As oil begins its creep back up toward the $90 a barrel mark, alternative and renewable energy technologies are once again gaining traction. The proxy for green energy, PowerShares WilderHill Clean Energy (NYSE:PBW), is up over 10% in the last month. While there are still worries about what effects European austerity plans will have on the renewable sector, rising traditional energy costs do make alternatives sources more cost effective. Solar is seeing its sun shine again, especially in China.
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Chinese Solar Expansion
Europe was traditionally the place for solar installation growth. Favorable subsidies and limited natural resources helped spur innovations within the solar market. With the cuts to the German feed-in tariff in February and ends of Spanish subsidies, many investors worried that solar's days were numbered. However, growth is still on the horizon. The same week Germany announced its tariff cuts, Chinese Environment Minister Pan Yue announced that Beijing was looking at ways to tax carbon. Similarly, China's National Energy Administration reported a 10-year plan calling for 15% of generation capacity to come from renewable energy by 2020.
While the U.S. still has no formal climate or energy bill, China has made its intentions for clean energy clear. Famed clean tech venture capitalist John Doerr was quoted after China's announcements" "My conclusion is China is winning. My conclusion is that we are barely in the race today. China's growth in renewables is astounding."
China's advantage in the solar industry is its low cost of production. For example, Suntech Power (NYSE:STP) employs around 2,500 workers to assemble solar cells into panels, a task normally handled by machines. It pays its workers around $200 bucks a month. These low costs and the Beijing government's pro-export driven policies should help cement China as a premiere solar destination.
A China-Centric Solar Portfolio
While First Solar (Nasdaq:FSLR) is the low-cost leader, investors may find that Chinese producers are the better long-term choice in the sector. Those wanting to play the solar sector should focus on Chinese companies. Heavily traded Claymore/MAC Global Solar Energy (NYSE:TAN) has about 30% of its holdings in Chinese solar manufacturers. Investors could use this as a proxy for the PV market, but additional gains could be had in the individual solar stocks.
The solar supply chain is divided into several steps from the mining of raw silicon to full systems. China Sunergy (Nasdaq:CSUN) and JA Solar (Nasdaq:JASO) are primarily wafer producers, although they have been taking steps to integrate module capacity into their systems. JA is one of the largest cell producers in the world and boasts some of the lowest processing costs among its peers.
As one of the first fully vertically integrated solar companies in China, ReneSola (NYSE:SOL) produces products across the full solar value chain. In doing so, RenaSola can have very low operating expenses and, as a result, higher margins.
As one of the largest module manufacturers in China, Trina Solar (NYSE:TSL) provides some of the most efficient panels based on cost per kilowatt. While the bulk of its business has traditionally stemmed from Europe, new markets in Australia and India should see demand for Trina's products. In addition, the reliance on Europe during the recent debt problems have driven Trina's share price within a cheap five-year PEG ratio of 0.50.
The Bottom Line
With the cost of oil rising once again, renewable energy is gaining traction. The solar sector, despite hindrances from Europe, seems to be moving in a positive direction with China leading the way. Investors wanting to play the sector should stick to Chinese firms. Their low costs of production and export-supporting government will help them thrive. (To learn more, check out our Spotlight On The Solar Industry.)
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