Politics Control The Solar Power Industry
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While media sources are making much ado about the extension of wind energy tax credits for another year, the nation's premier investment and experiment in clean energy is occurring now in California, far from the wind tax credit issue. Solar is far closer than wind energy is in achieving what is known as “grid parity,” or being equal in cost with traditional energy production methods even without direct subsidies to either. The recently extended wind energy tax credit allows for about a 2.2 cent per kilowatt credit, equal to about a third of the overall cost. Even the most optimistic proponents of wind energy do not see it with grid parity until close to 2020. Making matters more difficult is that wind energy competes as a “baseload” energy source, generated at mostly remote locations, and having to be transported to end users.
Solar, on the other hand, has seen its price plummet across the globe to become a small fraction of what it was ten or more years ago. That fall has not been without pain, as a good many solar providers in this country or elsewhere have collapsed due to price wars. But by some measures, solar energy, which has the capacity to be a source of decentralized energy generation, is already at grid parity.
Of course, all this discussion of grid parity assumes that we are only discussing the internal costs of energy generation. If we include external costs, which are no less real, due to pollution, health care, and related matters, worldwide annual subsidies to fossil fuels reach to $1 trillion or more. A hamster would be a less expensive source of energy.
Back to California. About a month ago, the state passed what will become the nation's largest implementation of cap and trade carbon emission control. If successful, and the goal is to bring the state's carbon emission down to 1990 levels by 2020, it will be a template for the country, and perhaps the world. If unsuccessful, goodbye to cap and trade.
Under California's plan, all companies operating in the state within specific business categories will receive carbon permits. A private market would be created, where those companies innovating to lower their carbon footprints would be able to sell their permits, while those unwilling or unable to clean up would have to buy permits. Electricity producers are of course, among those companies subject to the new law. Is it a coincidence that a number of transactions involving clean energy have occurred of late? I think not.
Some of the most respected names in the corporate community have become interested in California solar arrays. At the lead of the acquisition trail has been Mid America Energy Holding, a wholly owned subsidiary of Berkshire Hathaway (BRK-B). Mid America purchased a 49% stake in a 270 megawatt solar array in Arizona from NRG Energy (NRG) early in 2011, along with First Solar's (NASDAQ: FSLR) 550 megawatt array in California in late 2011. Mid America has followed those up by purchasing from SunPower (NASDAQ: SPWR) what will be California's largest solar array, the 579 megawatt Antelope alley facility. Mid America is paying $2.0 to $2.5 billion for the facility, which it will hire SunPower to actually build for opening by 2015. Insurance giants such as MetLife (NYSE: MET) have long ago invested in solar. MetLife recently joined General Electric (GE) and Mitsubishi UFJ Financial Group in buying a major stake in a 143-megawatt Catalina solar project currently under construction in California’s Mojave Desert. Many large entertainment and football venues have solar rooftops. So, why aren't solar companies making money?
What is good news for our carbon footprint and the planet's health is not necessarily good news for the manufacturers of solar equipment. Panels themselves cost an average of $0.73 per watt, compared with construction costs of $3 per watt for coal and $1 per watt for natural gas. The solar panels do need to be installed, but so do coal and natural gas need to be purchased. Sunshine is free, and any time sun is “spilt”, we call that a sunny day. That $0.73 average compares to $76 per watt in 1977, $30 per watt in 1980, about $5 per watt in 2000, and just over $1.00 per watt in 2011. The entire chart can be viewed here.
The collapse of solar prices has been brought on largely by cheap Chinese imports. A harsh tariff battle occurred earlier in 2012, and the result, substantial tariffs for Chinese built products, will do little to help American manufacturers, as all Chinese solar makers have to do to avoid tariffs is move some of their manufacturing operations offshore.
Despite the apparent good fortune of SunPower, the company's existence is far from secure. They are a high cost supplier, with an average 2012 cost of $0.84 per watt. They have not secured a profit in any of the first three quarters of 2012, and with exception of the deal with Mid American, there is little to be optimistic about until the European economy recovers. Add into that the fact that SunPower stock is up 50% in the few days after the Mid American announcement, and I feel the company is currently overvalued.
First Solar stock has gone up in concert with SunPower, up about 10% in the three days since the announcement. It is a lower cost supplier than SunPower, with a 2012 average price of about $0.63 per watt. It too is struggling with plummeting prices of solar panels, but has proven profitable most of the time. First Solar is a long term holding of the Walton family of Wal-Mart (WMT) wealth, giving some stability to the stock.
I can think of no large company in a worse situation now that First Solar. Its profits this year were predicated on large scale, utility contracts negotiated a year or more ago at contract prices far higher than they are today. Going forward, as per watt prices trend lower and lower, profit margins will undoubtedly shrink further. And I believe that First Solar's focus on utility scale systems and abandoning the decentralized rooftop model is not a winning long term strategy. With the stock nearly tripling over the past six months, I don't see a great deal of upside for the next year or two, and would look elsewhere.
I believe as strongly as possible that solar energy is vital to our country's energy future. It is a shame I cannot find a large domestic solar energy company that I can invest in comfortably.
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