Here comes the sun: investors moving into rapidly expanding
solar power industry
RBC Capital Markets identifies four key investment strategies
NEW YORK, May 9, 2007 — Demand for photovoltaic
solar power, which directly converts the sun's radiation into
electricity, is expected to grow by 40 per cent per year by
2011, offering opportunities for investors who can ride out
near-term bumps, according to a new report from RBC Capital
Markets, "Investing in Solar Now."
"Solar industry profits are here to stay, since both
public and government support are likely to remain strong
until solar can compete on a cost basis with grid electricity,"
said Stuart Bush, lead alternative energy equity analyst for
RBC Capital Markets. "Today, solar energy costs nearly
double what would be economical without subsidies, but solar
energy companies are aggressively pursuing their Holy Grail:
Organic competitiveness with grid electricity."
Rising fossil fuel costs, environmental concerns, geopolitical
factors and growing energy demand have swelled interest in
alternative energy globally; and with more government subsidies
for technologies such as solar power, profitable companies
are on the rise in this sector. The solar industry is already
seeing profits throughout the supply chain. Silicon cell photovoltaic
solar technology installations, which currently account for
almost 95 per cent of the market, will book gross profits
of about $7.7 billion in 2007, growing to $11.5 billion in
2011, according to RBC. This estimate does not include profits
from the alternative thin-film photovoltaic technology, which
is projected to grow from 6.5 per cent of the market in 2007
to 19 per cent in 2011, and excludes equipment makers and
The solar industry is implementing technology improvements
that will further drive down costs. RBC estimates that the
total industry average installed cost for photovoltaic solar
will decline from about $7.37 per kilowatt in 2007 to about
$4.40 in 2011, and achieve organic competitiveness with grid
electricity at about $3.50 per kilowatt, without incentives
and depending on the region in 2012-2014.
Although the long-term outlook for solar power is positive,
sector stocks are likely to remain volatile in the near term.
A proprietary supply and demand forecast model developed by
RBC Capital Markets projects that solar companies are likely
to experience tightening margins over the next few years,
driving vertical integration and capacity consolidation, particularly
among new silicon producers, smaller cell and module producers
and independent installers.
Given the industry's evolution, Bush said investors should
consider four key investment strategies for the emerging global
- Play the Supply Chain: Solar companies that focus
on high value-added elements of the solar supply chain,
such as silicon, wafer and cell producers will generate
higher margins than the labor-heavy and low barrier-to-entry
module and installation segments.
- Play Tech Differentiation: As the majority of the
solar industry is dominated by standard solar products,
companies with higher efficiency products or lower-cost
thin-film designs are better suited to command superior
profits long term.
- Play Globally: As additional silicon supplies drive
raw material costs down over the next 24 months, a company's
operating cost structure will emerge as the long-term driver
of profit margins. Asian producers, most notably in China,
stand to benefit. An investment strategy that seeks to pair
Asian producers long versus European producers will benefit
in the long term.
- Play within a Geography: Investing among companies
located in particular regions, such as Germany or China,
will limit exposure to cross-border macro trends and highlight
comparably strong regional producers.
About RBC Capital Markets
RBC Capital Markets is the corporate and investment banking
arm of RBC, the masterbrand used by Royal Bank of Canada (RY
on the TSX and NYSE), and is active globally in debt origination,
sales and trading, foreign exchange, infrastructure finance,
structured products, metals and mining and energy. Its North
American equity underwriting, sales, trading and research
business leads the Canadian market and supports a significant
and growing franchise in the U.S. middle market. Bloomberg
ranks the firm as one of the Top 20 investment banks globally.
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