Garvin Jabusch
For most of 2011, the stocks of solar power companies of all kinds, from providers of raw polysilicon to developers of finished utility scale plants, have been taking a beating on world and U.S. stock markets, partly because solar has been the industry most singled out for attack by bearish short sellers. I can’t describe this phenomenon any better than did Roberto Pedone in a recent column for thestreet.com:
Besides the banking sector post-2008 financial crisis, I can’t think of a group that’s as hated and despised as solar stocks…For whatever reason, this entire complex has become a favorite target of short-sellers. There are so many names in the solar sector that are heavily shorted that it’s hard to find a name the bears aren’t leaning all over. One famous and successful short-seller, Jim Chanos, has even made it publicly clear that he thinks the wind and solar stocks are a bunch of “hot air.”
“For whatever reason” indeed. Solar is hated in spite of being the fastest growing energy sector in the U.S. (67% 2010 growth; 66% growth just in the first quarter of 2011) and in the world (70% 2010 growth), and also despite its shares trading at very low valuations already. Take for example Green Alpha ® Advisors‘ holding and China-based solar company LDK Solar (LDK). The company’s shares have fallen from US$14.49 per share in February to $6.94 as of this writing. I can find no good fundamental reason for the decline: LDK’s latest quarterly earnings came in at $.95 per share where consensus analyst expectations were $.86; the company has year-on-year sales growth of 202%, has a price-to-earnings ratio of only 2.22, plenty of cash on the balance sheet, and a price-to-book ratio of just .91. That’s right, even if the company were closed and its assets liquidated, the cash generated at the yard sale would be greater than the current market cap, though the earnings should have value. LDK is the very definition of a “value” stock. Or, inversely, shorting any company this cheap, that’s this fundamentally solid, and that’s growing this fast is the very definition of “irrational.” LDK happens to be one of our favorites, but it’s easy to find similar valuation stories throughout the industry today. This trend would be odd enough on its own, but, simultaneously, other events in the story of global energy are unfolding.
While solar companies are being beaten up, the fossil fuels side of the energy supply is having a more fundamental, structural problem: oil demand has run ahead of our apparent capacity for production. Image 1, below, shows that total world oil reserves have declined significantly over the last two years (an exception being the U.S. strategic reserve, but that too may soon be tapped), which can only mean that the world is using oil faster than it’s being pumped.
It’s difficult to overstate how economically dangerous this is, since, see image 2 below, oil price spikes have preceded all recessions since 1970. Environment aside, this is why we need to bring more renewables online, to lessen our ridiculous economic vulnerability to oil prices. Referring to his chart (image 1) below, economist Gregor Macdonald writes: “[f]rom the latest IEA Paris Oil Market Report, you can see that starting in mid-year, total OECD inventories started a new decline. Moreover, the histograms in the below chart also show the difference to the five year average, which also illustrates the global stocks drawdown. This coincided by the way with a resurgent, mid-year advance in the price of oil from a low of $69 to $92 by [2010] year end.”
Image 1: decreasing oil reserves since 2009 (Source: economist Gregor Macdonald from his blog gregor.us)
Macdonald concludes, “Unable to meaningfully increase global oil production to meet demand, the world ate through inventories. You have been warned.”
Again, the drawdown in inventories and evidence of peak oil is alarming because spikes in oil prices crush economies. We’ve written about this many times, but this chart (image 2), compiled by Stuart Staniford, says it all: “since 1970, every single recession has been preceded by a runup in energy prices.”
Image 2: price of oil relative to recession onset (Source: scientist Stuart Staniford from his blog http://earlywarn.blogspot.com)
Oil is expensive to the point that it is threatening the economic recovery, and due to demand exceeding supply, its price will most likely continue to increase, except, maybe, during oil-caused recessions.
Meanwhile, on the electricity side, solar is quietly becoming competitive with average grid price (especially in sunnier climates) and is rapidly getting cheaper still. “Price per watt of solar modules (not counting installation) [have] drop[ed] from $22 dollars in 1980 down to under $3 today,” according to Ramez Naam, in a great piece for Scientific American. And, as this trend continues, “in 2030, solar electricity is likely to cost half what coal electricity does today.” I personally believe that solar’s scale is increasing rapidly enough that Naam’s 2030 prediction will occur much sooner, by 2020 or so (the Institute of Electrical and Electronics Engineers says “within 10 years“), but whenever it happens, as
solar comes into its full potential, it will become so cheap and plentiful that any type of fossil fuel will seem foolishly expensive by comparison, at least where electricity is the energy of choice.
Image 3: Historic and forecast price of solar electricity vs. US grid price averages (source: Ramez Naam in his blog for Scientific American)
But behind these macroeconomic realities, Wall Street’s consensus opinion of solar stocks looms large. And, so far this year, the consensus has been extremely negative. Does Wall Street to some degree answer to the huge buckets of money represented by Big Oil? Yes. Is there therefore some effort underway to delay the inevitable solar powered future? Possibly, but suffice it to say that Wall Street at least has enabled a culture that, against all economic and climactic evidence, loves fossil fuels and still views renewables as “alternative.” (Anecdotal but interesting on this point, on May 4, 2011 CNBC reported on-air that Arizona’s First Solar, Inc. (FSLR, a Green Alpha holding) missed their first quarter earnings, when in fact the company’s earnings had beat expectations by 15%; the stock plunged 10%.)
Meanwhile, other folks are beginning to embrace the Next Economy. Smart oil money in Saudi Arabia is converting itself to massive amounts of exportable solar. “Converting” as in Saudi Arabia is hoping to develop the same quantity of solar electricity exports that it now enjoys via oil exports. As I discussed in my previous post, “Saudi Arabia exports about 2.7 billion barrels of oil per year, each containing the equivalent of 1,700 Kilowatt hours (kWh) of electricity for a total of 4.59 × 1012 kWh [or 49,500 GWh] per year, or the equal of about one quarter or the world’s annual electricity demand.” Using a standard PV average of 30 square kilometers per gigawatt hour (GWh) year, this means the Saudis would need 1.377 million km2 of solar panels to achieve their goal solely with PV. This is well over half the country’s total size of 2.218 km2! Now of course this is an extreme goal that the Saudis are unlikely to reach, and their efforts will no doubt also include concentrated solar thermal, but even a small fraction of this goal would provide every solar manufacturer on earth with years of order backlog. It’s worth noting that the Saudis are likely pursuing this policy to replace lost revenues as they deplete their oil reserves (and they’re using foreign petro dollars to do it).
Elsewhere in the world, China has recently doubled down on its goal of 5 GW of installed solar capacity by 2015 to a new 10 GW goal. In Germany, they’re halting their solar subsidies repeal in order to meet their plan of replacing nuclear power with renewables (the end of German/European solar subsidies has been one of the short sellers’ chief arguments. Italy has just voted to scrap new nuclear plans as well, so they may also feel the need to keep their solar incentives; more broadly, the twilight of nuclear in general may have arrived). In Japan, a “proposed feed-in tariff would create guaranteed demand for all of the output from renewable energy projects” and companies are planning projects accordingly. Adding up the world’s PV solar plans in his “Plan B” review, Lester Brown reckons that “cumulative PV installations could reach 1.5 million megawatts (1,500 gigawatts) in 2020,” and goes on to say that “[a]lthough this estimate may seem overly ambitious, it could in fact be conservative, because if most of the 1.5 billion people who lack electricity today get it by 2020, it will likely be because they have installed home solar systems.” (Brown’s estimate could indeed be conservative; he was writing before the Saudis’ announcement).
Viewed simply in terms of potential growth as a slice of the world energy market, solar again appears set for massive growth. The Economist reported this week that as of 2010 “non-hydro renewables still check in at only 1.3% of global energy consumption.” Since many local, regional and even a few national governments have set mid-term goals of 20% or more from renewables, it seems likely that solutions such as solar and wind have potential to grow 10 fold or more on policy basis alone.
You get the point by now. Aggregate solar power demand in the global economy is huge and growing. Any way you slice it, the solar industry is currently very undervalued by analysts and traders, even though overdependence on oil is threatening to return us to recession.
So, how do we judge Wall Street’s treatment of solar stocks? Irrational? Obviously. Dangerous? Only if you fear for the economy.
Garvin Jabusch is the cofounder of Green Alpha Advisors, LLC and manages The Sierra Club Green Alpha Portfolio a unique blend of Green Alpha Advisors’ Next Economy universe and the Sierra Club’s proprietary green-investment guidelines.
