Solar Energy may Shine Brighter with Fuel from Venture Capital

By Jay Wei - April 25, 2012 | Tickers: FSLR, SPWR, TOT | 0 Comments

• Email
• Print

Solar energy may well be the energy future both in a figurative sense and literally. Adventurous investors eying the future can always find their source of energy to propel themselves over the conventional crowd. But for solar energy, the future is more in a literal sense, and moving ahead of the energy reality means not realizing that today's solar energy may not light up everywhere anytime soon. Many years from now, the world may reflect on the development of solar energy in a similar way in which it observed the oil exploration more than one hundred years ago. All business ventures highlight initial frenzy, ongoing failures, later consolidation and eventual stabilization. The current solar industry as we know is still in its very early stage, and solar companies as start-ups may be better served by venture capitalists as opposed to common shareholders.

Compared with common equity, venture capital is meant to be the riskier capital and thus more suitable for handling potential business failures. Venture capitalists in theory should stay with their start-ups and hold the stakes for years, if not a decade or more, until their invested companies can finally operate in a stable market environment. Only then, venture capitalists will decide whether to launch an IPO for exit. But take a look at First Solar (NASDAQ: FSLR), and I suspect that the company's IPO may have benefited its original financial backers, but brought an unstable business to the public equity market because of the still fragmentary and weak demand for solar uses.

First Solar's stock debuted in November 2006 with a closing price of about $25 on its first trading day. The stock went on to rise to over $300 in around a year and half, but then started its persistent decline in the four years afterwards all the way to below $20 as of 4/25/2012. This level of loss is not justifiable for common shareholders, especially given their lack of control in company operations. The losses would be bearable and expected for venture capitalists who usually are board members of their invested companies. In my opinion, solar companies are better off remaining in private hands at the current state of the play. This will not only benefit solar companies' ongoing business development, but also prevent unnecessary investment shocks that can easily burn the investing public.

Solar companies are squeezed by the lack of market demand on the revenue side and the need for ongoing research and product development on the cost side. One element that has kept solar companies in operations is government subsidies. Without tax breaks and other form of financial support from governments, the numbers for market prices and product costs simply cannot line up right. The solar energy market has yet to become truly market functioning, and it's challenging for average investors to get involved in something that often is influenced by government policies. While government support has helped build up solar manufacturing capacities, the expiration of solar subsidies everywhere from the U.S. to European countries is starting to cause oversupply in the solar market. Without the government in the play, solar products are either too expensive for users or not profitable for producers. 

Making solar energy eventually cost effective and practical relies on continuing research and development, which can be highly cost intensive. Stock offering to the public is a one-off capital-raising event, and issuing more shares later may not be possible when a stock is under-performing the market. But venture capital injections can be arranged and repeated as a company's needs for capital arise. Therefore, publicly-traded solar companies don't seem to have the proper financing structure for advancing solar technology and making solar energy the real future.

It's no surprise that lacking ongoing capital support, some publicly-traded solar companies have either sold their shares to others or filed for bankruptcy. In April 2001, SunPower (NASDAQ: SPWR) had to sell 60 percent of its equity to Total SA (NYSE: TOT), Europe's third largest oil company based in Paris. The sale gave SunPower much needed low-cost credit support from the cash-rich oil company. Total SA and a handful of other oil companies, including BP, have tried to enter the solar industry and explore the alternative source of energy as a hedge against their fossil fuel’s losing popularity. There also remains plenty of interests from private investors to buy failed solar companies as Bloomberg News reported. I suspect that some solar companies may even be taken private if they continue to struggle financially.

• Email
• Print
• Feedback