Eco Investor Guide

Investors who got onboard with Claymore/MAC Global Solar Energy Index ETF (TAN) when it came out in April of 2008, are looking rather pale, having lost two thirds of their investment.  This loss is a fairly good proxy for what the average solar investor has lost over that time period, with most stocks being down in the 45%-70% range.

So the obvious question is a fair one: where do we go from here?  To answer that question, it helps to look at what got us here. A variety of factors conspired to bring down the high-flying solar stocks: the recession, credit crunch, drop in energy prices, and elimination of Spanish subsidies all hurt demand. On the supply side, new polysilicon capacity and increased competition from new market entrants, reduced prices and thus revenues for solar companies.

As investors, we have to look forward, however, and I believe that the future looks bright.  Though the reduction in price per watt has been a challenge in the short-term, it will be a positive going forward, as it will lead to increased demand due to lower capital requirements and quicker payback. Though 2009 sales will likely be flat or even down relative to 2008, solar sales have picked up in the second quarter as compared to the first quarter, with PV equipment shipments up 81% (IMS Research). According to Barclays Capital, supply and demand are predicted to balance somewhere in the second half of 2010.  Meanwhile, solar thermal projects are steaming ahead.

Recently, Engineering firm Bechtel took an equity stake in Brightsource’s Ivanpah project, which intends to build three plants for a total of 440 MW at the Ivanpah dry lakebed in San Bernardino County. The plants will use fields of mirrors to focus sunlight on water towers. The steam generated from boiling the water, will turn a turbine and generate electricity.

Another company in this space,  eSolar, recently flipped the switch on the first commercial concentrated solar power plant in the US, in Lancaster, CA with a capacity of 5 MW.  eSolar has another deal in the works in the Antelope Valley with Southern California Edison for 245 MW.  First Solar (FSLR), not to be outdone, signed an agreement with China to build the world’s largest solar plant in  Inner Mongolia. The 2 GW plant, would cover 25 square miles (64 square kilometers) and is estimated to take about 10 years to complete.

Our strategy in solar is to look for companies that offer a combination of scale and product differentiation, and ideally trade at a discount to their competition. This might be a tough combination to find in one company, but if we can approximate that mix, I think we will be well situated when solar rebounds.