Friday, February 3, 2012

Solar Stocks Down Then Up; Obama Calls For Energy Aid

President Obama talked up the promise of alternative energy in his State of the Union speech Tuesday, and said he'd clear the way to produce clean power on public lands.
Solar and wind energy got good play in Tuesday's State of the Union by President Obama

But whatever their future, the solar and wind industries — and alternative energy investors — have had it rough lately.

Subsidy cuts around the world have hurt profits, and analysts see a fierce global price war cutting the number of solar material suppliers.

For months, IBD's 24-company Energy-Solar industry group has ranked dead last in long-term stock performance among 197 groups tracked. It's down 60% over the past 52 weeks. But so far this year, those stocks have risen 38% vs. the S&P 500 index's 5% gain. Several are foreign ADRs, and China leads in making silicon solar products — the main type — at low prices.

"I will not cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here," Obama said in his speech, as he talked about ending subsidies for oil and broadening incentives for an alternative energy industry "that's never been more promising."

Demand And Perks Seesaw

Jefferies analyst Jesse Pichel says solar stocks' good start to the year stems from stronger demand in big-market Germany's fourth quarter.

"But it's a double-edged sword," he said. "Germany coming back to life in terms of demand means the German government will look to lower subsidies."

The country's environment minister is already pushing to move up incentive cuts to the spring, according to a Reuters report Wednesday. That could spur demand — but only in the short run, as projects rush to beat the deadline.

Shares of the 10 biggest solar companies IBD tracks dipped or stayed flat early this week. But nine rose Thursday, and each is up strongly for the month, from ReneSola's (SOL) 52% gain and Suntech Power Holdings' (STP) 47% jump down to SunPower's (SPWR) 10% rise. The largest, First Solar (FSLR), lifted 21%.

Pichel says the European solar market is in decline but that will be mitigated by China, Japan and U.S. growth. Overall he says the year is shaping up to be "kind of flattish, still dominated by oversupply."

Until the solar and wind industries can thrive broadly without subsidies, changes in perks will affect demand and viability.

"The biggest issue on the federal side is financing and especially extension of the 1603 program," said Rhone Resch, president of the Solar Energy Industries Association. "It expired on Dec. 31 and, unfortunately, this program has done more to expand use of renewable energy than any other in history."

Without it, projects can't get a 30% upfront grant. Instead they have to take the 30% perk as a tax credit, so they need profit to offset or investors with profit to offset.

"Big projects in the hundreds of millions of dollars can attract tax equity investors, but that's just a handful," Resch said. "The majority of companies are small and they're not finding those tax equity investors."

The American Wind Energy Association notes that Obama's speech is the fifth wind-power mention in a State of the Union address in the past decade. George W. Bush talked about it in 2006 and 2007, and Obama in 2009, 2011 and now 2012.

Wind, more established than solar energy in the U.S., is seen generating 20% of its power in 2030.

"We're well on our way," AWEA CEO Denise Bode said in a presentation to press Thursday. The fourth quarter of 2011 marked "another strong showing with healthy installations," and the full year came in at 6,810 megawatts, up 31%.

However, the AWEA says, if a renewable-energy production tax credit is allowed to expire at the end of 2012, private investment in wind would be cut by almost two-thirds.

Bipartisan legislation backs a four-year extension, and Bode says it now has 56 co-sponsors, including key Republicans in the House.

With fierce competition from China and amid problematic oversupply, solar players have pushed hard to lower costs and pricing, moving closer to being self-sustaining without perks. That largely means reaching grid parity, when prices are on par with conventional energy — and still leaving big enough profit margins to survive.

"Retail grid parity is very easy to achieve ... in a reasonably sunny area," Pichel said. "Retail energy rates around the world are high and getting higher."

"We think China is ultimately the biggest market for all renewables projects, and leverage to that will determine the winners in wind, solar, LED and smart-grid products," Pichel said. "We have a buy on Yingli (YGE) because it's most levered to Chinese projects."

It's his only buy rating in solar.

'All-Out' On Energy

Obama said in his speech that U.S. oil production is at its highest in eight years, but said with the nation having only 2% of the world's oil reserves, it's not enough. He talked about the need for "an all-out, all-of-the-above strategy that develops every available source of energy," including natural gas supplies that can last the U.S. almost 100 years.

"There's no reason why Congress shouldn't at least set a clean energy standard that creates a market for innovation," Obama said. "I'm directing my administration to allow the development of clean energy on enough public land to power 3 million homes. And I'm proud to announce that the Department of Defense, the world's largest consumer of energy, will make one of the largest commitments to clean energy in history — with the Navy purchasing enough capacity to power a quarter of a million homes a year."

How, and how much, Washington incentivizes alternative energy has become a campaign issue. A $535 million loan guarantee to now-failed solar firm Solyndra is the poster child. And just Thursday, battery developer Ener1 said it's restructuring via bankruptcy. A subsidiary was granted $118.5 million by the Energy Department in 2009.


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