Solar Cells Info

by Josh Wolfe, SIFY business watch /Oct 9, 2007
Source: SIFY
http://sify.com/finance/fullstory.php?id=14540309

Solar energy-related stocks are hot. In the first half of 2007, there was a record $4.7 billion in capital raised in solar-based IPOs, according to U.K.-based research firm New Energy Finance. That’s more than double the amount raised in new solar issues during all of last year. Venture capital and private equity funding for solar firms reached new highs as well, totaling $1.4 billion in the 12 months ending June 2007. Much of this isn’t just pie-in-the sky financing. According to RBC Capital Markets, annual profits will reach approximately $7.7 billion in the solar sector this year and grow to $11.5 billion in 2011.

Meanwhile, Congress is fueling the fire already burning in the solar sector. In early August, the U.S. House passed Resolution 3221 (HR3221) offering expanded renewable energy incentives that, according to one industry group, could enable solar to provide 50% of all new electricity in the U.S. within eight years. Investors are positively giddy about solar’s sunny prospects and ETFs like WilderHill New Energy Global Innovation Index soared over 50% during the first half of this year.

But despite the rush of capital and excitement, there are signs that a cloud is forming over solar stocks. First, most of the IPO excitement stemmed from a handful of new issues out of China. These stocks have benefited from a double shot of PR. The IPO pipeline for the latter half of 2007 appears relatively dry.

Also many of these shiny new companies no longer look cheap they are trading at greater than 50 times earnings. Take Phoenix-based First Solar for example, a leader in thin films: Its stocks is up more than 250% in 2007 and it has a P/E of 148.

My view is that the solar market is overheated and a correction is in order. But the good news is that the technology underlying the solar sector is strong, and the prospect for profitable investing in this sector over the long term is good. Here is how I handicap the solar market.

Solar: The Big Picture
Remember, the solar sector is a small part of a much larger energy industry. Based on 2004 data from the U.S. DOT’s Energy Information Administration (EIA), solar energy represented only 0.066% of all energy consumption in 2005. But, for advocates, this only signals the opportunity for growth. Solar’s contribution to current overall energy doesn’t generate any greenhouse gases. This makes it an excellent alternative to hydrocarbon sources.

Second: Whatever the fate of HR3221, governments worldwide appear willing to subsidize solar’s growth until its product costs can compete organically with grid electricity. The solar market is still dominated by the crystalline silicon (c-Si) technology that was developed in the ’60s for the space race and then converted for commercial use during the energy crunch of the ’70s. The technology has since evolved and, today, c-Si modules regularly convert 20% of radiant light into electricity.

At best, second-generation, thin-film technologies convert about 15%. Despite this, thin-film technologies have steadily stolen market share from the incumbents because they are relatively cheap to manufacture. Shipments of thin-film photovoltaic modules more than doubled between 2004 and 2005, by EIA estimates. Meanwhile, RBC projects thin film solar panels will continue to increase their market share from 6.5% today to 19% by 2011.

The two technologies, however, do not necessarily compete one-on-one for the same applications. On average, the sun radiates 2.6 gigawatts (GW) of energy onto a square mile of the earth’s surface, and the most suitable way to harvest that light depends on two factors: cost and the available real estate.

“Traditionally, people have divided the [solar] market between residential vs. the commercial/industrial space, but I look at it as space-constrained vs. non-space-constrained applications,” said Stuart Bush, an analyst for RBC. “Non-space-constrained applications are more attractive to the thin-film market. A company like First Solar can install a watt of power more cheaply than silicon products, but its [technology is] not as effective if you’re on top of a house with limited space.”

Solar 2.0: Thin film
The solar market is further divided within the thin-film subsegment, where three technologies are vying for dominance. The leader is amorphous silicon (a-Si), which represented 64% of the market as of 2005. Based on films measuring less than a micron thick, a-Si panels offer a clear benefit in materials costs compared with the 200-micrometer-thick crystalline wafers. Although a-Si modules are based on a familiar material technology, their conversion efficiencies average only 8%.

The current market leader is Energy Conversion Devices’ subsidiary, United Solar Ovonic. Cadmium telluride (CdTe) modules are the next largest thin-film technology, with 26% market share. The leading player is First Solar, which has achieved 9% conversion efficiencies with its modules, while reducing manufacturing costs as low as $1.25 per watt.

Stock Performance
First Solar’s stock performance has been shining as brightly as its products. It’s shares more than doubled from April to August alone and are now trading at an all-time high. Pushing the stock up has been a 176.7% increase in Q2 sales (from $27.9 million to $77.2 million) and steadily rising earnings (reaching $44.4 million, or $0.58 per share).

“I am a short-term bear and long-term bull on solar stocks. The solar industry’s energy usage is miniscule, but the hope is that there’s plenty of runway to grow,” said Ted Sullivan, an analyst for Lux Research. [Full disclosure: my venture firm is an equity investor in Lux Research.] Unlike the 1970s, Sullivan added, the current movement toward renewable energy is a macro trend driven largely by two factors.

First: Global warming’s stellar performance has largely been fueled by enthusiastic support from public and government investors. But the sector’s growth is not yet organic. Nor will it be until solar’s cost/watt approaches that of grid electricity.

“Comparing the cost of either energy source isn’t easy,” said RBC’s Bush. “It’s a fun little stat that everyone tries to reach, but there are always a lot of asterisks attached.” Some of those asterisks include geographical variables in grid costs, solar intensity and available government subsidies. Even so, RBC estimated the average installed cost worldwide for solar is about $7.37/watt this year, and that should decline to $4.40/watt over the next four years. But without subsidies and outside capital, solar may not be able to compete with grid electricity until 2014, or until the installed price approaches $3.50 per watt.

But the inflow of government and public funding into the solar market is a double-edged sword. It’s encouraged silicon-based solar providers in particular to ramp up capacity at every step of the supply chain, from raw silicon, through wafers, cells, modules and installation. The growth in capacity shows little regard for current demand, and the market for c-Si photovoltaics is clearly overheated.

Second-generation, thin-film technologies are a relatively safer bet, with emphasis on “relatively.” In the near term, caution is advised in this sector as well. Jenny Chase, senior solar analyst for New Energy Finance, warns against indiscriminate investment in thin-film solar stocks. “German developers are clamoring for its stuff,” said Chase. “But whether its $7 billion market valuation is worthwhile or not is something investors need to think about.”

Investment Strategies
Most of these solar stocks are volatile and thus fraught with risk. One strategy is to play the supply chain for crystalline silicon photovoltaic providers. RBC’s Bush expects higher margins at the upstream end of the chain (e.g., silicon and wafer manufacturers) where capital equipment costs and technical know-how provide more protection against new competition.

Unfortunately the top three wafer makers–REC, SolarWorld AG and Schott Solar are all privately owned German companies. The next largest provider is PV Crystalox. Chase of New Energy Finance agrees, but advises that investors look among thin-film companies that are technology leaders in their field. Here again, publicly traded stocks are limited to First Solar, DayStar Technologies and Energy Conversion Devices.

My view is that all of these stocks are overpriced. My advice is to remain patient and wait to see what happens after the dust settles from an IPO of Miasole or Nanosolar, which could happen within the next 12 months.