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The Myth of Solar Stocks as a Monolith

By  +Follow October 31, 2013 6:58AM
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Anyone who takes even a passing interest in the stock market is probably aware that 2013 has been the year of solar, with the Guggenheim Solar Trust ETF ($TAN) climbing nearly 135 percent so far this year. Of course, as much as this year has been the year of solar, the last two years weren’t, with the Solar Trust plummeting almost 80 percent from the start of 2011 to the end of 2012.

Solar remains a new industry, relatively speaking.  While the first solar modules date all the way back to 1958 when they were installed on space ships, it’s only started catching on as a serious alternative for generating electricity in the last few years. In fact, over 66 percent of global solar capacity has been installed in the last two and a half years. And capacity is expected to double in the next two and a half years.

And, as with most relatively new technologies, there’s a tendency for the stock market to treat the industry as a monolith, with daily moves for one or two major solar company creating a ripple effect across the entire segment. If SunPower Corporation (SPWR) or First Solar (FSLR) make a big move, it’s not uncommon to see other, smaller companies moving in a similar direction for no other apparent reason than that they’re mirroring the industry leaders. And while many of the companies are subject to similar market forces, that doesn’t mean that it makes sense to treat them all the same. The solar industry has multiple facets, with residential installations representing a market totally unique from utility customers, and different technological underpinnings to the offerings of different companies.

A Growing Source of Power

The biggest factor driving the recent growth of the solar industry appears to be primarily the rapid increase of solar installations for utility companies. In fact, solar is set to outpace wind power in new installations this year for the first time. Driving this is a steady improvement in the efficiency of solar panels paired with large-scale government support in the United States and China. And, ultimately, utilities have represented the biggest portion of the solar market for years.

The portion of total photovoltaic (PV) cell capacity for utilities is on the rise. In fact, Q4 of 2012 saw a massive spike in installations, reaching nearly 900 MW for the 3-month period. What’s more, while there remains seasonal fluctuation, utilities are driving the majority of new solar installations in America, something that represents a dramatic shift from even just a few years ago. It wasn’t until Q4 of 2010 that installations exceed 200 MWs total for the first time, and utilities represented only a fraction of that.

Photovoltaic Panels vs. Concentrating Solar Power

When one looks at the use of solar power by utilities, there’s an important distinction to be made: photovoltaic panels (PVs) vs. concentrating solar power (CSP) plants. Solar panels are typically silicon-based panels that convert the radiated energy from the sun into electricity directly. Concentrating solar power is much more coneventional in the sense that it uses heat to create steam that, in turn, powers turbines, just like any fossil-fuel fired plant. However, in this case, the heat is coming from the sun. Plants using CSP will concentrate sunlight onto a singular point, creating the heat that’s then used to power the turbines. About 90 percent of global CSP capacity comes in the form of parabolic trough plants, which use curved mirrors to focus the sun’s heat onto a pipe in the middle which contains a working fluid (like molten salt), which is super-heated and used to heat water, create steam, and power turbines.

The United States has lagged well behind Europe in installing CSP plants, with Spain leading the way with an expected 1.8 GW of capacity to be in place by the end of 2013. The United States, though, is rapidly closing that gap. For 2013, installations of PV power are on pace for 4.4 GWs as compared to just 912 MWs of CSP capacity. However, this is 912 MWs more CSP getting installed than in 2012, when there was no CSP capacity added in the United States. That should bring American capacity to over 1.5 GW by the end of 2013. But that’s just the start. Contracts have been signed for the construction of at least another 6.2 GWs of capacity.

Residential vs. Non-Residential

While the increase in solar power utilities is the biggest factor driving the exploding solar capacity in the United States and abroad, there’s a growing interest in residential installation. Solar panels on rooftops allow consumers to reduce their power bill and, in some cases, even sell power back to the grid. It’s become a major concern for utilities companies, which have mounted anti-home solar campaigns in Arizona and California.

However, the widespread availability of home solar systems appear to be a trend that utility companies will have difficulty reversing. In the state of California alone, over 150,000 roofs have solar installations with a total capacity exceeding 1.5 MW. What’s more, steadily rising rates of residential installations were beginning to approach 200 MW every quarter by mid-2013, and should continue after California’s state legislature passed key legislation this September with protections for the rooftop solar industry. In the meantime, company’s like Elon Musk’s SolarCity (SCTY) appear to be poised to benefit from the growing industry.

Different Technology

Even within the subset of PV cells, a variety of different technologies are in play. And while some might be tempted to overlook these differences, one should remember the story of Solyndra. Solyndra, which became the symbol of everything that’s wrong with the world for any number of conservative pundits after its 2011 bankruptcy, went out of business because it gambled big on its ability to build a solar panel using less refined silicon than its competitors. This was a solid plan. Until the price of refined silicon plummeted. Suddenly, Solyndra’s panels were significantly more expensive than the competition, and the company rather abruptly went from “wave-of-the-future” to “wave-of-criticism-over-chapter-11-filing.”

While the details of solar cell technology are considerable, on a basic level, there are two types of technology used with solar cells. The first are manufactured using crystalline silicon, the second are known as thin-film solar cells, which are heavier because they use more glass but require less silicon. Each of these two groups break down further, with the differentiation based on the size and type of silicon crystals or the materials used to make the thin films in question.

China vs. the United States

Finally, knowing what country is producing solar cells is crucially important. Currently, the United States and China are responsible for producing the majority of the world’s solar panels, and the two countries are locked in an ongoing trade war. Much of the crash in the solar market in 2011 was driven by a glut of cheap Chinese-made panels hitting American markets and driving down the price of panels around the globe. American makers accused the Chinese companies of relying on significant government price supports, which prompted the United States to slap tariffs on Chinese panels. This, in turn, led China to slap its own duties on imported polysilicon from the United States. Now, as everyone seems to be making money again, the situation appears to have cooled some, but it doesn’t change the fact that the solar market as a whole tends to rely heavily on government support, at home and abroad.

Investing in Solar

Precisely what sort of solar play one wants to make is entirely dependent on the investor, and one’s personal research is what ultimately matters. However, assuming that all solar companies are alike is a mistake that could easily land one in hot water. While it may not be out of the question to assume that the market will remain largely ignorant and continue treating solar companies like a monolith, it’s more likely that as capacity continues to skyrocket, investors will become wiser and differentiation between companies will start to shake out.

If/when this happens, a savvy investor looking to invest in solar should have done their research, digging into each company and examining things like what sort of panels they’re making, what sort of customers they’re selling them to, and what sort of support their country’s government is offering them.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

The author does not hold a position in any of the securities listed above.

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