Floss your teeth, get plenty of sleep, and get the hell out of PV...

Quick post here. I wrote last year about the correlation between clean energy and oil services funds, and how the former still played as a proxy to the oil sector. Investors aren't buying clean energy based on expectations on climate policy, they're buying it on oil profitability.

With the bear market upon us, it's appropriate to turn to the stocks again to see how they are. And in addition, make note of recent commentary about the bubble that is the solar PV market. Bottom line, there are way too many PV companies around, and the demand is likely not going to be there. Something has to give. Many of these warnings were from a few months/weeks ago, and the results are starting to show:

The solar PV producers fared very well in the last year, but they are starting to crater:

I've included a selection here: REC from Norway, CSIQ from Canada, China's STP and JASO, and LDK. I'm sure there are more, but the point is made.

So why was there a boom in PV companies? Analysts, particularly Jerome Ball seem to point to a number of things:
-High oil prices bouyed the entire clean tech industry
-Solar PV has relatively lower barriers to entry than other clean techs: many chip manufacturers are simply spreading out into PV.
-PV profitability is dependent on ramping up the scale of production, which has lead to a large supply capacity

What are the risks to solar companies this year? Here are the main ones:
-Global downturn in stocks and US recession will likely ease off oil prices and reduce demand for cleantech overall.
-Oversupply: At the bottom of this post, Ball does a small comparison of this calculations of global PV demand and supply.
-Reduction in government subsidies: Ball points out that Germany and Spain are reducing their feed-in tarriff support, while the situation in the US (which has had a preference for supporting ethanol), is unclear.

So, to finish up: there's no question that clean energy will be making it big in the next decade. Long-term investors should be confident in that. But just like the tech boom of the 1990s, it's impossible to say who will make it out of it alive.

(This isn't investment advice, just observations. The title is just a joke.)

Comments

[chiara]

Nathan, thank you for referring to this good article on PV. However, I have few comments, in particular because your post seems to be rather pessimistic about PV. I think it is important to not just “dismiss” a technology on the basis of market cycles and stock market dynamics and expectations..

First, couple of comments on Jerome Ball analysis:
- As some comments to his article pointed out, the total production capacity figures he quote for 2008-9 are likely to be too high
- I am not fully convinced of the policy argument. Yes, it is true that Germany and Spain feed in tariffs (FIT) are due to decrease, but no plans to scrap the incentive schemes are in place. It is a tariff reduction law provision which should mirror the relative cost reduction. Secondly, there are other increasing potential markets for PV, both in Europe and US. France, Italy, Greece for example have all implemented FIT. France in particular is doing quite well. Portugal have already very appealing FIT tariff implemented, although the market expansion is currently hindered by red tape and burocracy (but they seems to be looking into this). In the US the support to FIT schemes at state level have been rapidly increasing in the last months. See this yahoo group for few news on this http://uk.groups.yahoo.com/group/feed_in_tariffs/
- It is important to look more in detail at the different players in the PV market and of which technology we are talking about.
As Ball says: “Major participants are making GW-level production plans (SunTech (STP), Sharp, Q-cells; published) in anticipation of grid parity. Someday, it will likely payoff. Near-term, however, there will be oversupply and margin compression.” He also says: “ PV has relatively low barriers to entry. Taiwan manufacturers, for example, see PV as a new opportunity requiring less investment and less risk than offered by the chip/components businesses and are now moving in”. Here we are talking about mature crystalline silicon technology and firms have different sizes, history and market strategies..

I agree the PV market for crystalline silicon technologies will go through margin contraction and consolidation. But this is not necessarily a bad thing: prices need to go down and currently they seem to be already far too high compared to production costs (again I am talking about c-Si). In the last years companies were making profits, which is probably one of the reasons behind the increasing number of new entrants. Such profits were needed to finance the capacity expansion and the in-house research needed to drive production costs further down (have to be said that for c-Si technology the majority of the cost reduction potential is along the production process, rather than the pure technology refinements).
New entrants in relatively mature markets foster competition, reduce margins and lower prices. Is that a bad thing? The only risk I see is that this might be happing too soon. Probably the companies that will survive the necessary market consolidation will be the bigger ones, vertically integrated and that have invested more in technological advancement in their production process (again, production scale is a crucial element here). And the result might be (I hope) quick cost reductions toward the not so far away grid-parity..which in turn will burst demand etc etc..

Thin film technologies are probably another chapter..

So, let’s be not so pessimistic about PV (as Ball itself concludes!). And please don’t let stock market dynamics and market cycles affect so much technology appraisal…

[Nathan Rive]

Let me first agree with you that talking about stock markets and business cycles is completely different to the long-term future for PV. The posting was focused only on the stock prices - a bit of a continuation of my post last year. I'm quite interested in what it really means to invest as an "ethical" investor, and how one deals with the highly speculative cleantech sectors.

Like all sectors, there will be boom and bust eras; and with solar stocks going up 100-200% in the last years, some of which have P/E ratios of 50-150, it's worth commenting that something has to give. You know the sector more than I do, so I'll defer to your judgement. ;)

What are your thoughts on barriers to entry into PV? I've always assumed this was the case - wind, geothermal, and wave all seem to need a lot more complexity and engineering.

[chiara]

Nathan, I do not know enought of other technologies to fully compare PV with them. But yes, at least for c-Si technologies technology wise the barriers seems to be relatively low. It is a relatively mature technology with well known production process. I do not know how much capital intensive the investment is compared to other technologies productions..
I do see increasing market barriers, i.e. the market is becoming more competitive and I have the feeling that only big players, vertically integrated will be able to survive a potential market consolidation. For thin film technologies instead there is more "space" in the market, but the production processes are still relatively more complex..although things seems to be developing fast here as well

Hope this makes sense!

[chiara]

and sorry for the bad english..

[Hamed Elbarki]

Some great information, thanks for posting!