German Chancellor Angela Merkel seems to have taken the world by
surprise by announcing over the weekend that Germany would phase out
nuclear energy by 2022. Although the timeline is different, Germany had
made a commitment, as early as 2000, to phase out their nuclear
programs by the middle of the century.
According to headlines, the driver behind Merkel's decision was the
disaster at Fukushima. But as recently as last year, Merkel had
vigorously supported nuclear energy as a bridge to renewable sources.
Also consider that seven of Germany's 16 states will be holding
elections this year, and Merkel's Christian Democrats (CDU) have not
fared well so far. The Greens, on the other hand, have been gaining in
the polls, and they are the most vociferous antinuclear party. So while
Merkel may claim that her actions are purely for the good of Germany
and its people, there are clearly political motives.
A Rapid Transition Could Be a Challenge
But the real question is whether or not Germany can make the transition
in the next 10 years. In the table below, you can see the breakdown of
German power production for 2010. At last report, nuclear comprised
roughly 23% of German electricity generation, whereas renewables made up
only 17%. (These numbers were released in February and compiled by
surveys done by Germany's Federal Association of the Electricity and
While this is a substantial transition even in 40 years, changing power
generation for 19 million people, and cutting the time frame down to a
decade, will certainly present challenges. This is particularly true
because the Germans do not want to increase fossil fuel usage and are
focusing on renewables, including solar.
Remember, currently renewables of all stripes are noncompetitive from a
generation standpoint, and are viable only as a result of what are known
as "feed-in tariffs." These are essentially power purchase agreements
that provide an eligible renewable electricity generator access to the
grid and long-term purchase contracts for the electricity produced.
Over time, these contracts pay less and less for each kilowatt hour,
since improving efficiencies from advancing technologies should diminish
the cost to produce the electricity.
At that point the renewable source reaches "grid parity" and is
competitive with conventional sources of electricity, making further
subsidies unnecessary. The consensus is that this is an effective way
to integrate alternative energies into the grid -- however, I did not
find any references to large scale integration that were subsidy free.
The specifics of Germany's feed-in tariffs will be under review later
this month. Since Germany is not under the same austerity pressures as
the peripheral EU nations, this review could provide additional
subsidies or, at worst, the status quo.The Solar Choice
Germany will develop renewables across the board, and it has been a
world leader in this area. I wanted to focus on solar because it is a
sector that offers the most alternatives to U.S. investors. It may also
offer the best shot at value, since the sector has been decimated since
One could take the basket approach and buy the Guggenheim Solar ETF
(TAN) or the Market Vectors Solar Energy ETF (KWT), but some individual
equities might offer additional opportunity.
SunPower Corp (SPWRA) is an interesting prospect. It is one of the few
companies in the sector that is actually trading higher than it was in
February. In early May, France's Total (TOT) took a 60% stake in the
company. There are a myriad of conditions that are required before
Total can acquire the remaining 40% of the company. The logical
question is why Total ($135 billion market cap) didn't buy the entirety
of SunPower ($2 billion market cap). One possible reason is that the
entrepreneurial and innovative spirit that is often found in smaller
companies can be lost in a mega cap. Leaving 40% of the stock available
for trading and employees allows SunPower to offer stock incentives for
talent going forward, while at the same time reaping the benefits of
Total's deep pockets.
You can debate the merits of SunPower compared to other solar stocks,
but you can rest assured that Total did its due diligence. In fact,
they spent two years searching for a suitable partner. The relationship
also provides a sort of backstop for the stock price -- not that it
can't go down, but it certainly has a powerful big brother.
Two more stocks that sparked my interest are Applied Materials (AMAT)
and KLA-Tencor (KLAC). These two companies have more than just solar in
their product mix, which can provide some little cushion for a very
tough market. Of course you have to like the semiconductor space in
general to invest in either one of these stocks, but it's nice to have
the potential for a solar pop mixed into their broader businesses.
Additionally, both AMAT and KLAC are two of five U.S. listed companies
that will have a presence at next week's Intersolar exhibition scheduled
for June 8 - 10 in Munich. The other tradeable U.S. companies that
will be in Germany next week are Amtech Systems (ASYS
), Ascent Solar
), and Satcon Technology (SATC
There are numerous other solar companies that can be played as well.
First Solar (FSLR), for example, already has an existing sizable
presence in Germany.
What's important to remember is that right now the supply of solar
technologies is much greater than demand. This is why many of these
companies have been beaten up of late; missing estimates and guiding
Many of the solar stocks did get a bounce on Tuesday with the revision
of Germany's plans, so investors are interested, but this is going to
take some time. Nonetheless, Germany's actions, which follow on the
heels of a similar decision out of Switzerland, could set a precedent,
and there will likely be some opportunities for solar and other
Don't get me wrong, nuclear isn't going away. It is far too cheap for
emerging markets to ignore, with China and India at the top of the
list. The upside is that time gives you the opportunity to do some due
diligence and find your own shiny solar gem to ride to profits when this
story really takes off.