research. Mr. Kann predicted further growth of 35 percent this year, to 129.7 gigawatts.
Nevertheless, company profits in the sector have been erratic — and shareholder profits scarce. The Guggenheim Solar exchange-traded fund, which mirrors a portfolio of solar stocks, fell nearly 30 percent in the 12 months through March.
So what is the most commonly invoked explanation for an industry where sizzling demand translates into sinking share prices? “Chinese industrial policy,” replied Kevin Landis, manager of the Firsthand Alternative Energy fund.
Chinese national and local governments have encouraged solar production with a grab bag of inducements, including loans, loan guarantees, tax breaks and even free land.
But the solar market, unlike other industries prone to cyclical overcapacity and subsequent busts, hasn’t self-corrected. Chinese vendors, Mr. Schuman said, haven’t been “as responsive to typical indicators” of excess production. “They haven’t closed capacity,” he said. “In China, shareholder profit can be a lower priority than employment, or the competitive dynamics between provinces and cities.”
So the prices of solar panels have been in free fall. In 2005, panels typically cost $3.50 per watt of power. By last year, prices had tumbled to 75 cents a watt. This year, Mr. Kann estimates, they will fall to 49 cents.
But Ken Abrams, a manager of the Vanguard Explorer fund for the last 18 years, says he thinks a looming shakeout of suppliers will ease overcapacity. Chinese producers are among the prime victims of their own overproduction, he said. And it is unclear how long the Chinese will support failing ventures. Eight Chinese banks pushed the main subsidiary of one major panel producer, Suntech Power Holdings, into bankruptcy last month.
“We see increasing hesitance on the part of Chinese government agencies to finance continuing deficits,” Mr. Abrams said. If Chinese authorities withhold support, more producers will fail, easing the overcapacity that has shredded prices.
Who would gain in such a shakeout? Mr. Abrams says it is a good time to consider industry leaders. The Vanguard fund holds large positions in First Solar, a solar systems developer based in Tempe, Ariz., and in Solar City, a leader in leasing solar systems; it is based in San Mateo, Calif.
But globally, low-cost producers should prevail, Mr. Schuman said. These would “probably be Asia-based,” he added.
Some fund managers are looking to a creative business model that can flourish with rock-bottom panel pricing.
Why lock into selling solar panels that keep getting cheaper? Better to buy the panels, install them free and then charge for the electricity they generate, gaining a predictable revenue stream. That’s the logic behind Solar City — which mainly serves residential and commercial customers in the United States — and several private solar leasing companies
“When the price of panels goes down, their business gets better,” Mr. Landis said. “The sweet spot is buying the panels and owning the output.”
Leasing is intended to overcome customer resistance to the high upfront cost of solar installation. Since a December initial public offering, Solar City shares have more than doubled.
Still, the leasing model requires upfront investment that can obliterate earnings until the customer base expands enough to produce offsetting lease income. Such is not yet the case with Solar City. which reported a larger-than-expected loss in the fourth quarter of last year.
Solar City is not the only company that employs leasing. SunPower, a major panel producer based in San Jose, Calif., has built a leasing business. And with several smaller private leasing firms, further I.P.O.’s are “a good possibility,” Mr. Abrams said.
“Leasing is going to be 90 percent of the solar business,” he said.