Politics dominate the solar power industry. The fate of solar stocks rests on government spending for renewable energy projects and austerity measures.
Trade barriers are another key political issue for solar stocks. U.S. trade barriers erected against Chinese solar manufacturers benefit domestically-focused solar manufacturers, as long as they are maintained. They also harm producers with significant Chinese manufacturing. An industry-wide lack of profitability and political dependence should give pause to solar bulls.
Good News from Down Under
First Solar (NASDAQ:FSLR), a U.S. based manufacturer of thin-film photovoltaic cells, expanding in Australia where the market for building large solar farms is four years behind the United States. It plans to build solar farms through collaboration with General Electric (NYSE:GE).
Jack Curtis, Vice-President of Business Development of First Solar's Sydney-based business unit, stated that the Company's 10 MW (megawatt) Greenough River project, the first large-scale solar plant in the country, will build up confidence of the local industry players for execution of such projects. First Solar also won a 159 MW solar project worth A$129.7 million in New South Wales in partnership with AGL Energy (AGK). The project will be operational by December 2015.
The country is taking steps to generate 20% of its total power from renewable sources and develop solar photovoltaic plants of 5,000 MW capacities by 2020. To increase green power investment the government has taken several steps including a $10.3 billion budget for in Clean Energy Finance. It also started charging polluters for carbon emissions to cut the country's dependence on fossil fuels and adverse environmental impact.
Geocentric Solar Political Economy
Unfortunately, Australia is the exception, not the rule. Solar companies are confronted by rough news and the threat of reduced government subsidies. Austerity at the national and municipal levels will curtail solar expenditures.
Solar systems are an alternative to marginal sources of electrical energy, primarily coal and natural gas. Solar financing is predicated on flat or growing energy prices, rather than declining ones. Hydraulic natural gas fracturing throws a wrench in such assumptions.
We should also not assume that low solar cell costs indefinitely. The precipitous decline in photovoltaic cell prices may reverse. The price of deploying solar systems is likely to increase based on US tariffs on foreign solar cells, which will be a problem for firms which depended on Chinese components in their systems. Many firms have such as Suntech Power plan to avoid US tariffs by using US-made cells.
Chinese Solar Tariffs
Recently, United States Solar manufacturers demanded disciplinary tariffs on Chinese solar imports. Foreign markets have been swamped by China's exports of crystalline silicon photovoltaic solar cells. U.S. solar manufacturers have accused China of using its immense, government-subsidized solar manufacturing capacity to dumping its products in U.S. markets.
As the U.S. elections draw near, edgier trade relations between the United States and China have become a talking point. The candidates have argued over the enforcement of international trade regulations, particularly in regards to China.
The duties imposed by Internal Trade Commission are set to continue if damages against domestic manufacturers are proven. In May, the Commerce Department concluded that Chinese solar cells were dumped in the U.S. below cost and imposed a trade duty of 31%. In addition, a separate 4.73% tariff was also imposed.
Several politicians believe that China's dumping of solar cells continues despite current import penalties. In a letter to the International Trade commission eighteen representatives wrote:
Chinese producers have continued to ship dumped and subsidized products into this country at an alarming and unacceptable rate…This is devastating to our domestic solar-manufacturing industry and costing us critical manufacturing jobs.
Overcapacity Threatens Solar Profit
Prices for solar panels declined from there $4 per watt peak in 2012 to less than $1 per watt. This 80% price decline has made many solar companies unprofitable.
Chinese solar companies are facing added pressure due to anti-dumping movements in United States and many European countries. Suntech Power Holdings (NYSE:STP) has responded by reducing production capacity by about 25% via cutbacks at its Wuxi facility (located near Shanghai, China) that will impact 1,500 jobs.
China-based LDK Solar (NYSE:LDK) announced that is has begun talks with potential investors in order to raise capital in light of these challenges. LDK recently reported a second-quarter loss almost three times larger than the previous year, because of this it decreased its revenue outlook. After reducing its workforce by more than 5,000 jobs this year, LDK stated that it would lay off another 4,000 employees.
Solar Industry Burns Investors
The solar industry can be treacherous for investors. For example, consider how the thin-film solar cell manufacturer Konarka filed for bankruptcy in June. Other firms are expected to follow suit. This was not a one-time event, and many would-be customers need some assurance that service and warranty contracts are made good in the future. Third-party insurance coverage is now being demanded by clients to cover multi-decade guarantees offered by financially shaky solar firms.
Fortunately, this risk seems to be reflected in the cheap price multiples of many solar stocks:
Yingli Green Energy
The cheapest firm on this list is Suntech Power. However, it is also very precarious since its debt-to-equity ratio is dangerously high and because its Chinese operations make it sensitive to protectionism.
SunPower and First Solar are cheap in the absolute sense, but not relative their peers. As U.S. companies they could benefit from protectionism. They are also financially more stable based on their lower debt-to-equity ratios.
First Solar sticks out as a more stable solar stock than the others on this list. It has the lowest debt-to-equity ratio and is domiciled in the United States, which might prove useful in avoiding tariffs. However, it is also the most expensive stock on this list based on it price-to-book ratio and price-to-sales ratio.
Investors should shy away from this sector for the time being. Those who cannot be talked out of speculating should consider either SunPower or First Solar for solar industry exposure.