It’s no mystery by now that the credit crisis has been nothing short of a disaster for solar PV stocks. For one thing, risk has been re-priced on an unprecedented scale, and the solar PV sector is, by most measures, a very risk sector. Rising debt costs in an industry where projects typically use between 50 and 70% leverage were bound to take their toll. It also hasn’t helped that most people pre-crisis predicted a significant glut of solar PV supply in 2009 on the back of markedly lower silicon prices. Lastly, concerns over the sustainability of generous subsidy regimes in places like Germany and Spain have been looming over the industry for a few months.
The net result of all this has been that, over the past three months, solar stocks (represented on this chart by the TAN ETF) have significantly underperformed wind stocks (PWND ETF) and the clean energy space as a whole (GEX ETF).
At this stage, with all the talk of the a "green" stimulus package from the Obama administration, are there reasons to be cautiously optimistic? With utilities now eligible for the ITC, will utility investors seize the opportunity low module costs will bring in 2009 to get heavy into solar PV?
I believe there are reasons to continue to be more bearish on solar than on the rest of the clean energy space, including wind. Solar PV, unlike other forms of alternative energy, has primarily been a residential story. A 2007 report by RBC Capital Markets estimated that the residential sector would account for 72% of solar PV end demand in 2008, with the balance split between the commercial and industrial sectors. By 2011, although the commercial/industrial sector would make up some ground, residential would still account for 68% of demand.
According to the same report, Germany should make up about 36% of global demand in 2008, California 10% and Japan 18%. For 2009, Germany should account for 26% of global demand, California 12% and Japan 18%. That makes them the three largest markets for both years.
As the financial crisis rapidly morphed into an economic crisis, households have been coming under increasing pressure: in Germany, Japan and California. Moreover, as discussed initially, credit continues to be tight, making it difficult for households to borrow for extravagant initiatives like installing solar panels on rooftops.
Unlike wind or solar thermal, which are primarily utility plays, solar PV is very much leveraged to the economic health of consumers and households, and it just so happens that those are the segments of the economy that are coming under the greatest pressure right now. I therefore think that solar PV stocks will continue to underperform wind and the clean energy space a a whole for at least the next 12 months.