Sun Shines On Clean Energy [IBD]
Friday May 18, 7:00 pm ET
Brian Womack
Sueling Cho faced a $40,000 bill to install a solar system on her home in Los Gatos, Calif., in late 2005.
Cho, a Sierra Club member, was willing to pay. She was happier when the cost dropped to $26,000, thanks to fresh government incentives. She's downright thrilled about the $900 she saves every year on power bills using solar panels from SunPower (NasdaqGM:SPWR - News).
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"I've always wanted solar," Cho said. "It was just a good time in our lives (to buy)."
It's not just a good time for Cho, but for many consumers and businesses around the world. They're helping make clean energy hip -- and lucrative for investors.
Companies making solar products have seen their stocks soar, despite some recent pullbacks.
Solar-related stocks make up three of the top four performers in IBD's Energy-Other group.
Covanta Holding (NYSE:CVA - News), which ranks near the top of the list, uses municipal solid waste as a fuel to generate renewable energy.
Several stocks in the group don't participate in clean energy, including a couple of coal companies. Another strong performer, USEC (NYSE:USU - News), supplies nuclear power plants with uranium.
"Investors look out right now to the growth they see in 2009 and 2010 and 2011 -- and they see what appears to be sustainable demand," said Michael Carboy, an analyst with Signal Hill.
1. Business
If there's a cool industry today, it's solar.
The industry is a key part of the push for cleaner energy that doesn't emit pollutants. Everyone from Hollywood starlets to billionaire business owners to Washington politicians is touting green.
"It's a hot sector right now because of all the buzz about global warming and with gas prices going up," said Jeff Osborne, an analyst with CIBC World Markets.
Like wind power, solar emits no pollutants and harnesses an elemental form of energy. In just one minute, enough sunlight hits the earth to meet the world's energy demands for a year, SunPower says.
The industry uses what's called photovoltaic (PV) technology. PV uses silicon-based solar cells to convert energy from the sun into electricity. These cells are are combined to make large solar modules.
Other companies typically handle the installation, though there are exceptions.
The companies can be young: Solar module maker Solarfun (NasdaqGM:SOLF - News) started in 2004. And most have had little time in the stock market; five have been public only since November. Several others companies have filed to go public in recent weeks.
The companies in the group are typically profitable. Still, solar companies can't compete head-to-head with traditional energy sources -- think oil, gas and coal -- without some help.
So governments are spending to help reduce the amount of pollutants in the air and to become more energy independent.
The incentives help make solar's electricity costs more comparable to those from power plants. Sometimes the prices are even lower.
Analysts say the industry should be able to get off the dole by 2010 to 2012 as costs fall. Along with lower material costs, more production capacity will drives down expenses.
To keep those costs down, many solar companies put their production facilities in China.
Name Of The Game: Solar companies are riding a wave of government incentives that should put them on the path to long-term growth.
2. Market
Germany holds more than half of the world's market, according to a CIBC report. It was among the first in the world to enact aggressive incentives. Japan is No. 2.
More European countries, including Spain, Portugal and Italy, are rolling out juicy incentives.
In the U.S., states such as New Jersey, California and to a lesser degree New York, are funding solar expansion. California is spending $3 billion over the next 10 years. There are federal incentives as well.
Customers include common homeowners or ranchers. Corporations have gotten into the act as well. They see an economically viable model that can't hurt public relations, either(see related story, this page).
Governments around the world tend to prefer distributed power, spread around homes and businesses in a region rather than centralized in big power plants. Utilities may use solar, but wind has emerged as a more popular technology for the sector.
Still, Ron Pernick, an analyst with research firm Clean Edge, says more utilities are looking at solar as an option.
The overall market for solar power -- including panel manufacturing and installation -- grew 39% in 2006 to $15.6 billion, according to Clean Edge and should grow to $69.3 billion by 2016.
3. Climate
A key challenge for the industry is supply. Solar companies, like the semiconductor industry, use the earth's second-most abundant resource: silicon.
But to make panels that can harness the sun, the companies need a more purified silicon, and that's been tough to manufacture in large-enough quantities.
"We could grow faster if we had more silicon," said Thomas Werner, chief executive of SunPower.
That's saying something. SunPower's sales jumped 239% to $142.3 million in the first quarter, compared with the year-ago period.
Carboy says the limits of silicon supply have stunted growth. But he says the drought should end in 2008, when supply grows by 70%.
CIBC's Osborne also expects more silicon to come online but says that it won't help until 2009 and 2010. And there's no guarantee all the new silicon will be up to the solar industry's tougher standards, he says.
4. Technology
Even in this emerging industry, analysts use words such as "commodity" to describe some of the companies' products.
But some companies get kudos for using fresh approaches to set themselves apart.
SunPower is a favorite on Wall Street because it gets the most bang for the buck out of its cells.
The company's traditional modules wring 20% of the potential power the sun creates in a cell. Its newer cells wring 22%. Most rivals get between 14% and 17%.
A key reason is how SunPower arranges solar cells and the metal contacts that collect and conduct electricity. Unlike some, SunPower doesn't put the metal contacts on the front of the cells, but on the back and away from the sunlight.
That lets the cells catch more rays. It also means the cells are completely black on the front surface, making them less visible on roof installations, which appeals to many homeowners.
Suntech Power Holdings (NYSE:STP - News) touts an unusual approach to manufacturing that has cut its production costs.
The company already has some of the most efficient manufacturing processes around, analysts say. Using Chinese equipment -- rather than pricier machinery from Japan, the U.S. and Europe -- has helped it lower manufacturing costs further.
And while that might seem a step backward in an age of automation, using human hands in some processes helps the company save more money and improve quality. Suntech reports breakage rates of around 1% vs. an industry average of 2% to 3%, Carboy says.
Steven Chan, vice president of business development at Suntech, says human hands have the dexterity and soft touch to keep cells from breaking.
First Solar (NasdaqGM:FSLR - News) uses a technology that avoids the supply issues plaguing the industry.
Instead of silicon, it uses a thin layer of a compound material called cadmium telluride. It's less efficient -- the material converts less than half of the sun power of silicon-based PV arrays -- but the firm is working on improvements.
5. Outlook
Even with the supply constraints, analysts say the outlook for solar is, well, sunny.
The opportunity is so vast that even if solar were to capture less 1% of the total energy market, it would be a coup.
"The market opportunity is the electricity market, and the electricity market is a $1 trillion market," Werner said. Government incentives remain a key by regional governments. Look for more growth in countries such as Spain, Portugal, Italy and South Korea.
The U.S. is a huge market that is really just getting started.
"Demand is strong because people want renewables to work," Werner said.
Upside: Concerns about global warming and energy independence aren't about to go away. With state and national governmental bodies stepping up, solar has a shot of continuing its solid growth. And as costs come down, demand should accelerate.
Risks: Supply issues could last for more than a year or two, driving up costs and restraining overall growth. Also, governments could scale back subsidies. |
