Understanding The Future Of Solar

| About: Trina Solar (TSL)

To understand solar investments, or any investments for that matter, it's worthwhile to try to understand the key people that impact the value of those investments.

Imagine for a moment that you are the Chinese government in Beijing. You oversee four times as many citizens as the United States. Many of these citizens are not exactly happy. Uprisings are always a concern and so you must constrain the media, activists, etc. Another concern is that you have too little control over your oil supply. Worse, it's the United States that influences, if not controls, your oil supply. Most of the oil flowing out of the Middle East goes to China and the rest of Asia, but few would argue that the United States has a fair amount of military control in the Middle East.

Ok. So what would you do? Would you walk away from your well publicized solar plan of 21 GW by 2015? Would it be wise to give up on your solar industry and abandon attempts to fully control your energy supply? If not solar, what alternative solutions are there? Wind? There just isn't enough wind in enough places to make a significant difference. Nuclear? The costs of nuclear power plants are climbing and earthquakes in your country make this particular solution risky. Fossil fuels? Note that natural gas isn't cheap in China, so it will not likely be a short term solution like it can be in the United States. Even if natural gas became inexpensive in China you are putting together 5, 10, and even 20 year plans. You are not wasting time on short term plans based upon 2 and 4 year election cycles, and once demand picks up due to the low cost of natural gas the price of natural gas will no longer be low. Fundamentally, no fossil fuel, not even natural gas, is a viable long term solution for China when your citizens are already choking on coal smog, complaining about related health issues, etc.

It's fairly clear that massive solar installations are still your best long term solution for the reasons listed above. They are also the most cost-effective way to deal with the current glut of panels. While these reasons are significant, there is an even bigger reason to move forward with your 21 GW by 2015 solar goal. Deviating from it now might create uprisings in your country. About 500,000 people are employed in the Chinese solar industry, and do you really want to spur uprisings by laying many of them off? These people heard you state that 21GWs would be installed by 2015, so dare you walk away from that plan and possibly seed the beginnings of a revolution? Regardless of whether you have any concern at all about a reaction from your citizens, what else are you going to do with the massive inventories of panels that have built up? Just throw them out? Of course not. Regardless of everything else, going forward with the 21 GW solar plan and using up the inventory of panels is far better than letting them waste away.

By the way, is your goal as high as 40 GW now?

Moving forward on your massive solar projects is still the best plan, so what are you waiting for? Most likely you are waiting on the tariff penalty resolutions. After all, it makes sense to delay massive solar projects for a while (and make your solar industry look weaker) in case the United States and Europe might be a bit more lenient, right? Unfortunately, that strategy isn't having much impact. More importantly, you're looking like a fool and running out of time.

Conclusion: I believe we will see some big announcements out of China soon. It appears that they need to make a statement soon to restore some credibility, and it might as well be a bold statement. Specifically, I expect to see some enormous solar projects announced soon. The benefits of this would include:

1. Calming the 500,000k employees in their solar industry.

2. China setting themselves up for achieving their well publicized 5 yr plan. Note that it's a plan of massive solar power plants, vast quantities of electric cars, and therefore less concern about what happens in the Middle East.

3. Via #2 above China would no longer have to worry about the United States' influence on their oil supply and ever-increasing oil prices. Both of these would serve as long-term economic advantages.

4. Once China's solar facilities are running at full capacity and they begin to apply next generation factory equipment, their cost/watt should come down even further. This, in turn, would likely enable them to offer solar systems that beat grid parity nearly everywhere on the globe. If this were to happen it would be a game-changer, and the word "game-changer" might be a gross understatement.

5. Once beating grid parity becomes commonplace the Chinese solar industry could grow to scales we can't even fathom right now. All existing sources of electricity would evolve toward solar, and this would give China's rural population a vast number of higher paying jobs.

6. If the above were to unfold the world might even thank China, versus punish them, for delivering a cost-effective renewable solution to the world's energy problems.

I have to believe the Chinese government sees the same benefits and possibilities that I'm seeing. They're not stupid, so I wouldn't bet against them. When I study my investment options, especially during the turbulent times, I remind myself about the bigger picture. In this case I remind myself about China's upcoming gigawatts of domestic installations, companies in India solving their grid supply issues, Japan transitioning away from nuclear reactors after the recent Fukushima event, Australia, South Africa, Saudi Arabia, etc. I listen to the news in the United States and Europe but I also keep in mind that there are 10 times as many energy consumers outside of the United States and Europe, and their economies are still growing at 5%+ versus stagnant and saddled with too much debt.

As stated in my disclosure statement below I'm long on Trina Solar (NYSE:TSL) and GT Advanced Technologies (GTAT). The tariff penalties issued by the United States only add 8 cents/watt to TSL's cost since they can get around them via third party sourcing in Taiwan. This is enough for Obama to claim that he's "tough on China", but not enough to make a difference in the US solar market. Heck, TSL decreased their costs nearly twice that in 2012 alone. TSL's balance sheet is ok, they're tied with Yingli Green Energy (NYSE:YGE) for the lowest cost/watt in the industry, and their cost/watt should decrease even further in years to come. I'm long on GTAT because the stock is oversold at the moment and it shouldn't be long before they supply China's solar industry with the next generation of advanced production equipment. Yes, things appear uncertain right now and conservative financial forecasts are coming out, but I see things turning quite positive for TSL and GTAT soon.

Some notes regarding First Solar (NASDAQ:FSLR) and Sunpower (NASDAQ:SPWR): FSLR's cost/watt is too high and their current profitability is not what it will likely be in the future. FSLR's financials are currently showing profits because they are just now executing old projects awarded with old profit margins. Here, there's no need to take my word for it - see here, here and here. SPWR's cost/watt is even higher so I won't spend much time talking about them until a miracle or breakthrough happens. Unfortunately, I don't see such an event happening soon enough.

Fundamentals will always will be the key, and FSLR's high cost/watt combined with a low energy conversion efficiency spells trouble for them. Note that low energy conversion efficiency has compounding effects. It means more panels must be purchased by a client to achieve a desired power output, installation costs are higher because more panels must be installed, and more real estate must be purchased to place those added panels. I don't think FSLR's strategy to highlight brand name and experience is enough to convince clients to pay a premium for their power plants. I say this because brand name and experience offered zero protection in the past. We learned this when we saw the Chinese swiftly take 60% of the solar market in just a few years, and that was when the Chinese firms were unknowns. Now the Chinese solar companies are very well established so it should be easier, not harder, for them to take additional market share, especially since there are more ways for them to lower cost/watt going forward. Finally, the warranty issues are killing FSLR right now. On top of the power loss issues earlier in the year they are now reporting loose core plates which increase the risk of electric shocks and fires. These problems can be especially catastrophic if "brand name" and "experience" are your published strategy.

Regarding companies like Suntech (NYSE:STP), LDK Solar (NYSE:LDK), and Renesola (NYSE:SOL): they too will benefit from large projects announced by the Chinese government, but they are a bit too risky for me. Their financials are weaker, their cost/watt is a bit higher, and stocks like TSL and GTAT offer more than enough upside.

Thank you for your time today and I welcome comments. Feel free to provide feedback but please support any comments with info, web links, etc. Good luck to all of you in your investments.

Disclosure: I am long TSL, GTAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.