Sun will shine on solar-energy investing, report says

Jun 18, 2007 @ 12:01 am

By Liz Skinner

WASHINGTON — Solar energy is emerging as an investment opportunity, with technology improving and costs predicted to drop.

With concern over global warming increasing in the United States, the discussion of alternative power sources is heating up. While wind and hydropower sources are likely to gain devotees, solar power is expected to play a starring role in the future electricity supply of the nation.

Solar-power use is expected to grow 40% a year through 2011, according to an RBC Capital Markets report. It projected 2007 profits for the industry of $7.7 billion, rising to $11.5 billion by 2011.

Today, even factoring in government subsidies, solar power is two to three times more expensive than electricity, which depends on coal, natural-gas-fired plants and nuclear energy. However, the cost of solar power is expected to fall as the price to buy and install photovoltaic cells, which convert light into electricity, drops.

“There is substantial public and political support to keep government incentives for solar strong for five to six years until it is cost competitive,” said Stuart Bush, lead alternative-energy equity analyst for RBC Capital Markets, the investment banking arm of Toronto-based Royal Bank of Canada.

Prices dropping

The report, which was released last month, predicted that the average cost for installed photovoltaic solar power will fall to $4.40 per kilowatt in 2011, from an estimated $7.37 this year.

Solar power will be competitive with grid power at about $3.50 per kilowatt, a price it will attain between 2012 and 2014, depending on the region and government incentives, according to the report.

The long-term outlook for the solar-power sector is positive, though stocks of companies in the sector are expected to “remain volatile in the near term,” according to the report. Consolidation is likely among installers of independent solar-power systems, smaller cell and module makers, and producers of silicon, the report said.

Investors should look for companies that focus on elements of the supply chain, such as silicon, wafer and cell producers, and avoid the installation segment, Mr. Bush said.

A global silicon shortage has helped shares of silicon producers MEMC Electronic Materials Inc. (WFR) of St. Peters, Mo., and Wacker Chemie AG (WCH.DE) of Munich, Germany, rise about 70% and 60%, respectively, over the past year.

Thanks to aggressive silicon plant expansions, the silicon shortage is expected to be relieved by the middle of next year, and the cost of the raw material is expected begin falling in 2009.

Among firms that are positioned to benefit are Asian solar-cell producers that have low operating costs, according to the RBC report.

China’s silicon cell makers, whose shares trade as American depositary receipts in the United States, include Canadian Solar Inc. (CSIQ), JA Solar Holdings Co. Ltd. (JASO), Solarfun Power Holdings Co. Ltd. (SOLF), Suntech Power Holdings Co. Ltd. (STP) and Trina Solar Ltd. (TSL).

U.S. producers of solar-silicon cells and modules include SunPower Corp. (SPWR) of San Jose, Calif., and Evergreen Solar Inc. (ESLR) of Marlboro, Mass., which isn’t yet profitable but is working on producing a solar cell using less silicon.

An alternative to silicon solar cells are systems made with thin layers of photovoltaic materials that convert light into electricity. The thin-film photovoltaic market is expected to grow to 19% by 2011, from about 6.5% of solar applications this year, according to the report.

Thin-film photovoltaic cells can be used to make cheaper solar panels, but they are less efficient and require more space to generate the same amount of power. The technology is useful for industrial and commercial applications.

Two American thin-film-module producers are Energy Conversion Devices Inc. (ENER) of Rochester Hills, Minn., and First Solar Inc. (FSLR) of Phoenix. In addition, there are dozens of private thin-film companies that have received significant venture capital funding, and they are developing new technologies, Mr. Bush said.

Clients lead the way

Many financial advisers are interested in opportunities that solar and other alternative-energy sources could provide, though few are putting clients into the sector. Some are being led there by client interest.

“These clients have a dual interest,” said Scott Coleman, an adviser with Schaumburg, Ill.-based KRD Financial LLC, which manages about $100 million in client assets. “There are the green reasons, but they also believe there could be very good returns from investing in alternatives.”

But some individual investors aren’t willing to gamble on the success of a single company in the solar market.

One mutual fund that focuses on alternative energies and includes many solar companies around the globe is the New Alternatives Fund (NALFX), which has returned about 17% over the past year.

Today, solar is one of the most important investments for the 25-year-old fund, said Maurice Schoenwald, chairman of the $200 million fund, which is based in Melville, N.Y.

He said that cheaper and less efficient thin-film cells don’t have a long-term future in the solar market. As silicon prices come down, “thin film will die,” Mr. Schoenwald predicted.

In addition, one exchange traded fund — the PowerShares WilderHill Clean Energy Portfolio (PBW), offered by PowerShares Capital Management LLC of

Wheaton, Ill. — includes many companies in the solar sector.

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