“Longer-term, a lesser reliance on tax credits is a good thing,” says Angelo Zino, senior equity analyst at S&P Capital IQ. “It will help investors see that the industry has solid economics on a standalone basis.”
Guggenheim’s Belden concurs. “There’s an increasing understanding that solar can stand on its own legs, and is no longer dependent on government subsidies.”
Strong Demand
Demand for solar is likely to keep strengthening as a result of factors both here and abroad. In the U.S., 36 states have some sort of renewable portfolio standards (RPS) which create mandates for alternative energy adoption. In California, for example, RPS mandates call for 33 percent of all power to be produced without fossil fuels by 2020. Many other states will require 15 to 25 percent of their power to be green.
In China, the industry’s largest market, epidemic pollution levels are leading government policy planners to steadily close coal-powered plants and replace them with solar––and wind––power.
Outside of the U.S., China and Japan (currently the three largest markets for new solar installations), demand has flattened, especially in Europe, which is in the process of eliminating industry subsidies. Still, in countries such as Italy and The Netherlands, solar installations continue apace despite the drawdown of subsidies.
The pullback for solar stocks in 2014 comes at an odd time, according to S&P Capital IQ’s Zino. He says many fast-growing solar equipment providers finally transitioned to profitability in 2014—a sure sign of industry maturity—and solar installers made great strides in utilizing very low interest rates to improve the economic returns of major projects.
Belden cites another sign of industry maturation. “The Chinese market place is getting cleaner, weaker players have shaken out,” he says. Just a few years ago, the industry was dogged by too much funding which created excess production capacity that impeded profit margins at all of the major firms.
For investors wanting to invest in solar through ETFs, the two pure play options offer slightly different options. The Market Vectors Solar Energy ETF tracks the Market Vectors Global Solar Energy Index and as of last month comprised 32 holdings. The largest country weights were China (38.7 percent), the U.S. (33.4 percent) and Taiwan (14.6 percent).
The fund began trading in April 2008, and has attracted just $20 million in assets and is lightly traded (its average daily volume during the past 10 days was only 1,200 shares, according to Scottrade). The fund’s net expense ratio is 66 basis points.