Credit: Shutterstock photoBizarre as it may sound, solar energy stocks have in fact taken a beating ever since oil prices began to tumble last June and weakness has continued this year as well. The decline in oil prices has made renewable energy stocks unattractive, sparing neither U.S. nor Chinese solar companies.
While the solar energy sector's long-term potential is undeniable, the industry's near-term prospects remain hostage to intrinsic limitations like high installation costs. But let's not forget that the demand for solar energy is strengthening at a rapid clip and analysts see no fundamental correlation between the oil plunge and solar share losses.
It is important to note that in 2014 only 1% of U.S. electricity was oil-generated. Renewable sources of energy accounted for about 10% of total U.S. energy consumption and 13% of electricity generation last year.
Hence, the recent losses suffered by some of the fundamentally strong solar stocks can be good buying opportunities. The U.S. solar market continues to grow as it registered 30% year-over-year growth in 2014, as per the Solar Energy Industries Association.
Apart from the recent oil price scenario, other weaknesses that can impact the renewable industry at large are discussed below.
High cost burden: Since the recession began in 2008, the solar industry has experienced both ups and downs, but the main trend has been a sharp fall in the prices of solar panels. This has forced many solar firms to go bankrupt leaving only low-cost producers, which are mostly the Chinese solar manufacturers. While the industry is showing signs of recovery, fueled by China's ambitious plans to boost solar capacity, panel prices remain depressed due to continuing oversupply.
The misery was deepened in recent times as one major panel manufacturer lost nearly half its market capitalization and may be forced to close down. The solar stocks were beaten badly around mid-May 2015 following a brutal plunge in the highflying Chinese thin-film solar manufacturer, Hanergy Thin Film Power Group.
The rout was followed by sluggish trading by another Chinese solar firm -- Yingli Green Energy Holding Co. Ltd. ( YGE ) -- on looming bankruptcy concerns. Shares collapsed as much as 51.7% on May 19 to reach the 52-week low after the company in its 20-F filing warned that "there is substantial doubt on its ability to continue as a going concern."
Yingli suffered three straight years of significant losses and had about $1.6 billion of short-term borrowings along with long-term debt of $460 million as of Dec 31, 2014. The company was once the leading module manufacturer in the world between 2012 and 2013.
Anti-dumping duties: The move from the U.S. Department of Commerce ("DOC") to impose new import duties on solar panels and other related products from China and Taiwan could escalate the U.S.-China trade conflict that has already been simmering since 2012.
The decision addresses one of the main charges in a petition brought by SolarWorld Industries America, a German solar manufacturer with major operations in the U.S. A complaint lodged by SolarWorld brought to the fore a loophole that the Chinese solar product makers were exploiting to evade duties imposed by the Department of Justice in 2012.
After suffering from a two-year slump given the global supply glut, the solar industry on the whole is now largely recovering. Hence, the additional tariffs will unfortunately put a hold on the entire U.S. solar industry, as prices of solar power on the whole will probably move north given the global dominance of China in the solar panel manufacturing space.
The Commerce Department in Dec 2014 set anti-dumping duties at about 52% on most module imports from China and at 19.5% on most imports of Taiwanese cells. It has also slapped 39% anti-subsidy tariffs on most China-made panels.
Subsidy roll-back: Budgetary constraints have caused the prime global solar markets like Germany, U.S., Italy, Australia, U.K. and Taiwan to roll back a portion of their grants. Earlier, solar players had witnessed a sharp rise in sales in these countries mainly fueled by the rush to complete projects ahead of subsidy roll-backs.
Alternative energy players will receive another jolt from one of the prime solar markets. Solar feed-in tariffs (FiTs) in Germany will be cut by 0.25% per month in April, May and June 2015 because installations in the past one year remained below the government objective of 2.4 GW to 2.6 GW.
Under German regulations, the FiTs are adjusted monthly depending on new capacity and additional factors. Germany is expected to cap subsidy payments after generation capacity reaches a certain target. Germany is consistently evaluating changes to the German Renewable Energy Law, or the EEG.
Japan is one of the brightest solar energy markets owing to the attractive FiTs launched in Jul 2012. However, the sector is facing the possibility of a double cut in the FiT this year along with grid connectivity problems. Japan has decided to make big cuts to the solar FiT, even exceeding the 10% or 11% cuts made in 2013 and 2014.
New emerging technologies: The alternative energy industry remains an emerging sector with a steady focus on the lowest-cost technology. This may prove disastrous for existing companies ruling the solar roost should a cheaper alternative emerge. The industry also has to deal with cost-competitiveness from traditional means of electricity generation.
Conclusion
Globally, China leads the world in total electricity generation from renewable sources, helped by its increased allegiance in recent times to the alternative path. The dragon is followed closely by the U.S., Brazil and Canada.
All leading solar cell manufacturers are looking for opportunities in the emerging markets. These markets primarily comprise the Asia-Pacific region with China, India and Japan being the key destination for the global solar giants. The long-term outlook on the whole looks bright. This is especially true as global warming and high fuel emission issues have proven how inevitable clean energy sources will be for the future.
So, if we are to expand renewable manufacturing infrastructure worldwide to fight the climate crisis, the U.S. as well as the Chinese manufacturers should try to settle their dispute before the industry is hurt at large. Measures to reduce the inflow of Chinese solar panels may hamper the battle against climate change.
Finally, the drop in oil prices and varying market conditions have raised questions as to how the market will re-balance. This involves implications for markets, policies, competitiveness, investment and the fuel mix if lower oil prices persist.
To see our comprehensive Alt-Energy Stock Outlook, please click here .
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
YINGLI GREEN EN (YGE): Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
