Long term global energy demand continues to see no bounds. As emerging markets continue their blistering modernization programs and economic growth, demand for power continues to surge upwards. While new drilling techniques, such as hydraulic fracturing and ultra-deep water rigs, have expanded the world's hydrocarbon reserves, there is still a finite amount of oil and natural gas on the planet. To that end, a variety of governments, policy makers and individuals have been turning towards the renewable energy space to meet future energy needs.
Despite surging installation growth, solar stocks spent most of the previous year in the dumps; however, 2012 is shaping up to be a good one for PV firms. For investors, now could be good year to finally add the producers to a portfolio.
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Falling Costs and Share Prices
In terms of new installations, the solar industry was on fire last year. Across the developed world, nations like Germany, the United States and the U.K. installed a historically high amount of solar panels. Germany alone installed a record 7.5 gigawatts of panels in 2011. However, as these installations took place, polysilicon prices begun to collapse. Prices for the vital ingredient for solar panels have fallen about 90% over the last five years and by the end of 2011, they stood at 90 cents per watt. That caused the prices for solar panels to plummet, as well.
This huge price collapse, coupled with rising production, caused most solar manufacturers' share prices to plunge. Broad measures for the sector, like the Market Vectors Solar Energy ETF (NYSE:KWT) fell more than 60% as the glut of panels took hold. (For related reading, see Hot Solar Stocks To Watch.)
However, the ship maybe finally be turning for the solar producers. So far in 2012, Bloomberg's Global Leaders Solar Index (BISOLAR) has risen 30% and some individual solar firms are up more than 50% year to date. The reason: a sunny outlook. The plunge in module prices has demand for new solar installations surging. Analysts at HSBC (NYSE:HBC) estimate that China will add 3 GW worth of solar power this year, up from 2.14 gigawatts in 2011. The bank also raised its forecast for the Indian market to 800 MW this year and to 1.2 gigawatts in 2013. Overall, global solar panel installations will reach a total 25.5 GW worth of new capacity in 2012 and 27.28 gigawatts in 2014.
Finally, solar is benefiting from a recent surge of private investment. As various government subsidies fall by the wayside, large scale investors have been boosting their involvement in the sector. Berkshire Hathaway's (NYSE:BRK-B) MidAmerican Energy recently reported that it purchased a utility-scale solar farm in Southern California for $2 billion. GE (NYSE:GE) also recently announced that it will begin construction on the largest solar plant in America.
Investing in Sunshine
Despite the recent run-up in solar stocks, shares of the firms still remain well below their pre-credit crash peaks. For long termed investors, especially those with decades to spare, betting on the solar sector could be a great play for the future. The previously mentioned Market Vectors fund along with the Guggenheim Solar (ARCA:TAN) make great broad plays on the sector. The Guggenheim fund is the larger of the two ETFs and tracks 35 different solar firms including GT Advanced Technologies (Nasdaq:GTAT) and Canadian Solar (Nasdaq:CSIQ). The fund should also get the nod from investors due to its global focus.
Perhaps the best way to focus on the solar industry is by choosing the low cost leaders. First Solar (Nasdaq:FSLR) has seen its share price fall about 80% during 2011, but still represents on the largest and lowest cost leaders in the sector. The company recently set a new world record for cadmium-telluride photovoltaic solar module efficiency. In addition, First Solar's current project pipeline/backlog currently stands at an impressive 3.2 GW worth of capacity. Likewise, Trina Solar (NYSE:TSL) represents another beaten down low cost leader. (For related reading, see Solar Stocks On Fire.)
The Bottom Line
After experiencing one of the worst years in its history, the solar energy sector could be having one of its best. New installed capacity is growing and shares of the producers are rising. For investors, it maybe finally time to bet on the sector. The previous ideas, along with Sun Power (Nasdaq:SPWR) make ideal selections to play the trend.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.