INVESTOR'S BUSINESS DAILY
Sure, the sun does plenty of useful things — like make life possible for us earthlings. But until it could do something really impressive, like power a few million blow-dryers, Wall Street shrugged.
Now that solar energy is a viable source of electric power, investors have seen the light, so to speak.
Five companies that make technology used in solar energy systems have debuted on U.S. markets over the past three months. Another has filed for its initial public offering. They join two others that bowed in late 2005.
Six of the seven stocks trade above their opening prices. Most are profitable, and all eye rapid growth as technologies improve, costs decline and policymakers look to reduce dependence on fossil fuels.
"Most estimates have these companies growing at double and triple the market growth we're seeing right now," said Sam Snyder, research analyst at Renaissance Capital in Greenwich, Conn. "The reason you're seeing them go public now is because they have good coverage in raw material needs and big customer orders in hand over the next year or two."
The industry is built on photovoltaics technology. PV uses solar cells to convert energy from the sun into electricity. Cells are grouped together to form PV modules, which go into full systems. These are used to juice everything from homes and offices to whole factories.
"Anyone with a roof exposed to the sun could do this," said Cowen & Co. analyst Robert Stone.
The challenge is harnessing the sun's power in a cost-efficient way. Materials to make solar chips fluctuate in price, so when supply is tight, costs go up. In addition to buying the systems themselves, most end customers must retrofit buildings to accommodate the systems.
"You can't do it as cheaply as regular electric power generation," Snyder said. "The technology works, but it's a matter of costs."
Outsourcing PV production to China helps lower costs. Four Chinese companies have gone public since early November. Canadian Solar (CSIQ) — yes, it's based in China — debuted on Nov. 9. It was followed by Trina Solar Ltd., (TSL) Solarfun Power (SOLF) and JA Solar. (JASO)
Another Chinese company, Suntech Power, (STP) went public in December 2005. It makes PV cells, modules and systems.
Suntech is one of two tier-one players in the sector, Snyder says. The other is SunPower, (SPWR) a San Jose, Calif.-based firm that went public in November 2005. It supplies solar cells, panels and inverters.
The list of recent entrants includes Phoenix-based First Solar, (FSLR) which bowed Nov. 17. It uses thin-film semiconductor technology to make solar modules. First Solar's shares shot up 22% on Feb. 14 after it easily beat quarterly views.
The playing field also features units of Sanyo, BP, (BP) Sharp Electronics, Royal Dutch/Shell (RDSA) and Mitsubishi. (MTU) All compete in an industry heavily dependent on government subsidies to offset costs and encourage production.
"Subsidies come in because if you put in solar today, and have to pay the full cost itself, it would take a long time to pay for itself," Stone said. "By subsidizing, it means that in about seven to 10 years you'll have paid back the cost of the system."
The subsidies range from tax credits to buyback programs that let customers sell excess electricity to the public grid.
Germany has the most comprehensive incentive program. It also accounts for more than half the world's market for solar energy components, Stone said. Programs in Japan, Spain and Italy get high marks as well.
U.S. subsidy programs tend to be more scattershot. On the federal level, the House recently introduced legislation that would extend solar energy investment tax credits for homeowners and businesses through 2016. Credits are set to expire next year.
The Bush administration's Solar America Initiative aims to encourage research and development. The program provides $84 million a year in matching funds for R&D. Efforts are under way to increase that to $148 million, said Rhone Resch, president of the Solar Energy Industries Association, a Washington, D.C., trade group.
On the state level, California has passed a $3.2 billion, 10-year bill to promote solar energy. Funding will come from utility charges on repairs. One feature is a mandate that after 2010, new homes of a certain size must include solar energy as an option.
"The most important aspect of the bill is that it has a long duration," Resch said. "There's foresight in the recognition that to create an industry, you need a long-term stable environment."
California's effort is the most far-reaching at the state level. Most states have only token programs in place, and rules can vary wildly.
"Solar doesn't have access to the electricity infrastructure equally across the states," Resch said. "Many states don't allow interconnection to grid. There are not uniform net metering laws across the country, with is the rate you'd get for selling electricity back to the grid. These are fundamental barriers to solar competing."
Technology Keeps Improving
While industry advocates address those problems, manufacturers eye more innovation and efficiency.
"Long-term, companies are going to have to keep pushing down their manufacturing costs," Snyder said.
One positive trend, he said, is that companies are working on thinner wafers, so it requires less material to generate the same amount of energy.