The Current State of the Solar Energy Sector 16 comments
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Last week I asked 'NCN Solar', a trader closely following and trading the solar space, to give us an overview of the current state of things. I talk to NCN Solar almost every morning, going over the most important developments - a great help to understanding this rapidly changing sector. His overview follows.
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I put some thoughts together here to educate you as to what is happening, and perhaps this will make it easier to capitalize on coming news in 2008. This year will continue to be choppy and unpredictable, so it's best to just be prepared for what may happen and to know how to react.
There seems to be more private equity money going into alternative energy than in any other sector. The high oil prices of the last few years as well as climate concerns, have led to a quest to reach grid parity with electric rates.
Most of the ways to play the growth in the US market involve stocks in the Solar sector. There are 2 well known technologies: (1) Thin Film, which includes First Solar (NASDAQ:FSLR), Energy Conversion Devices (NASDAQ:ENER) and many exciting private companies, and (2) Silicon, which is led by SunPower Corp (NASDAQ:SPWR), Suntech Power (NYSE:STP) and many others.
Let us take a closer look at both these groups. FSLR is the clear cost leader. They developed Thin Film CDTE technology which doesn't require the currently expensive polysilicon, and is a quick production process which FSLR has successfully copied at their other facilities. There are certain geographies, such as areas of Germany, where no other product can come close to comparing. As they increase their conversion efficiency to 12% of the sunlight to power, and continue to increase production and yields, they appear well in the lead towards grid parity, at a point which this growing market expands to incredible levels. There are a number of private companies, NanoSolar, Miasole etc. as well as ASTI and DSTI which are working on Thin Film CIGS technology in a well financed drive to reach what FSLR has accomplished. There are various challenges in scaling this technology, and it is certainly hard to know exactly how close these companies have come. The Thin Film amorphous technology is a bit difficult to understand, because the conversion efficiency achieved so far does not seem high enough to compete.
As we enter 2008, no one comes close to FSLR in terms of cost per watt. So why is there strong interest in any other stock? In the residential market, it does not appear that FSLR will be a player, and I’m not sure they are even suitable for that. Because FSLR has lower efficiency, they require more panels, which means the amount of roof space, or cost of land, can tilt the economics. There are also various geographies where perhaps the amount of sunlight or heat can work better for a silicon company. As we stand right now, the costs for silicon panel companies are much higher, but they are greatly influenced by the inflated level of polysilicon prices. The current poly demand dwarfs the supply. This affects the companies in different ways, and it is worth looking at which solar stocks have most of their polysilicon at contract rates, and which need to purchase their required poly at spot prices.
At some point, the additional supply from China will come online, and one would expect the prices to drop significantly. A company like WFR, which benefits from selling polysilicon in the market, will have to deal with the lower prices in the future, though at this time, they are doing very well. Once these prices do come down, the buyers of polysilicon, STP SPWR etc. will see their costs dropping and can become more competitive with FSLR in more locations, and can start the move towards grid parity. At this point SPWR is a technology leader with their high efficiencies, and tracking systems, and STP is a leader helped by their low cost operation and low taxes. We will see if anyone else can make the leap to the top tier.
The important thing to understand is that what is good for one solar company may not mean much for another. We recently saw FSLR blow away estimates for the quarter and guide higher. This may not mean that the silicon players will have a good quarter. But it does show what can be achieved, when your costs are low, and when you run the operation smoothly. A future drop in polysilicon prices would be a big help for a polysilicon company that buys at spot prices, but may not mean as much for a silicon company that has a great supply, and would probably be negative for FSLR because other companies will become more competitive in some markets.
What I look for in 2008 is that we will see the winners and the losers start to emerge. The same way that many tech companies did not emerge from the internet boom, many will not succeed in solar. But the ones who will, meaning the ones that achieve grid parity, or assist companies in achieving it, will be continued winners. We should begin to see more poly supply come on line before the end of the year, and a drop in poly prices will help the industry. At a certain point, the silicon players may decide they would rather not sell a panel even if there is demand, because they don’t want to pay up for poly. But that would lead to this coming drop in prices. Utility solar deals will be big news this year. FSLR has suggested that there will be multiple pilot projects for utility solar deals in the United States and a number of companies will be in the race for utility deals.
This may be helped by the expected extension of solar tax credits which should take place before the end of the year. There is bypartisan support for these credits, and once the politics get played out, it seems clear that the bill will get passed.
We may hear more about other solar technologies. EMKR is a player in CPV (Concentrated PhotoVoltaic) which has high conversion efficiency, and concentrates the sunlight on to a cell. There is also strong potential from solar thermal technology. We should also here more about the progress on Nanosolar and other new entrants. There likely will be more ups and downs then we saw in 2007, which was virtually all up. But there should be some big winners once again from some old and perhaps some new names.
I incorporated a lot of what I saw and heard in Silicon Valley into an earlier summary. Most of the companies I saw were private, and some such as Nanosolar, which has the Google founders among their investors, were very secretive and would not talk much. In terms of the public companies, SunPower (SPWR) was very optimistic and positive, Suntech (STP) was cautious and seemed to want to talk down numbers. They seem to have alot of demand, but will not pay up for poly to increase their supply. Since things are changing so quickly in the industry, its hard to really have an opinion on a company, but it is possible to identify trends.
Best regards, NCN Solar
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This article has 16 comments:
First, grid parity will come in stages--not all at once in x number of years--and indeed, we are at grid parity in some areas already (see my article on grid parity). Second, achieving grid parity will be helped MORE by the difficulty in building coal-fired power plants THAN BY decreasing cost-per-watt of solar (although, of course, that is very important). For various reasons, it is going to become much harder to build coal-fired plants, and the ones that do get built (many won't) will cost a lot more. That process will help get us to near-universal grid parity faster than most people realize.
I believe FSLR's cost advantage will decrease much faster than others do. Poly is at $200 per kilo or more these days. Many people expect poly to reach $50 per kilo within 2-3 years, and when it does, the price of silicon panels will be much closer to FSLR's panels than most people seem to be thinking. In addition, because FSLR's panels will probably be 11% efficient in 2009, and silicon panels will be in the low 20's, you need twice as many FSLR panels to make the same amount of electricity as silicon panels. This means that some of FSLR's remaining cost advantage will be eaten up by material (aluminum for frames, etc) and manufacturing costs involved in making two panels instead of one.
However, I think the demand will grow sufficiently that many (if not most) solar companies will be able to ramp revenues 50% and more annually (depending on execution) for the next several years. I want to highlight something that is not widely appreciated--it seems that some folks believe that FSLR will steal sales from its competitors, but in fact, although FSLR has a cost advantage, it simply does not play in the residential solar space, and I believe that growth in residential demand in 2008 and 2009 will be substantial. That means that there is a big and growing residential pie to split among the companies making silicon-based solar panels.
I agree that utility use of solar is an extremely exciting prospect but want to underline that 2008 will only be the pilot-demonstration stage for this. I doubt any significant quantity of solar power plants will come online before the end of 2009, and more likely, it will happen in 2010.
I also agree that federal solar tax credits will be extended and I believe that many states will roll out their own incentive programs as more citizens object to coal-fired and even nuclear power plants. In addition, other countries will roll out solar incentives--Italy comes to mind, and some countries will continue to (or begin to) heavily subsidize solar in other ways (Israel comes to mind because there is a strong political incentive in Israel to help the world wean itself from OPEC oil).
In sum, the size of the solar pie will grow enough such that I believe that all well-run companies in the solar space won't be hurting for customers for the foreseeable future. We may see some consolidation (mergers and acquisitions) to achieve larger scale, and certainly, marginal players will fall by the wayside.
But generally, I think the prospects for solar in the next few years are exciting indeed.
Jack Yetiv
It has been estimated that the Alternative Energy mega bull market, led by solars, will be 4x bigger than what we saw with the Internet Bubble.
There is no time to waste and now is the time to buy buy buy!!!
beanieville.blogspot.c...
Would appreciate you comments on HOKU, as I am considering adding it to my prrtfolio,as well as Canadian Sola
One question though. I bought some LDK-shares. LDK solar is building an impressive polysilicon factory which should come on line in about a year. It seems that LDK will then hold a strategically very strong position indeed: they will sell polysilicon to the other players, which will no longer be so much their competitors as their clients. Smart move! Or is it? Jack Yetiv predicts that prices for polysilicon will drop with as much as 75%... My question is: is it smart to invest in producers of polysilicon?
(If you want to see LDK’s factory being build, here it is: LDK solar -- World Class Solar Wafer Manufacturer
www.ldksolar.com/progr...#
One thought that always come back to my mind, but which doesn't particularly seem relevant in an immediate way to the stock market (but is, ultimately), is the very nature of what we dub "alternative energy." That is, the philosophy behind it, and why it has become so popular.
Well, as the saying goes, "first things first." One must remember that the threat of an "energy shortage," or an actual energy shortage, is artificial.
Case in point: refrigeration. Refrigerators, if you look back at their entire history, have never been particularly well designed, not because of some esoteric laws that the designers ignored, or because of some cost cutting measure that put them in hands of the proletariat who wouldn't otherwise have been able to get their hands on them. No, they have almost always been made with relatively little insulation and almost always with the compressor mounted either on the bottom (where it's heat would warm the cooling compartments), or on the back (where its heat still warms the cooling compartments, just not quite as much).
So, the simple, obvious answer? Put more insulation (thicker walls) on the fridge, and move the compressor to the top of the unit, as Sunfrost manufacturing first did in the mid-eighties, when they began manufacturing the world's most efficient refrigerator.
The only problem is that being a small company (a cottage, practically, and remaining one), the economies of scale have always made them prohibitively expensive to all but the most devout. (Example: my 16 cubic foot Sunfrost cost $2800.00 about four years ago, far above what is probably was an industry average of around $800.00 for a similarly sized fridge).
I repeat -- there is nothing inherently expensive (or subtle) about moving the compressor to the top of the unit, or making the unit with thick, more-insulating walls. But there is something very expensive about having a small "factory," and being unable to get enough of the population interested enough in saving energy to buy sufficient quantities of one's marvelous product to expand to a larger factory and thus reduce costs. The more business one has, and the more consistent it is, the more inevitable will be one's growth, and the better able one is to reduce one's prices.
This isn't a factor of ignorance, either, necessarily. When Mother Earth News had their explosion of creativity back in the very late seventies and the beginning of the eighties, they got a lot of press, including even the nightly news. They built a hybrid car that got over 100 mpg, a truck that ran on smoke from a wood fire, and many other incredible low-tech demonstrations of just what true Yankee ingenuity can -- and did -- accomplish. But did it have any real impact on the "average" fellow, whether rich or poor or middle class? No.
And why not? Because ironically, when something wonderful gets a lot of publicity, it has the effect of buttressing people's faith so much in the "rightness of things," that instead of inspiring similar feats of ingenuity, or political change for the better, or investment in
like-minded innovation, it instead tends to make people complacent. After being a little frightened by gas-rationing and rising energy costs and political instability in foreign places earlier etc., people began to believe that "everything is being taken -- or will be taken -- care of" -- and that any interest or effort on their part in helping
produce such change is gratuitous.
And thus began Ronald Reagan's tenure, followed by Bush Sr., followed by the not-so-stellar Clinton era, and now . . . well, you get the picture.
So what does this have to do with the alternative energy sector and the stock market? It is this: that as long has the people of earth have this laid-back attitude about changing to alternative sources of energy, and emulating Amory Lovins in adopting far more efficient designs of automobiles, refrigerators, houses, etc., then the true "alternative revolution" will still be short-lived, and far less than what it could and should be.
Simply airing programs like Invention Nation and the like, or talking about how many more wind-turbines there are than there were 5 years ago isn't even coming close to changing America's habitual "waste is wealth" philosophy.
It is easy to prove this to yourself. Simply drive to any big city in the USA, and go to the wealthiest section of town, and see how many of the houses have solar-thermal water heaters, or even photo voltaic panels on their roofs or yards. I've done this in the more ritzy sections of the sun-drenched state of Florida, among other places, where there is neither lack of sun nor a paucity of wealth, but one can do it anywhere.
Okay -- what do you see? Very, very little, if any of the above mentioned technologies are extant, even in states that have net-metering laws and state incentives, like California (where the payback is often only a few years).
So what does it prove? It proves that even when given plenty of reasons -- economic, environmental, even sociological reasons or imperatives to change -- most folks, no matter how rich, are almost completely hardened to changing for the better.
I'm not being cynical, just factual. I'm inspired by the relative progress of our European cousins in embracing alternative energy and conservation -- so it isn't really "the human condition" -- or "the fall of man" or whatever that makes Americans so incredibly stupid. It has to be something else -- and it is something that predates Dubya by a great many years.
Americans claim to care, but in reality they are willing to let things go for a very long time. What could have been a true energy-efficient/alter... energy renaissance in the late seventies (and jumped far ahead of Europe even), instead imploded into an era of ever more ridiculous "optimism," "psuedo-patriotism," and pseudo-prosperity. As always, except under the "whiplash of necessity," America waits and waits and waits until war, broiling summers and toasty springs and falls, before it starts to take something seriously. And even then, it still doesn't -- not really.
Very little, about 3%.
Sources of Electric Power in 2007:
Coal 49.7%
Nuclear 19.3%
Natural Gas 18.7%
Hydroelectric 6.5%
Crude Oil 3%
Other 2.9%
Yes we need to rid ourselves of the burning of fossil fuels, but those that promote solar power as an energy alternative to crude oil deceive us intentionally on our dependance on imported crude oil (OPEC). Crude oil is refined mostly into gasoline, diesel, and various fuel oils. Plastics take 10-15% of imported crude. Very little fuel use contributes to electric power generation. Heating oil in the N.E. will not be replaced by solar power any time soon. Solar power as an alternative to crude oil, is a red herring.
Offgrid-Living.blogspo...
You are correct that today, there is little connection between crude oil use and electric use in the US, but many believe that in two decades from now, that will be much changed. I believe that electric cars (actually, some version of plug-in hybrids, PIH's) will be the most common type of car sold in 2025--if not in 2020. Those cars WILL SUBSTITUTE electricity for oil products. Indeed, Israel is expecting to achieve the above goal within 10 years.
This is why many of us see solarly-generated electric as (at least in the future) a substitute for oil. The beauty of this substitution is that there is enough sun resource in the US to produce all the electricity we need for our homes, offices, AND cars/trucks/semi-tract... etc, decreasing the need (and hopefully eliminating it) for us to important oil from countries that don't like us (to put it mildly). Because we have such a large installed base of gasoline/diesel-powere... vehicles (about 250 million of them) in the US, this goal will take decades to realize, but there is little question in my mind that this is where we are going to go.
Electricity is the only realistic substitute for oil in our transportation network.
Although it will take a long time to populate this country with PIH's, you won't have to wait too long to see the beggining of that road. I predict that in 2010--just two years from now--we will be able to buy a plug-in hybrid that will get hundreds of miles to the gallon if its daily commute is less than the normal 30-35 miles per day.
Jack Yetiv
Please enlighten: What is the approximate conversion efficiency of this category? Does the comment refer only to Energy Conversion Devices,which, although cited in the article, is not mentioned? What about ENER???
Vanity. The same thing that explains most of their purchases.
To sum up, most people are in a rut and up to their neck in debt and won't change anything without practically having a Federal mandate to do it or else. No one wants or needs any more Fed. mandates, so it's up to us to make changes because the payback time for the changes is slowly becoming shorter and overall it becomes obvious that it's the smart thing to do. One more important factor is that if you live in certain communities, your neighbor may object to seeing a solar panel on your roof, your back yard, or even solar shingles.
I have already read about a guy who sued his neighbor because the neighbors trees got so tall that they put the guy's solar panels in the shade for the better part of the day.
I fully agree about the need to change, but there are some truly practical reasons that keep people from making changes. LC
I am pretty sure is the point in which the cost of power from a solar system is equal to the cost of getting it from a power company (the "grid"). It is a little tricky to define exactly because their could be differences in how you amortize the upfront cost of the solar system over its useful life.
akb asked about the NYTimes article stating Nanosolar has achieved grid parity already:
If you go to their website, nanosolar.com, you see they just went online in December with "full" production, and they have made no news releases since then. So it is hard to know if their claim is really true or not. Hopefully, it is. However, they are apparently sold out for the next 12-18 months, so grid parity, if it has truly been reached, is only going to be available to those who already have orders in place with them. But it is very exciting nonetheless.
I am hopeful that these advancements, along with product enhancements in battery technology, will about a paradigm shift in power production. Think of house shingles which are also solar cells and battery technology that can store a couple of days usage without breaking the bank. I wonder about the future of power companies.