Bottom line: The recent plunge in solar stocks is the result of panic selling due to falling oil prices, meaning the shares could rebound sharply once the sell-off subsides.
US investors were showing signs of new energy indigestion in the shortened trading day after Thanksgiving, dumping stocks of all the major solar panel makers in a messy post-holiday sell-off. With no major news from any of the companies, the driving force behind the sell-off appears to be the recent plunge in oil prices, which hit new 4 years lows late last week after OPEC declined to cut its daily output quotas.
Investors appear to be worrying that falling oil prices will dampen enthusiasm for building new solar plants, since lower oil prices mean solar power will be less competitive with more traditional power sources derived from fossil fuels. The only problem with that logic is that solar power was never competitive with fossil fuels to begin with, meaning solar stocks could be getting punished for no good reason.
All that said, let’s look first at what’s been happening to oil prices, which were in the spotlight last week after Saudi Arabia vetoed a plan by other OPEC members to cut oil output in a bid to boost sagging global prices. That move fueled fears that oil prices will continue to fall from current lows not seen since 2010 when the world was still suffering from the effects of the global economic downturn.
Following the drop last week, oil prices are now down by about a third since June. The plunge has understandably hit major oil companies, which will get far less revenue even though their costs will remain fixed. But suppliers of equipment used to make alternate energy are also getting hammered and took an especially big beating last Friday.
Leading the post-Thanksgiving sell-off was high-flyer Canadian Solar (Nasdaq: CSIQ), whose shares plunged 11.6 percent on Friday and are now down 40 percent from a September peak. The picture looked similar for most other solar panel makers, with Yingli (NYSE: YGE), Trina (NYSE: TSL) and JA Solar (Nasdaq: JASO) all dropping 7-8 percent on Friday. Wind power also got caught in the selling frenzy, with wind turbine maker Ming Yang (NYSE: MY) down 7 percent on Friday and off 24 percent since September.
One of the worst hit was ReneSola (NYSE: SOL), which tumbled nearly 9 percent on Friday and whose shares have lost nearly half of their value since September. The company may have looked especially vulnerable since it is one of the few that relies completely on exports, unlike its peers which have positioned themselves to take advantage of a major solar power building program in China.
So the big question now becomes: Is all of this selling justified, and is the industry headed into a new downturn just as it starts to emerge from its previous slump? I’m not a major expert on solar energy policy, but my answer to both of these questions would be a fairly confident “no”. The reason is simple, namely that solar and wind were never economically competitive power sources using current technology, even when oil prices were still high. The only reason solar and wind energy plants are being built at all is due to government policies that subsidize their development. [Ed. note: There’s also the much more relevant fact that solar and wind compete with other sources of electricty, such as coal, natural gas, and nuclear. Even at current prices, oil (diesel) is too expensive to compete with solar and wind without subsidies.]
Those policies typically see governments set prices for solar and wind power at artificially high levels, and then force utilities to buy that power at those inflated prices. Thus even if a power company can make its own power at much cheaper costs, it still has to buy all the output from solar energy plants at the government-set prices. That reality means that solar plant construction shouldn’t see any major shifts despite the big drop in oil prices, and that solar stocks are likely to rebound strongly once the current round of panic selling subsides.
Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.