It still makes no economic sense to install a solar power system for your home, but solar stocks continue to skyrocket higher and higher. Given that we are still a few years away from feasible solar power, are the gains being made on solar stocks justified? Will investors get (sun)burnt by a solar bubble?
Photo: benjamin Lechlitner, Creative Commons, Flickr
A NY Times article, published on April 14, discusses just how hard it is for homeowners to justify the switch to solar power. As an example, a homeowner in New Jersey with an electric bill of $100 a month could buy a system for about $54,000. After the state rebate of $18,468 and the $2,000 federal tax credit, the system would cost $33,532. According to an online calculator, it will take 11 to 22 years for the system to start seeing savings, with the average payback at 14 years. Instead of investing in a solar power system, the homeowner is better off investing the system cost into a government security and using the interest payments to cover future electricity bills.
The bottom line is that solar companies are competing against utility rates, and they still have a lot of work to do. Utilities generate a kilowatt-hour at 10 cents, while a kilowatt-hour from solar technology costs somewhere between 20 cents and 40 cents.
There is a lot of excitement about the prospects for solar, but what happens if the forecasts for global solar demand are too optimistic? Current global demand for solar is seen at 12GWp-14GWp by 2010, but some say a reading around 5GWp is more realistic (this was the projection of the European and Global Photovoltaic Industry released in Sept 2006). The main problem is that current (optimistic) projections assume that the solar markets will develop at these high rates in all countries. Many industrialized nations still lack clear policies on solar power, making a 12GWp-14GWp projection by 2010 (potentially) unrealistic. Despite these concerns, solar stocks continue to defy gravity.
But don't fear the potential bubble! Just use common sense when choosing investments. In a few years, if solar power is proven to be feasible, the solar stock prices we are seeing today might look extremely cheap.
When investing in an emerging technology like solar, it makes sense to get into stable companies with ample cash. Another good strategy might be to look for solar companies that are integrating throughout the solar PV value chain. Margin pressure, resulting from reduced barriers to entry into the solar market, is expected to lead to many casualties. The smart money will be on companies that are integrating both downstream and upstream in order to stabilize margins.
A perfect example of a stock that will "pop" sooner or later is DayStar Technologies (DSTI – Last trade $5.30). The stock has rallied from a low of $2.00 in January to a high of $6.25 at the end of March. The company is a developer and manufacturer of non-silicon based solar cells, and received a going concern statement from accountants at the start of March.
DSTI recently raised a $5 million bridge loan from a group of six investors, with the money helping carry the company while it raises significantly more capital to be used for the building of a production line in Malta. It is rumored the company is seeking as much as $30 million for a new manufacturing facility in Malta but has said it needs funding just to keep operating past the first quarter of this year.
DSTI's cash burn accelerated during the last quarter. In addition, the sharp decline in their stock price towards the end of 2006 has forced the firm to escrow $3 million to satisfy lender terms. The company's founder resigned as Chief Development Officer in December to pursue other opportunities. The company is also operating without a Chief Financial Officer (two victims of the dot-com bubble, is this starting to sound familiar?)
I'm not saying DSTI is a bad investment. DSTI is one of many small solar companies that are too small to survive on their own, offering opportunities to be bought out at attractive prices. In order to try and lower costs during the raw materials shortage, solar gear producers are expected to start buying solar equipment suppliers like DSTI.
But why get into a risky investment like DSTI when investing in an emerging technology "bubble"? Voltaire said that common sense is not so common, and maybe DSTI is a good illustration of this point. For common sense investments, click here, here, here and here.
Disclaimer: I do not own any stocks mentioned above. I do not give investment advice. Do your own research. Do not rely on anything in this blog to make investment decisions. Consult an investment professional familiar with your specific financial situation before buying or selling any security.