As I read yet another article about a revolutionary solar technology being pitched to investors, it struck me that disruptive innovation in the industry is bound to occur soon; it is a matter of when, not a matter of if. This industry has, essentially, been dormant since the solar crash in 2008. During that dark time, very few industry players were profitable and thus, I believe, there was little reason to innovate.
In 2013, the landscape is drastically different. Solar power is here to stay, and the major manufacturers should be motivated to make big moves. Consider, for example, First Solar's (FSLR) recent $400M secondary stock offering and its acquisition of TetraSun. Clearly FSLR is ready and able to make a power play.
The second side of the equation is the availability of disruptive technology. There are many companies and research groups that claim to possess the "next big technology". I will avoid mentioning specific companies because Seeking Alpha now avoids microcap companies, and anyway, the point of the article is to prove that disruption is inevitable.
The most well-known, potentially disruptive technologies are modifications to the surface of the solar cell in order to trap more light. By one estimate, this could nearly double solar panel efficiency. Several microcap companies as well as the National Renewable Energy Lab are working along these lines. Another interesting technology involves applying the anti-reflective layer to solar panels at room temperature, rather than in high-temperature furnaces. The anti-reflective layer accounts for a significant portion of each solar panel's cost, so the savings here would be significant. To predict which of these technologies will become commercially successful is beyond me.
Assuming one of these disruptive technologies eventually comes to fruition, what can an investor do to protect himself? I think there are three good ways and one poor way to manage the risk:
1) Invest in the tech startups that are most likely to make it big. This is the most risky path, because there are many horses in the race. Some of these groups are not publicly traded and it is very hard to predict who will come out on top. However, if you pick the right horse, the return on investment could be huge.
2) Invest in the solar manufacturers that can afford radical new technology. I believe FSLR is the clear winner here, because it is flush with cash and management has shown that it is not scared to make big moves. Most (all?) other solar manufacturers are in debt, so large capital investments will be more difficult for them.
3) Invest in solar installers. Regardless of who makes the solar panel, solar installers will come out ahead. For this reason, SolarCity (SCTY) looks like an attractive investment.
One poor option:
4) Dilute the risk with ETFs. Exchange traded funds Market Vectors Solar Energy (KWT) and the Claymore/MAC Global Solar Index (TAN) expose the investor to a broad range of stocks across the solar industry. For example, TAN comprises 52% U.S., 25% Chinese, and various European companies. TAN exposes the investor to all facets of the solar industry, from panel manufacturing, to inverter manufacturing, to rooftop installation. By spreading exposure across the entire industry, an investor should be protected from disruptive technology.
The reason I don't recommend investing in solar ETFs is the junk that comes along with them (and I have experienced this personally). Sure, TAN includes some good stocks like First Solar and SunPower (SPWR). However, it also brings a lot of junk Chinese companies like Trina Solar (TSL). These Chinese companies have not performed well compared to U.S. stocks in the past six months and I expect that trend to continue. For example, SPWR is up 238% YTD while TSL is only up 37%.
In summary, stick with the first three methods to manage your solar risk. Your portfolio will thank you as the solar industry continues to grow and evolve in unexpected ways.