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The Solar Industry: Looking At A Bright Future

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By: Darren Gold
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As global energy demand rises amidst a wave of concern over environmental issues, engineers and scientists are increasingly looking to the sun as a source of clean and virtually unlimited energy. According to the US Department of Energy, the entire global demand for energy can be met from solar panels spread over 191,817 square miles, an area that is roughly one-twentieth the size of the Sahara desert.

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Within the renewables segment, solar generation accounted for nearly 4,342 Gigawatt hours (GWh) of energy produced in 2012, which was up more than 139% over the preceding year. Furthermore, according to Ernst & Young’s Solar Attractiveness Index, the US overtook China this year (2013) as the most attractive country for solar power generation in the world. Similarly, the European Union saw electricity generation from solar sources rise 99% in 2011 over the preceding year. Among European countries, Germany is the largest producer of solar electricity, with 5.1 terawatt hours (TWh) generated in July 2013.

Bidness Etc takes a look at the solar power industry, and analyzes the potential for investment in what could potentially be a major game changer in the power generation sector.

Trends

Falling Average Selling Prices

Solar cell prices had already slumped 93% from their highs, when the world first realized it needed alternatives to non-renewable fossil fuels following the OPEC oil embargo in 1970. Following this drop, average selling prices (ASPs) of solar cells had also come down from $300 per watt to $20 per watt, and even then, solar power had seemed like the best alternative source of energy supply.

ASPs have declined further following a supply glut between 2008 and 2012. Currently, multicrystalline cells are selling for less than 50 cents per watt, according to Bloomberg New Energy Finance (BNEF). Furthermore, the demand for solar photovoltaics (PV) is expected to remain at 35-40 gigawatts (GW), whereas manufacturing capacity is much higher at around 60-70 GW. Simultaneously, declining raw material prices, especially of polycrystalline silicon (an important component of solar cells) are expected to keep ASPs low in the foreseeable future.

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Rising Retail Power Prices

Higher retail power prices have also catalyzed the rise in solar demand in the US, with consumers preferring to shift to solar power when prices of power from other sources rise. The levelized cost of energy (LCOE) (the price at which electricity must be generated from a specific source to break even over the lifetime of the project) for natural gas and coal has increased by more than 39% and 43% respectively over the past five years. In the same period, the price for photovoltaic (PV) crystalline silicon has declined by more than 53%. In fact, LCOEs for all photovoltaic technologies have declined, and solar power is expected to achieve parity with other, cheaper power sources in the future.

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Source: Bloomberg New Energy Finance

The Shift to Green Energy

Climate protection agreements, like the Kyoto Protocol, have also accelerated the shift towards renewables. Under these agreements, energy-intensive businesses in a number of countries are given monetary benefits if they achieve targets to boost energy efficiency or reduce carbon emissions.

In this context, solar power has become a focal point as countries work to achieve clean energy targets and reduce carbon emissions. China aims to install 35 GW of solar generation capacity by 2015, which will be a 67% increase from current levels. Saudi Arabia plans to install 6 GW of solar capacity by 2020, and 16 GW by 2032. Japan already had the capacity to produce 6.6 GW of solar energy in 2012, and targets to increase it to 28 GW by 2020.

Risks

Withdrawal of Subsidies

However, even though the world seems to be gradually shifting to solar power, some major hurdles remain. Government subsidies, which are a major factor in making solar products affordable for consumers, may be reduced in the future. In October 2013, top executives from major power companies such as E.ON SE (EONGY) and Eni S.p.A. (ENI) urged the EU to reduce subsidies on solar and wind power.

The US government extends a 30% federal tax credit on solar installations and investments, which is expected to be cut to 10% by 2016. The IRS Modified Accelerated Cost Recovery System – which allows solar power generating equipment and its installation to be fully depreciated in six years, saving an additional 40-45% for commercial users – may also be discontinued, which will significantly impact solar companies’ margins.

Falling Shale Gas and LNG prices

The shale gas boom and increased supply of Liquefied Natural Gas (LNG) is exerting significant pressure on natural gas prices. Natural gas is considered the cleanest fossil fuel and electricity generation plants fueled by natural gas are around 50% more efficient than coal-fired plants. Natural gas’ lower LCOE as compared to solar power due to falling gas prices can reduce the demand for solar power as customers switch to the cheaper electricity generated from natural gas.

Disruptive Technologies

Finally, disruptive technologies in power generation, if they can be developed for commercial use, can dent the profitability of the solar industry and may even run some equipment manufacturers into the ground.

Thorium energy is such a technology and is one of the biggest potential competitors of solar power, even though it is still in the development phase. TerraPower, LLC – which is funded by Bill Gates – has been working on alternative nuclear reactors powered by thorium, which is a more abundant and cleaner resource than uranium. If the technology is developed successfully, it could spell death for the solar industry.

Performance

The risks notwithstanding, solar energy equipment manufacturers are currently enjoying healthy growth in revenues and orders due to government subsidies and new installations around the world. In 2012, photovoltaic solar installations were up 42% year-over-year.

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Stock prices of larger solar energy equipment producers are up 114% since the start of the year, with shares of Chinese manufacturers recording the highest rise. However, even though revenues for these companies are high right now, falling ASPs have squeezed their operating margins. The average operating margins for solar power modules and systems manufacturers declined 37 percentage points in 2012 over the preceding year.

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The NYSE Bloomberg Global Solar Energy Index – which comprises companies involved in the entire solar energy value chain – is up more than 88% since the start of the year and is currently at record highs. Meanwhile, the Guggenheim Solar Energy Index ETF (TAN) has risen more than 170% over the previous year.

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Despite risks from falling natural gas prices and withdrawal of subsidies, Bidness Etc is bullish on solar energy equipment manufacturers and the solar industry due to steady growth in orders, falling ASPs and raw material prices.

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Bidness Etc is keeping an eye on solar companies like SolarCity Corporation (SCTY), FirstSolar (FSLR) and SunPower Corporation (SPWR), which have shown stellar growth in revenues. We will take a closer look at the valuations and future prospects of these companies in our next piece.

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