Renewable energy has been a hot political topic, but it has also been just as hot as an investment. We have seen tremendous growth in wind, hydro and geothermal energy production, but one of the more recent markets to catch fire has been solar. To see just how explosive this market really is, there is no need to look any further than a couple of solar module producers, Trina Solar (NYSE:TSL) and First Solar (NASDAQ:FSLR). These two companies have recently signed some major deals, and it has shown in their stock prices. These companies have seen huge run-ups in the past few months.
Let’s first take a look at Trina Solar. It has recently signed contracts with a German company and three Italian companies. These contracts have TSL set to deliver solar modules that will produce approximately 88-99 megawatts of power over the next three years.
Just on the news of these contracts, Trina’s stock jumped 16%, but this company was hot before these contracts even came out. TSL is up over 47% since the middle of June! But it isn’t the only one taking advantage of the solar boom. In fact, the story for First Solar is even more impressive…First Solar, like Trina, produces solar modules. With the signing of its recent contracts, FSLR is set to manufacture and sell enough solar modules to create 658 megawatts of power by 2012. To make this number relevant to you, the total amount of solar energy produced in the U.S. amounts to approximately 400 megawatts.
This is an enormous deal, and to help make good on its end, First Solar has announced the production of a manufacturing plant in Malaysia that will have an annual production of solar modules producing 120 megawatts of power. This plant is set to come online in the first half of 2009.
After the news release of its most recent contracts, First Solar shares jumped 24%, but even more impressive is that it is up more than 180% since the beginning of May.
The solar market is still young, and there are still some amazing gains to be had. However, there is a completely different way to play this market and experience what might turn out to be the greatest gains of the solar rally yet to come…
What Do Commodities Have to Do with Solar Energy?
Commodities aren’t the first things that come to mind when you think of the solar market. Why should they be? The whole notion of renewable energy is based on the fact that it doesn’t use oil, coal, natural gas or other tangible assets to produce electricity. But there is big money to be made in gray gold…
Gray gold, or silicon, is the base semiconductor used in the production of over 85% of solar cells. Rapid growth in the use of solar energy has led to a very large increase in the demand for silicon. The problem is that refiners are really having a hard time in keeping up with this sudden increase in demand…
So Why Not Use a Substitute?
The idea of substitutes is very important because it can act as a price cap for certain items. For example, if the price of beef gets too high, people will start eating more poultry. If there is a feasible substitute, there is a limit to how high the price of an item can go before consumers switch to something else.
There is no reasonable substitute for silicon. It is the same reason that silicon-based semiconductors make up over 85% of the solar cell market.
The preferred form of integrated circuit is called a complementary metal-oxide semiconductor [CMOS] logic circuit. Producers use this kind of circuit because it has a much lower level of energy consumption than any other form of integrated circuit used in the solar industry. In other words, it becomes much more economical in the production of electricity when the integrated circuit consumes less energy.
Here’s the kicker: Silicon-based semiconductors are the only way you can make a CMOS logic circuit. This is a very important notion, because it will allow for the price of silicon to run up as long as supply-and-demand fundamentals favor a bull market.
We’ll be closely monitoring how this all plays out…