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Solar power shines

Created:

7 November 2008

Written by:

Jon Mainwaring

As the world finds ways to tackle both climate change and energy shortages, there is a certain neatness about people returning to the same sources of energy that their ancestors used long ago. The most obvious example of this is the widespread use of wind turbines - modern versions of the windmill, which has been around since Don Quixote. But even the fuel cell predates the internal combustion engine.

One renewable technology that has been making a comeback in the past few decades also has a rich history: solar power. Passive solar power was used by the Ancient Greeks, Egyptians and Romans, who designed homes to store energy from the sun during the day so that heat would be released during the night. Commercial solar water heaters were first sold in the 1890s in the US.

Although solar roof tiles for heating hot water tanks are seeing a resurgence, it is photovoltaic cells (PV cells) - which convert sunlight into electricity - that investors in solar energy are principally interested in at the moment.

PV cells have been around for quite a while, but while the selenium-based cells of the 1880s had only 1-2 per cent efficiency, today's silicon-based solar cells can convert much more of the sun's energy into electricity. Meanwhile, novel technologies such as thin-film PV cells (which use only a fraction of the silicon used by traditional solar cells, so reducing their production cost) and solar concentrators (which employ the same principal used in the childhood experiment of burning paper with a magnifying glass) mean you can capture far more of the sun's energy for the same investment.

Perhaps one of the best examples of PV cell use in the UK is the headquarters of insurance company CIS, an office block towering over Manchester that is clad with 7,000 PV panels that feed 181,000 units of electricity into the building every year.

Where to catch sunshine shares

Meanwhile, the London Stock Exchange plays host to a number of (mainly foreign) solar power technology companies, but most of these are quoted on the Alternative Investment Market (Aim) and tend to be small both in terms of revenues and market cap.

Given that the UK government is set on wind power and nuclear energy as the solutions to meeting its commitment to reducing carbon emissions, investors seriously interested in solar energy need to look abroad. A good place to start is Continental Europe and its bourses.

While we have the CIS Solar Tower, sunny Spain has several giant solar farms either completed or under construction, each one of which is capable of providing electricity to thousands of homes.

But the European solar companies themselves also tend to be a lot bigger than those quoted on Aim. And size looks likely to prove important in the solar industry during the next few years.

This is for two reasons: the first is the effect of the credit crunch on the renewable energy sector generally; the second is to do with oversupply of PV cells and modules as government subsidies for solar energy schemes and projects are reduced.

Clouds appearing

There are signs that, after a few years of strong growth, clean technology investing is suffering a hiatus. One big clue is the fact that the WilderHill New Energy Global Innovation Index (or NEX) - which comprises companies around the world that own clean energy technologies - has fallen 30.3 per cent in the three months to 30 September 2008. And it seems likely that sentiment should further sour after the huge volatility on stock markets worldwide that we saw in early October.

Meanwhile, New York-based Lux Research expects the government subsidies that have helped support solar power generation projects in the recent past to fall over the next year, and this is expected to lead to oversupply of photovoltaic modules and price decreases.

In Germany, for example - the largest solar market today - years of strong investment in solar and wind power will push the market closer to the limits of that country's electricity grid infrastructure, which can only handle around 20 per cent of intermittent renewable sources. Subsidy caps in Spain are also expected to reduce growth in the near term.

Consequently, a consolidation of the solar industry is expected, with tremendous pressure being put on the smaller players.

"We expect module oversupply to occur early in 2009, and the resulting aggressive price reductions to trigger an industry shakeout, with the weakest players being acquired or failing," says Ted Sullivan, an analyst at Lux Research. "Companies active in lower-cost thin-film technologies will be better positioned to weather the price reductions, but those without differentiated technology will still be at risk."

Over the longer term, conditions in the industry should improve significantly. And, although gloomy about the sector in the short term, Lux still expects the solar industry's total revenues to increase from the current $33.4bn to $100.4bn by 2013.

Lux makes these predictions in its recent report, 'Solar State of the Market Q3 2008: The Rocky Road to $100 Billion'. Here we look at the European companies that look best-placed to ride out that rocky road.

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