Mondays are myth-busting days in the Wall Street Daily Nation! Today, I’m tackling a politically charged topic – alternative energy – by focusing solely on the economics. What the heck does that mean? It means I have no political agenda.
I don’t care what Governor Mitt Romney or President Obama said about alternative energy during last week’s Presidential debate. All I’m concerned about is the investment potential of one of the most popular alternative energy sources: solar power.
Despite what you may think – or might have heard on Wall Street – it’s not good. Here’s why … We’ll See Grid Parity Tomorrow … or the Next Day … or the Next Day. I constantly remind subscribers that the most profitable time to invest in a new technology is just before it reaches the tipping point for market adoption.
3D Systems (NYSE:DDD) – and 3-D printing in general – is the perfect example.
The technology’s definitely hit the mainstream, as consumers can now buy a 3-D printer for under $1,000. (A few years ago, the cheapest version cost almost 10 times as much.) Not to mention, every newsletter editor and bulge bracket firm, like T. Rowe Price, is now recommending the industry for investment.
But guess what? Investors with the foresight to anticipate this inevitability (i.e. – prices dropping far enough to encourage widespread adoption) have already doubled their money. Indeed, the early bird on Wall Street gets the worm.
Under the same premise, Wall Street and industry insiders have been encouraging us to pile into solar stocks for years. They’ve been telling us the critical tipping point for solar – grid parity – was drawing ever closer.
If we put the enthusiastic projections from the biggest players in the industry on a timeline, it becomes evident that expectations for grid parity keep getting kicked down the road.
As you can see with Suntech Power Holdings (NYSE:STP), each time an original projection drew nearer – and grid parity was still nowhere in sight – it simply made a new projection.
In November 2007, Suntech projected we’d see grid parity in five years. Then in February 2009, it said grid parity was still five years away. In 2010, yup, still five years. And in November 2011 – you guessed it – still five years away.
Of course, it didn’t say “still” in any of its projections. So an investor tuning in for the first time to any of those comments no doubt got duped that grid parity was actually within reach. Let it be a lesson to always put any bold predictions into context.
Believe it or not, the U.S. Department of Energy’s (DOE) projections have been the most conservative and, in turn, the most accurate. In its latest report, the DOE SunShot Initiative said its “aspiration” was to reach grid parity by 2020.
How’s that aspiration shaping up, though? Not so good!
The Tale of the Tape
As Catherine Wood and Brett Winton of AllianceBernstein, wrote, “Today, you’d need to charge $375 per megawatt hour to justify investment in new solar equipment – nearly four times the average U.S. retail price of electricity.”
Those costs don’t even take into consideration backup storage costs. After all, when the sun’s not shining, you need a way to supply power.
Nor do they reflect real estate costs. As Wood and Winton rightly point out, utility-scale solar can’t fit on real estate that’s already paid for (i.e. rooftops). It requires land. Lots of it. And including real estate costs in the equation can double the cost of new solar power.
These estimates don’t include costs to update power grids to control and manage the unpredictable delivery of solar power, either. Put simply, solar power’s still way too expensive. And now you know why steep government subsidies are commonplace.
As a general rule, I avoid investing in any company or industry that relies solely on government subsidies to remain relevant in the marketplace. Why? Because when the economics don’t work on a stand-alone basis, neither do investments in the respective companies.
Don’t believe me? Look at the two-year price performance for leading solar power players like First Solar (NASDAQ:FSLR), SunPower Corp. (NASDAQ:SPWR), LDK Solar (NYSE:LDK), Suntech and Yingli Green Energy (NYSE:YGE).
Unsurprisingly, as grid parity projections keep fading into the distance, these stocks keep falling. They’re all down by more than 60%.
Truth be told, the steep drops are what prompted me to put together this research. You see, investors see the selloffs and start licking their lips over the potential bargains. As I warned last Thursday, though, not every cheap stock is a bargain. Many are value traps.
Bottom line: Solar power’s a legitimate alternative energy. It’s clean and there’s plenty of it. The only problem is, it’s too darn expensive. So anyone running around screaming, “Grid parity is coming! Grid parity is coming!” is either lying or delusional.
We’re years away from it, even longer if we strip out subsidies. Accordingly, the time to invest in solar stocks is not now.