Want Solar Panels? China Will Pick Up the Tab

What a day! On Thursday, we saw solar stock prices jump sharply higher in what can only be described as a stunning reversal of fortune. The two solar positions held in the ZachStocks Growth Model were up 12% and 45% respectively, and my actively traded Death Cross Trader service took home 189% gains in a solar related options play.

The move came out of the blue and caught many traders a bit unprepared. Investors sitting on the sidelines quickly realized their cash should be invested in this sector, and short sellers scrambled to cover positions while likely taking substantial losses.

But what actually caused this move? Why such a pronounced reaction? And will this mark the beginning of a new trend, or are we just seeing a “one-day-wonder?”

In order to answer these questions, let's first take a look at how we got to this spot in the first place.

Solar Energy’s Challenging Road

It’s been a difficult last six months for solar companies. Despite a worldwide push for alternative energy solutions, solar stocks have largely taken it on the chin.

The issue has been closely tied to the weakness in the credit markets. After all, it's no small thing to set up a 50,000 watt installation on top of an office park or at every retail location.

Prices for solar installation average $5 to $7 per watt. So a 50,000 watt project would cost a cool quarter million. But the good news is that once the installation is up and running, the maintenance costs are fairly low. So instead of paying $5,000 per month to keep the lights on, companies now just use their own solar energy.

So with these theoretical numbers (every situation has its own differences in details) it would take just over 4 years for the savings to cover the cost of installation. And then after that, energy is FREE for the rest of the useful life of the solar installation. Not a bad deal at all…

Can You Spare a Quarter Million?

But there’s just one problem. That initial price tag is quite a large hit. It may make good business sense, but who has a quarter million sitting around to spend on a long-term project? And if you’re putting in multiple locations, the cost is even larger.

In the past, an opportunity like this would be taken straight to Citigroup (C), Bank of America (BAC), Lehman Brothers or any other investment bank. The mathematics work, the savings are tangible, and so a deal could be hammered out in no time. The company might get a reasonably priced loan, or they may sell additional equity to raise the necessary cash. But the bottom line is the deal would get done.

But fast forward to late 2008 and 2009 and all of the sudden there’s no cash to lend. Companies with great opportunities simply couldn’t get a buck to put them into practice. Even though prices of solar panels have dropped (technology has advanced to make costs much more affordable), there still just isn’t a way for most companies to play this game… until now!

Ministry of Finance Writes a Blank Check

It’s a bit ironic that one of the biggest pieces of news to hit the markets Thursday, came in the form of a press release that was only available in Mandarin. But thanks to the modern marvel of Google Translator, I was able to read a rough paraphrase of the news item. And the text was pretty surprising… We’ve got a serious turn of events here!

We’ve heard about stimulus plan number one, and stimulus initiative XYZ to the point where the word stimulus has lost its meaning. Heck, I’m sitting here yawning just hearing the word.

But the Chinese Ministry is actually putting action to words by offering to pay $3 per watt for large solar installation projects. Now remember, these projects typically cost $5 to $7 per watt. Since we’re talking about “large” solar projects, one can only assume that these project use economies of scale to get the best price (near $5 per watt).

So essentially, China is picking up the tab for 60% of the cost of solar installations. That’s HUGE! It means that our theoretical $250,000 project is now costing businesses $100,000. And still the same energy savings are in place! Instead of 4 years, it now takes less than 2 years to pay for itself.

When you begin to understand the magnitude of this announcement, its actually only surprising that these solar companies didn’t jump more than 45%. In the coming weeks I expect that markets will continue to absorb this news and as a result solar stocks will move higher…much higher!

Credit conditions are beginning to ease (just a bit). China is putting actual cash on the table, and the US has passed several bills that should significantly support purchases of alternative energy systems. All of these forces should result in a long-overdue rebound for the solar industry and significant profits for nimble investors willing to put capital to work in this sector.

Comments

[oaksleeksbeans:]

Let us assume $5/watt, annual generation of 1.4 kilowatt hours (kWhs)/watt of PV and see what price of power would be required for a PV system to pay for itself it two years.

First cost: $5/watt
Cost after incentive: $2/watt
Generation per year: 1.4 kWh
Generation over two years: 2.8 kWh

Cost of power required to payback over two years:
$2/2.8 kWh = 71 cents a kWh

Electric prices are not that high, not even in Hawaii. I currently pay about 13 cents per kWh here in the Midwest.

You can be sure that power prices are far lower in China.

Mar 29 08:03 AM

[MJJP:]

China will be well ahead of the curve on this one. Lets not forget that China's population will not be looking to replace any old gasguzzlers with more fuel efficient and electrical ones. They will be starting off fresh with the latest most fuel efficient vehicles and if electric they will put them that much further ahead. Currently they have no capital gains tax and when these energy conversions are finally paid free and clear that leaves a lot of extra cash to start taxing and helping to pay for health care and infrastructure etc. They will end up being the best hybrid culture on the planet by combining the best of capitalism with socialism.

Mar 29 11:01 AM

[dan-d:]

Also the chinese will take what the government allows them to have. Noticed you didn't even mention the other american based solar panel manufacturer, Evergreen Solar, which was up 15% on friday. This is in addition to a 100% rise over the past 3 -4 weeks. What gives? Pumping chinese stocks is nice but don't forget viable american based companies since a stated government policy goals are job creation, decreased carbon production, and energy independence. Don't you think Evergreen deserves a look?

Mar 29 01:41 PM

[Road Runner:]

Zachary, In the report from China, did it mention any limits on the total amount of money the government is willing to spend? This action is a windfall and could prompt an overwelming response.

Wow! Solar may have woken from its coma.

Mar 29 02:26 PM

[ksmithdc:]

Interesting read, thanks.

Mar 29 02:46 PM

[Road Runner:]

I totally agree with MJJP. The Chinese seem to have an optimal government for the current world situation. They can do the big projects necessary for continued growth. Example. They can do the 3 Gorges damn that displaced millions of people but will provide huge amounts of electricity, more navigable river way, and flood control. The US can't even put a nuclear waste storage facility in no-mans-land Nevada because a powerful Senator is from Nevada.

China's gross domestic product is only 25% that of the US. They are expected to catch up to the US in a few decades because of their large population. However, with moves like this solar move, they could catch up faster than anyone expected. In 15 years after much of this newly installed solar infrastructure is paid off, they will be reaping the benefits of cheap energy that the US may be jealous of. Note that labor cost and energy cost are usually number 1 and 2 in manufacturing cost.

Mar 29 03:07 PM

[PeteK:]

Solar is a joke.
When they drop, it will be faster than the meteor.
Since last july, many many people got BURNT at least Twice.
Won't trust any news for solar.
They said that many times before.

Mar 29 06:38 PM

[dawase@gmai...:]

The real issue is that its a commodity business. Look at the flash memory manufacturers for a glimpse of the future for solar manufacturers. Way too many of them out there adding way too little value to the end product. Government subsidies aren't going to do anything to change this.

Mar 29 09:02 PM

[billp37:]

"28/3/2009

"This photovoltaic (PV) power plant is another demonstration of our ability to provide affordable, utility-scale solar solutions," said John Carrington, First Solar executive vice president of marketing and business development. "In addition to being cost-effective, the plant will create 120 to 140 construction jobs, significantly reduce green house gas emissions and provide enough power to serve the equivalent of approximately 9,000 homes."

The agreement, which represents the largest PV contract by an electric cooperative in the U.S., calls for First Solar to engineer, procure and construct (EPC) a 30 megawatt AC (MW) ground-mounted PV power plant in northeastern New Mexico."

www.renewableenergymag...


"Sunday March 29, 2009 19:05

New Mexico has violent wind, dust, hail, rain, and snow storms as well as prarie fires. Cimmaron1 area can be very cold too.

Some PNM employees were critical of solar electricity generation. They pointed out that solar electric output peaked with the sun was highest in the sky while peak load was late on a hot summer afternoon.

We are still not convinced that large-scale solar electrical generation is practical as a result of articles posted to the contrary.

No doubt, however, that a lot of money can be made building such plants. "

www.prosefights.org/pn...

Mar 29 09:23 PM

[alpha24seven:]

Umm... Is it just me, or we wandering around a bit here. So China is going to subsidize solar, ok. Where are they going to subsidize solar? In China right? Ok, so why is everybody talking about how great this is for example -- New Mexico?

We currently have thousands (yes I said thousands) of manufacturing facilities shutting down in China right now. There will be thousands more. The scale of these PV arrays are made for these same manufacturing facilities that are shutting down in record numbers.

So what is the point here exactly? Do you really think the Chinese government is going to subsidize 60% of a solar PV array to go on top of a Whole Foods store in Los Angeles?

We need more clarity on this. One thing is for damned sure. The Chinese solars popped big on this news and we know the local Chinese government officials are the hand in the glove of many of the Chinese solars. They announce some wide eyed funding initiative with about 10% visibility and the stocks pop. Somebody should be investigating that. Maybe the Chinese have finally figured out how solars move -- by press release. Think about it. Some obscure Chinese government agency issues some fanciful PR talking about this and that and boom big money made in one day. Somebody should look at option activity and the relationships between the Chinese gov and these solars executives. This isn't passing the sniff test.

Mar 29 11:40 PM

[Van Gastel:]

You can talk this up as much you like, there are no details, no timing. The report is too good to be true, it doesn't even make much economic or environmental sense, so it will turn out to be just that. It almost looks like "the plan" is only intended to make the solar companies fat, to create this shareprice runup. Now it's just waiting for who is going to head for the exits first, for any reason, general downturn, this or that "worse than expected", falling oil prices, taking profits etc. Volume simply indicates that we have a near term top, an overreaction, which will eventually be corrected, so move with extreme caution.

Mar 30 05:44 AM

[Zachary Sch...:]

Thanks for the comments guys... Just a few notes:

DanD - The reason I didn't cover many of the US solar manufacturers is because this deal was announced in China. For whatever it is worth, I have looked at ESLR and up to this point they have not turned a profit. But that may be changing and the stock could be worth looking at now that they have started to turn. You may want to take a look at posts on ZachStocks that mention solar - here is a link: zachstocks.com/?s=solar

Road Runner - The release did not give many details and we definitely need to look into this. It seems clear this is a large undertaking, but it will take some time for the full picture to unwind. As for the political benefits China enjoys, I understand your argument but also am thankful to live in a free society where my property cannot be taken without due course. China can certainly move its population around at the government's direction, but that isn't necessarily always a good thing.

PeteK - I wonder if this "burnt twice" issue could be the wall of worry that helps this market to climb. When people are the most skeptical and all the weak hands have been flushed out, that can lead to powerful rallies. This is often why you see markets "test" important low points (thereby burning investors a second time) before sustainable bull markets. Just an observations.

Alpha247 - I'm not much of a conspiracy theorist. I suppose you may be able to find some market manipulation but I haven't seen any actual proof. The bottom line is that I think these stocks are moving up - and manipulation or not, there is strong potential to make investment gains in the coming months.

Good luck to all this week!
Zach
zachstocks.com

Mar 30 08:55 AM

[disdaniel:]

Zach, the monthly savings from a 50kw install would be at best 1/2 (more likely 1/3) the $5k you project. (although in CA with 2009 state and fed incentives the cost to the business would also be less)

1 watt of solar generates ~ 2kwh/yr of power under optimal conditions (like the US southwest) so unless you are paying (or being paid) $0.50+/kwh you can't pay off a $5/w investment in less than five years.

I'm a big booster of solar, but w/o incentives people should not be looking for <10yr simple payback. Outside the SW, even with incentives <15yr simple payback will be hard to achieve.

BTW to a purchaser of solar panels a 10 yr payback is equivalent to a 10% no-risk bond yield.

Mar 30 12:13 PM

[bartpr:]

solar on a lrage scale can be sued as a substitute for peak power generation. this is currently done by natural gas fed turbine/generators. this is expensive.

also, one must look at the cost of new coal fired power as opposed to new solar. new coal fired power has a annual fuel cost . solar has no annual fuel cost. i dont haave the current figures on new coal fired power, but with the higher pollution controls on coal, i read somewhere where solar is already competitive

if someone can verify this, fine. i will try to find it again.

Mar 30 09:00 PM

[Road Runner:]

Zachary, I agree with you. The US is a better place to live than China, by far. I'm not condoning the Chinese government. I'm just pointing out how powerful and threatening the Chinese economic engine is, and why.

That's why we should be more blatant in our recruitment of the best and brightest from other countries. If they don't want to improve the lifestyle of their people, we should force them to by "stealing" their best people. We do it some now, but we need to be more "in your face" about it so they are forced to divert resources to social infrastructure, thus working toward a more level competitive environment for the US and the rest of the first world.

Also, property rights in the US are not as strong as some of you may think. There are many cases in this country where strapped-for-cash cities have declared nice parts of town “blighted” just so they could knock down the homes and build luxury condos that generate more property tax for the city. One of these cases was on 60 Minutes a couple years ago. I know – this has nothing to do with solar in China.

Mar 30 09:23 PM

[Jonathan Ch...:]

At this point, there were two economic calculations about the real value of these solar panel and a total of 16 comments. Those two calculations hit the nail on the head : A solar panel will produce somewhere between 1 and 2 kilowatt hours per watt of capacity in a year. In North Carolina, where I pay about $0.07 per kilowatt hour, I would be paying , in the best case, $2 to receive $0.14 of benefit in a year. In Hawaii, where I have another home, I am paying about $0.35 per kilowatt hour, and would be receiving $0.70 maximum benefit per year. So it really could work, in Hawaii, but definitely not in North Carolina.

Mar 31 10:02 AM

[dan-d:]

Thanks Zach, I appreciate your reply. Nice article overall.

On Mar 30 08:55 AM Zachary Scheidt wrote:

> Thanks for the comments guys... Just a few notes:
>
> DanD - The reason I didn't cover many of the US solar manufacturers
> is because this deal was announced in China. For whatever it is worth,
> I have looked at ESLR and up to this point they have not turned a
> profit. But that may be changing and the stock could be worth looking
> at now that they have started to turn. You may want to take a look
> at posts on ZachStocks that mention solar - here is a link: zachstocks.com/?s=solar
>
>
> Road Runner - The release did not give many details and we definitely
> need to look into this. It seems clear this is a large undertaking,
> but it will take some time for the full picture to unwind. As for
> the political benefits China enjoys, I understand your argument but
> also am thankful to live in a free society where my property cannot
> be taken without due course. China can certainly move its population
> around at the government's direction, but that isn't necessarily
> always a good thing.
>
> PeteK - I wonder if this "burnt twice" issue could be the wall of
> worry that helps this market to climb. When people are the most skeptical
> and all the weak hands have been flushed out, that can lead to powerful
> rallies. This is often why you see markets "test" important low points
> (thereby burning investors a second time) before sustainable bull
> markets. Just an observations.
>
> Alpha247 - I'm not much of a conspiracy theorist. I suppose you may
> be able to find some market manipulation but I haven't seen any actual
> proof. The bottom line is that I think these stocks are moving up
> - and manipulation or not, there is strong potential to make investment
> gains in the coming months.
>
> Good luck to all this week!
> Zach
> zachstocks.com

Mar 31 12:36 PM

[ariesl:]

No one mentioned that a solar system is typically waranteed for 20 years. It should last many more years w/ minimal maintenance. I wonder how much the cost of electricity will be in 20 or 30 years?

How many of you figure the "pay back" time for your car, etc.? After all many could take the bus. Also, how much per KWH would you value quiet electricity during a power failure? How much is it worth to know that you are part of the solution to global warming, instead of part of the problem?

Mar 31 07:22 PM

[Rob Sthcoast:]

Zac,
I just discovered your info above.
At the time of your writing I wastouring a PV factory out of Shanghai.
Needless to say I was very impressed with the set-up there. The factory made 3 products only. All mono solar panels and they did so by the thousands. Of interest is the fact that the raw silicon comes from the US, the machinery is German and Japanese and the films are Japanese. The quality was without question. The factory manager pointed out that the main client was the Chinese and EU. There was no separate production line for either customer and there was no possibility of ordering a panel of "cheaper" specs.
They aren't geared up for it.
A couple of comments have had a go at the Chinese government and the quality of life of the people. Yes their is a lot of smog, something that China will once ablewill address 20 times faster than any other country. The people where I went were happy and as free as any Westerner, yes they have rules,a lot less than us westerners, they just follow them. This I felt gave these people stability and direction, something most westerners sadly lack. There are entreperurs aplenty, shonks and clear proffesionals. This is a country of commerce, communisim has no chance of keeping up with the pace of the countries development. What they do however is put in a rail link and a freeway before they build a town - good thinking. Anyone who thinks that China is being held back or is going any where but the optimal environment for its population is out for a huge shock. The benifit of the type goverment is that is beyond commercial corruption and is of the people. Westerners could take a lesson.

Apr 04 02:29 AM

[Zachary Sch...:]

Rob - thanks for the first-hand view! I must admit I have never traveled to China but would welcome the opportunity. I'm not completely qualified to comment on the social issues in China except to say that I'm firmly of the opinion that free market economics opens opportunities for individuals and eventually leads to stronger economic situations. As China makes strides towards more open markets and free trade, I believe their economy will become even more competitive. There will certainly be bumps along the way, but over time, personal ingenuity and work ethic will propel any free market.

Thanks for the insights!
Zach
zachstocks.com

Apr 06 02:28 PM

[Pablodiablo:]

Zach. You ought to take one on the cheek for that last comment about: "I am firmly of the opinion that free market economics opens opportunities for individuals and eventually leads to strong economic situations." Chinese Solar manufacturers, unless taxed fairly, will annihilate US solar manufacture and rob thousands of jobs in the process. Wal-Mart is a perfect example. How has wal-mart led to strong economic situations for us in this country, rather than propel further Chinese domination our consumer market? I think it would be fair to examine the possibility that the Chinese government is, in fact, not subsidizing the production cost of these solar panels purely to monopolize our solar industry, before suggesting it is a good thing. We have laws against this with the Chamber of Commerce and International Trade Commission called anti-dumping laws. I believe you would benefit understanding the ethics of something before further condoning predatory market manipulation.

Aug 16 10:45 PM

[Penchito:]

I see that everyone that has commented so far is mainly looking at the financial, economic & business aspect of solar power, which is great! However, everyone commenting on the subject of solar energy is not progressive enough to fully comprehend its true market value regardless of where the product is manufactured.

I would recommend that the majority of the people that have commented study solar panels, their application and more importantly better understand their needs and the costs involved to meet those needs, so they can actually state factual figures not bogus calculations.

Everyone here still has a lot to learn and is a long way from making an impact on the subject of truly depicting the future landscape of solar energy.

I wont divulge any key details via this comment tool however If anyone wishes to continue this conversation please feel free to contact me via my blog page penchito.blogspot.com

Sep 08 10:43 PM