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Drive through even the sunniest parts of the nation today, and you probably won't see more than a smattering of roofs decked out with solar panels.
But with heating costs projected to rise sharply this winter, demand for electricity swelling and tax incentives for solar-powered homes taking effect, rooftop panels are likely to become a much more common sight in coming years. For solar-minded investors, that could be a good thing.
Future StockSolarbuzz, an energy-research firm, estimates that the global market for solar-power system installations generated $6.5 billion in revenue in 2004 and predicts sales will nearly triple to $18.5 billion by 2010. Just last year, worldwide shipments of photovoltaic cells and modules, used in rooftop panels, surged by more than 50 percent, according to Strategies Unlimited, another research firm.
For investors in the solar sector, picks are reasonably varied, ranging from diversified large caps with steady incomes to startups still waiting to turn a profit. Given that solar power supplies only a tiny share of energy consumed today, prospects for growth are sound. Still, it's wise for investors to take some precautions to avoid getting burned.
Solar sector is already hot: New tax incentives at the state and federal level and a boom in construction have boosted the solar energy industry in the past year -- and stocks are reflecting that.
In some cases, pure-play solar energy stocks have increased several hundred percent in the past year.
Evergreen Solar (ESLR), a maker of solar cells and panels, currently trades above $8. A year ago, the stock was below $3. Another developer of solar cells, DayStar Technologies (DSTI), has seen its stock surge in the past year -- from a low of $2.24 to just above $9 now. Energy Conversion Devices (ENER) and Spire (SPIR), two other solar players, are also up sharply for the year. That said, solar stocks have dipped in recent days, in concert with a drop in oil prices.
Investors' heightened interest in solar is also drawing newcomers to the public market. Sunpower, a Silicon Valley developer of solar electric power products, is planning an initial public offering of stock to raise as much as $115 million. The company, which filed for its IPO in August, is owned by Cypress Semiconductor (CY), a maker of microprocessors and memory chips.
While some companies have logged enormous stock price gains despite thin or nonexistent profit margins, that state of affairs is unlikely to continue. Tim Woodward, managing director of venture capital firm Nth Power and a member of Evergreen's board, predicts that profits for more mature firms in the solar power business will pick up next year. Looking at current valuations, it seems shareholders are betting the same thing.
Tax perks will be a boost -- if they catch on: The high cost of installing solar electric systems has in the past kept many homeowners from investing in them. New tax breaks for homeowners and businesses that put in solar systems, however, promise to bring real costs down.
The energy bill signed by President Bush in August provides tax credits of up to $2,000 for homeowners who activate solar energy systems in 2006 and 2007, with potentially larger benefits for businesses, according to the Solar Energy Industries Association (.pdf). Industry insiders are also eyeing a bill pending in California: The Million Solar Roofs Initiative aims to place solar energy systems on a million residential and commercial sites -- including 50 percent of new home developments -- within 13 years.
"That'll be a game changer for California and the United States," said Ron Pernick, co-founder of Clean Edge, a research and marketing firm focused on clean-energy technologies.
Currently, the United States lags Japan and Germany in installing new solar power systems, something that Rhone Resch, the Solar Energy Industries Association's president, attributes in part to weaker tax incentives and lower conventional electricity costs. Resch believes tax incentives in the new U.S. energy bill will be particularly beneficial in boosting installations of solar thermal systems, which are used to heat water and typically cost less than $5,000 to install.
Solar investments take time to pay off: Even with tax incentives, installing a rooftop photovoltaic system probably isn't an appealing option for people who like to see investments pay off quickly.
Sunpower admits as much in its IPO filing, noting that "today, the cost of solar power exceeds the cost of power furnished by the electric utility grid in many locations."
Resch estimates that installing a photovoltaic system for a home typically costs between $20,000 and $30,000. The return on such an investment varies. Homeowners in sunny Phoenix, for example, will generate more power from their panels than those in overcast Seattle.
Even in a sunny area, however, it can take a couple of decades for a solar electrical system to generate enough savings on power bills to compensate for the cost of installing it.
Not enough polysilicon: While setup costs should drop over the long haul, a shortage of polysilicon, a key component used in making photovoltaic cells, could keep prices up in the near future.
Demand from the solar power industry for polysilicon, which is created by refining quartz or sand and growing it into crystalline ingots, has been rising rapidly, according to Sematech, a semiconductor industry association. The group said in July that it is investigating strategies to boost short-term supplies.
In its IPO filing, Sunpower said the average price of polysilicon increased from $25 per kilogram in 2004 to between $35 and $45 per kilogram for the first quarter of 2005, citing data from Solarbuzz. Sunpower said it does not believe that the supply imbalance will be remedied in the near term. High prices could also lead to a slowdown in new solar installations.
Solar powerhouses are heavily diversified: Investors who like the solar power business but not the risks associated with energy startups might prefer one of several large, diversified firms that are heavily involved in the sector.
The four major manufacturers of solar modules -- Sharp, Kyocera (KYO), BP Solar and Shell Solar -- all fit in this category. Japan's Sharp, best known as an electronics manufacturer, is also the leading supplier of photovoltaic panels. Pernick also ranks General Electric among the top players in solar power through its acquisition last year of AstroPower, a photovoltaic-cell producer.
For investors seeking out next-generation solar technologies, however, the most viable approach may be simply to wait. Some of the emerging applications that Resch views as promising, such as power-conducting plastic that can be incorporated into portable devices, are being developed by private companies that aren't expected to launch stock offerings in the near future.
"That's where our largest increase in energy demand is coming from: the iPods and cell phones and portable devices we carry," Resch said.
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