How Solar Energy Can Begin to Heat Up

Evan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The solar industry has been through the proverbial wringer for the past few years.  On July 23, 2012, I wrote an article entitled “Bite-Sized Solyndra: The Amonix Shutdown.” In that article the state of solar energy was described (and alternative energy as a whole) as being vastly over dependent on governmental funding.  The article proposed that this cycle of dependency harms the competitive free market process as a whole and that solar energy will not be a viable form of American energy until the government gets out of the way of true innovation and lets capitalism function.  Some of the companies mentioned did have other financial difficulties not necessarily directly linked to governmental subsidization – but those examples further underscored the overall point that solar energy is currently a struggling, lagging industry, and the American marketplace just isn’t ready for solar to go mainstream yet.

Fast forward to today.  While the overall state of the solar market remains constant, the future of the solar energy sector appears to be brightening.  The Initial Public Offering (IPO) of SolarCity (NASDAQ: SCTY) has been largely deemed a success, as the company has some strong prospects for growth and is expanding its line of business.  Overall, consumer sentiment for solar is improving, and solar Exchange Traded Funds are producing astonishingly eye-popping results so far in 2013.  But do these numbers actually suggest a permanent turnaround for the solar industry, or will the industry be relegated back unto the “Dark Ages”?  If current trends of “de-subsidizing” and market forces continue to hold, then the solar industry is most likely poised for significant gains in 2013.  If investors allow the solar industry to default to government instead of private industrialization, then the potential of solar energy will be very much unrealized.

So, what does the solar energy sector need to do to continue moving forward off of its strong New Year start?  The following will discuss one major overall principle that the solar industry and America as a whole should follow when examining how to produce quarter-over-quarter, long term, sustainable fiscal growth.

The government needs to let free enterprise choose the winners and losers

We have to recognize that there are winners and losers in life.  Period.  There’s nothing we can do to change that.  That is the purpose of the free market system:  to weed out the unproductive businesses and reward those businesses which produce useful products and improve people’s overall standard of living.

Unfortunately, oftentimes the federal government does not ascribe to this simple, common sense principle.  The solar industry, as well as alternative energy as a whole, has been lavished with our taxpayer dollars for many years.  But, instead of producing a booming new energy of the future, for the past decade, solar companies have been languishing as more and more federal money pours into their coffers.  This might seem counterintuitive, but there are two main encompassing reasons why this unfortunate event has happened.

First, getting a free handout doesn’t produce a strong work ethic.  The government has not been awarding contracts or subsidies to companies based on their actual profitability or business accountability – Uncle Sam has given solar companies tax credits and subsidies galore simply because they are “green.”  This does not encourage innovation, but rather, encourages a dangerous mindset of dependency and entitlement.

Secondly, taking money and “spreading the wealth around” removes consumer incentive to invest.  On September 14, 2012, I wrote another article entitled “Two Tragic Reasons Why Investors Love the Fed,” which more fully expounded upon the overall economic theory as to why this principle is true.  But, specifically applying to solar companies, many investors and consumers are simply not ready yet to turn from oil and natural gas based sources of energy and fully transition over to alternative fuel sources just yet.  It is not the government’s job to compartmentalize people’s wants and desires.  Consumers make the best choices for themselves and are the final arbiters of their own desires; after all, consumers are the ones who know what they want best.  When government tries to force people to move a certain direction prematurely before consumer sentiment has shifted, it produces a regressive, retroactive change from what government wants in the first place.  Consumers are the best gauges of their own wants and needs, will make the best decisions in their own interests, and reward the truly innovative companies in due time.

So, how has the market been responding to solar technology?  Although the market has not been treating solar too kindly for the past few years, just recently some major developments have taken place as federal and state subsidies are beginning to wane.  As the Atlantic notes, “While Washington's support for green things rises and falls every twelve months or so, some corporations have had less up-and-down interest in renewable energy.”  Google (NASDAQ: GOOG) has been a bastion of consistent support for alternative energy forms for several years, while First Solar (NASDAQ: FSLR) has just acquired a rather large operation in Chile and has been enjoying a large increase in First Solar’s stock value.

It is interesting to note that on July 23, 2012, I wrote, “First Solar, a company that used to be prosperous on Wall Street, is now bleeding cash profusely. The company has reported substantial losses and not enough revenues to remain financially solvent.”  Why has the situation started to change for First Solar?  Because the company is moving away from subsidized markets and successfully beginning to market solar to consumers.  Had First Solar not been subsidized, the company might have folded much earlier.  But another, more practical and effectual company would have replaced it and taken over where First Solar left off.  Just because First Solar is doing well now does not give credence to government.  Rather, the example of First Solar is a testament that government falters where free enterprise succeeds.

The example of SunPower (NASDAQ: SPWR) further proves my underlying investment thesis.  The company’s stock price has climbed sharply , shooting up 59% as the company signed a deal to build two solar power projects in California with a unit of MidAmerican Energy Holdings, a part of Warren Buffett's Berkshire Hathaway (NYSE: BRK-A).  Construction for the projects — with a combined capacity of 579 megawatts — will begin in the first quarter of 2013 and is set to be done by the end of 2015.  The reason why SunPower is doing well is because of free market contracting and building with Berkshire Hathaway, which is the real engine of growth for the economy.

The Bottom Line

The hype and buzz surrounding the latest solar IPO, SolarCity, indicates that 2013 promises to be an exciting year for solar companies, regardless of their comparative success or not.  As subsidies begin to wane, solar companies can finally begin to make their inroads into the heavily fossil-fuel dependent culture of the United States.  Solar energy needs to transition from being seen as a big-ticket novelty to being a profitable, successful, energy producing power source.  It’s impossible to determine the direction of a company, let alone an entire industry, from one good quarter.  After all, the solar industry has had several years of pretty poor fiscal returns.  Companies such as Google and Berkshire Hathaway have been and are beginning to partner with solar companies to help precipitate the growth of alternative energy.  There is much room for development and expansion for the solar sector, and if Uncle Sam minds its p’s and q’s, then the solar energy industry will soon be ready to take on the challenges of an increasingly diversifying world marketplace.

EvanBuck has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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