Investors Moving Into Rapidly Expanding Solar Power Industry
Demand for photovoltaic solar
power, which directly converts the sun's radiation into electricity, is
expected to grow by 40 per cent per year by 2011, offering opportunities
for investors who can ride out near-term bumps, according to a new report
from RBC Capital Markets, "Investing in Solar Now".
"Solar industry profits are here to stay, since both public and
government support are likely to remain strong until solar can compete on a
cost basis with grid electricity," said Stuart Bush, lead alternative
energy equity analyst for RBC Capital Markets. "Today, solar energy costs
nearly double what would be economical without subsidies, but solar energy
companies are aggressively pursuing their Holy Grail: Organic
competitiveness with grid electricity."
Rising fossil fuel costs, environmental concerns, geopolitical factors
and growing energy demand have swelled interest in alternative energy
globally; and with more government subsidies for technologies such as solar
power, profitable companies are on the rise in this sector. The solar
industry is already seeing profits throughout the supply chain. Silicon
cell photovoltaic solar technology installations, which currently account
for almost 95 per cent of the market, will book gross profits of about $7.7
billion in 2007, growing to $11.5 billion in 2011, according to RBC. This
estimate does not include profits from the alternative thin-film
photovoltaic technology, which is projected to grow from 6.5 per cent of
the market in 2007 to 19 per cent in 2011, and excludes equipment makers
and derivative industries.
The solar industry is implementing technology improvements that will
further drive down costs. RBC estimates that the total industry average
installed cost for photovoltaic solar will decline from about $7.37 per
kilowatt in 2007 to about $4.40 in 2011, and achieve organic
competitiveness with grid electricity at about $3.50 per kilowatt, without
incentives and depending on the region in 2012-2014.
Although the long-term outlook for solar power is positive, sector
stocks are likely to remain volatile in the near term. A proprietary supply
and demand forecast model developed by RBC Capital Markets
solar companies are likely to experience tightening margins over the next
few years, driving vertical integration and capacity consolidation,
particularly among new silicon producers, smaller cell and module producers
and independent installers.
Given the industry's evolution, Bush said investors should consider
four key investment strategies for the emerging global solar industry:
- Play the Supply Chain: Solar companies that focus on high value-added
elements of the solar supply chain, such as silicon, wafer and cell
producers will generate higher margins than the labor-heavy and low
barrier-to-entry module and installation segments.
- Play Tech Differentiation: As the majority of the solar industry is
dominated by standard solar products, companies with higher
efficiency products or lower-cost thin-film designs are better suited
to command superior profits long term.
- Play Globally: As additional silicon supplies drive raw material
costs down over the next 24 months, a company's operating cost
structure will emerge as the long-term driver of profit margins.
Asian producers, most notably in China, stand to benefit. An
investment strategy that seeks to pair Asian producers long versus
European producers will benefit in the long term.
- Play within a Geography: Investing among companies located in
particular regions, such as Germany or China, will limit exposure to
cross-border macro trends and highlight comparably strong regional
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