Monday, November 1, 2010

Solar, partial Eclipse

For full disclosure, I own a solar Energy company.  We sell and install systems and also act as a utility and finance long term projects.  From a personal point of view, I love solar, from an investment point of view they are going the way of memory chips, with few exceptions. The industry is growing quickly, but profitibility will fall even faster. 

 I first wish to discuss the most optimistic growth scenario from an industry advocate, Greenpeace.

"Solar photovoltaic is a key technology to combat climate change and to secure access to clean electricity. By 2015, the global market could be twice as big as today, leading to a Rs.430 billion investment. Our goal is to make solar photovoltaic a mainstream power source through more supportive policies around the world,' said Sven Teske, senior energy expert at Greenpeace International."

That is a market growing 12-14% per year not bad, but that is the top line and we need to get through some headwinds in 2011 first.  This is a quote from an industry research report I get.

"Looking ahead into 2011, the most challenging quarter will undoubtedly be Q1'11. Leading European markets, including Germany will face large reductions in tariffs at the beginning of the year. Even with careful phasing of projects and price reductions, market demand is projected to be less than 50% of module production. As a result, the analysis forecasts end Q1'11 upstream and downstream module inventory days to increase significantly by the end of that quarter.
"Historically, the PV industry has often exuded over-optimism in the face of uncertain end-markets. However, the recent industry conference in Valencia confirmed two prevailing industry positions, one that emphasizes oversubscribed order books, the other that focuses on the German tariff declines and a demand reduction next year," Stevens concluded."

And that is before our elections.  If the Republicans take the House, they will not be renewable friendly.  They are the extraction party.  This will create domestic headwinds.

Another source I have speculates that solar prices will fall 25% over the next five years, and with these near term headwinds I expect to see aggressive pricing to move inventory, frontloading the margin compression.

Another concern for the industry is new entrants with enabling technology.  These companies have already paid for their fixed costs selling other products, and will compress margins even more.

For me, too much risk, recent price action in the space is already sensing this. I will opportunistically short the rips.  Tomorrow, I will show some trade ideas.


  1. Short your own business segment....almost as diabolical as GS. No joke, though, I am in same business....and to make $1500 on a $28,000 project is absurd, but that is all the market allows. 2000% more companies competing than 5 years ago. It is silly.

  2. Hey Steve, hope all is well. I expect a big shakeout in CA. I am getting e-mails from distributors dumping inventory at cost. Are you seeing that in HI?