NEW YORK, New York, US, May 16, 2007. Demand for solar PV power will grow 40% per year by 2011, “offering opportunities for investors who can ride out near-term bumps,” according to a report from one of the top investment banks.
“Solar industry profits are here to stay, since both public and government support are likely to remain strong until solar can compete on a cost basis with grid electricity,” says Stuart Bush of RBC Capital Markets and author of ‘Investing in Solar Now.’ “Today, solar energy costs nearly double what would be economical without subsidies, but solar energy companies are aggressively pursuing their Holy Grail: Organic competitiveness with grid electricity.”
Rising costs for fossil fuels, environmental concerns, geopolitical factors and growing demand for energy have swelled global interest in renewables and, with more government subsidies for solar and other green technologies, profitable companies are on the rise in this sector, the report explains. The solar industry is seeing profits throughout the supply chain and silicon cell PV solar technology installations (currently accounting for 95% of the market) will book gross profits of US$7.7 billion this year and grow to $11.5 billion in 2011, the report predicts.
The estimate does not include profits from the alternative thin-film PV technology, which is projected to grow from 6.5% of the market now to 19% in 2011. It also excludes equipment makers and derivative industries.
The solar industry is implementing technology improvements that will continue to drive costs down, and the industry’s installed cost for PV will decline from an average of $7.37 per kW in 2007 to $4.40 in 2011. The industry will achieve organic competitiveness with grid electricity at $3.50 per kW, without incentives and depending on the region by 2012 - 2014.
The long-term outlook for solar power is positive but sector stocks are likely to remain volatile in the near term, it warns. RBC has developed a supply and demand forecast model that predicts solar companies are likely to experience tightening margins over the next few years, driving vertical integration and capacity consolidation, particularly among new silicon producers, smaller cell and module producers and independent installers.
Given the industry's evolution, investors should consider key investment strategies for the emerging global solar industry, Bush suggests. Solar companies that focus on high value-added elements of the supply chain (silicon, wafer and cell producers) will generate higher margins than labour-heavy and low barrier-to-entry module and installation segments. As the majority of the solar industry is dominated by standard solar products, companies with higher efficiency products or lower-cost thin-film designs are better suited to command superior profits long term.
As additional silicon supplies drive raw material costs down over the next two years, operating cost structure will emerge as the long-term driver of profit margins and producers in Asia (most notably in China) stand to benefit, it adds. Investing among companies located in Germany or China will limit exposure to cross-border macro trends and highlight comparably strong regional producers.
RBC Capital Markets is the investment banking arm of the Royal Bank of Canada.