Friday, July 25, 2008

Solar Burst

Apparently the Spanish government is considering a reduction in its subsidies for solar power. The prospect has cast a shadow across the solar cell industry around the world. First Solar (FSLR: Nasdaq), which has become something of a bell weather for the solar industry, has held up well. FSLR shares are trading just 10% below its 52-week high. However, JA Solar Holdings (JASO: Nasdaq) is well off that stock’s high despite a strong net profit margin of 14%.

Spain has been a leader in promoting solar energy by providing generous subsidies for solar generation. Now Spain’s government is considering a cap on subsidies at 300 megawatts, less than one-third current the current level of 1000 MW. The ASIF, the Spanish solar industry association, has called for a cap of subsidies at 480 megawatts.

Since estimates and valuations for the solar cell industry had been counting on continuation of Spain’s subsidies, stocks in the sector have been hit hard. However, we believe the solar sector is strong enough to survive without subsidies and we suggest investors stand firm in solar industry investments.

Our view is based on two points. One the price of oil is not likely to fall below $100.00 per barrel any time soon. Even at lower oil prices, alternative energies such as solar and wind still make sense when environmental considerations are included in the equation.

Second, improving efficiencies are closing the gap on cost competition with fossil fuels even if the price of oil declines to the level at the “turn of 21st century.” We note that third generation solar cells are operating at 30% to 60% efficiency - that is the amount of solar radiation that is converted to energy. This is being achieved with multi-junction photovoltaic cells, higher cell concentrations per array and use of excess thermal generation to enhance voltages.

The Worldwatch Institute also claims that the solar industry is poised for a rapid decline in costs that could propel this new age power source into the mainstream. Growth in solar cell production was actually held back in 2006 and 2007 due to the lack of adequate manufacturing capacity for polysilicon, a key material for solar cells. However, more than a dozen producers in the U.S., Europe, China and Japan are expanding capacity that should come on line in 2008 and 2009. Worldwatch estimates solar cell costs could decline by as much as 40% over the next three years.

Falling costs and rising efficiency may make government subsidies unnecessary to compete with fossil fuel. Then again the whole comparison equation should also include environmental costs of pollutants and emissions. We have yet to see an analysis provides a fair comparison of energy sources in terms of the environmental impact.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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