(By Kevin Donovan) In about 5 billion years, the sun will become a red giant, on its way to becoming a white dwarf and no longer a source of renewable energy. So we've got some time. Do solar power companies, though?
"The Prospects for Cost-Competitive Solar PV Power," a new study released by the Stanford Graduate School of Business, should give hope to green investors and companies such as First Solar (FSLR), SunPower (SPWR) and GT Advanced Technologies (GTAT).
Given the encouraging potential seen for solar energy, we think these three American companies, though faced with tough Chinese competition, offer compelling value. They trade at respective forward PEs of 3.40, 7.88 and 3.78, and price-to-sales ratios of just 0.43, 0.36 and 0.57, respectively.
Share price performance has been abysmal, providing good entry points for these stocks. Year-to-date, shares of FSLR, SPWR and GTAT are down 60%, 24% and 37%, respectively.
The Stanford paper finds that a commercial power user – that is, a business location with lots of roof space, preferably in the southwestern United States – can now generate the electricity it needs at parity with the retail price from the power grid.
However, there's a catch. Solar power still only makes economic sense with the help of the not so invisible hand of government subsidies, the study finds, but it could viably compete with fossil fuel on its own if scientific progress continues at the rate seen in recent years.
"Solar PV [photovoltaic] is not yet competitive with fossil fuel, like natural gas, from the perspective of a utility that can either build a new natural gas power plant or invest in solar installations,''according to Stefan Reichelstein, accounting professor at Stanford and lead author.
Reichelstein notes that "the solar panel manufacturing industry has been on a remarkably steady learning curve for several decades now, which has pushed down the systems price of solar panels at a dramatic rate. However, this learning curve seems very much dependent upon production volume. So, if the tax subsidies were to cease, new production volume would probably be lower, and the effect of that would be to slow down the rate of cost improvements."
If the trend can be sustained for the next 10 years and subsidies remain in place for that period, the Stanford research posits a real possibility that solar could become cost competitive on its own without subsidies for commercial users. Utility-size solar installations would take longer, perhaps 15 years, to become cost-competitive.
Federal tax subsidies are in place until 2016 unless Congress changes them. That means the beneficent hand of government depends on politics, always a wildcard. There is already plenty of anti-solar subsidy sentiment as a result of the failure of government-backed Solyndra.
Like the sun, we are all dead in the long run, as Keynes famously said, but the case for solar panel manufacturers is persuasive for patient investors, in our view.