With new concerns about nuclear power, rising alternative energy mandates, and continued government subsidies, the solar industry appears well-positioned for the second half of 2011 after a rough start at the beginning of the year. But what are the core drivers of this growth, where are the opportunities, and what’s the best way to play them?
Japan’s Nuclear Crisis Boost Demand
Japan’s nuclear crisis has caused concern among many developed nations with nuclear reactors and led many of them to close older plants. Germany is among the most likely to phase out nuclear energy, and has already closed roughly half of its nuclear plants temporarily after the events in Japan. Meanwhile, France and other EU nations are also facing protests against nuclear energy that could expedite cuts.
Ultimately, alternative energies like solar and wind are likely to replace nuclear power, given the strong commitments that these governments have to clean energy sources. And with supply shortages already showing up in Germany (nuclear accounts for 25% of its energy), near-term demand for solar capacity to offset the temporary loss of nuclear power could boost the sector higher.
California Boosts Clean Energy Requirements
California became the first of many states and countries that may boost its clean energy requirements even higher than previously set. Governor Jerry Brown signed a bill last week that mandated that 33% of electricity in California must come from renewable sources by 2020. The new “renewable portfolio standard” is the most aggressive in any state and ups the ante for Texas and Iowa.
Meanwhile, the residential market is also seeing stronger demand as solar panel prices become more affordable and service becomes more ubiquitous. According to the Department of Energy, there’s growing evidence that homes with solar systems sell for a price in California. Assuming these trends continue to grow, residential demand could provide a further boost to the sector.
Italian Solar Cap Drives Sector Lower
Earlier this month, Italy indicated that it plans to introduce a cap on state incentives for solar power generation in an effort to curb costs. The cap will be reportedly set at between €6-7 billion per year by the end of 2016, when the country anticipates having 23,000 megawatts installed. As one of the largest solar markets in Europe, the news sent solar stocks lower when it was first announced.
Since then, many investors have digested the news, and there are signs that additional favorable revisions will be made. Jefferies analysts noted today that revisions to the Italian solar draft this week will be modestly favorable and anticipate a rebound in solar demand during the second half of the year. Meanwhile, the EU’s energy chief previously had urged Italy to ensure stability for investors.
How to Play the Growth in Solar
First Solar, Inc. (NASDAQ:FSLR) represents one of the most popular plays in the solar sector and may be undervalued, according to some analysts. Kaufman Brothers recently upgraded the stock to a Buy rating with a $165 per share price target, citing valuation, geographic diversity and likely strong guidance in its first quarter earnings report. In the end, this is one of the largest standard plays in the sector.
Meanwhile, other companies like RenaSola Ltd. (NYSE:SOL) are widely considered to be undervalued in the industry. In fact, Wells Fargo analysts -- who recently lowered estimates on the sector after the Italian decision -- maintained a bullish look on SOL, saying they view the stock as cheap and attractive. As a result, this may be a more conservative play in the sector.
Less-active investors may also want to consider solar ETFs like Claymore MAC Global Solar Energy Index ETF (NYSEARCA:TAN) and Market Vectors Solar Energy ETF (NYSEARCA:KWT). Meanwhile, more active investors seeking to create a basket of stocks can find other names like Canadian Solar Inc. (NASDAQ:CSIQ), LDK Solar Co., Ltd. (NYSE:LDK) and SunPower Corporation (SPWRA) worth a second look.
Finally, it is important to note that the solar sector is relatively volatile due to the rapidly changing regulatory environment and supply chain factors. As a result, risk-averse investors may want to consider using a more conservative options strategy in conjunction with buying the stock, such as writing covered calls, buy puts, or using a combination of both strategies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.