The Solar Power Wave

03/17/2006 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Always on the leading edge of emerging trends, ChangeWave Investing provides ongoing, in-depth coverage of alternative energy. Here, Tobin Smith looks at the "Solar Power Wave", which he expects to show strong growth for "at least the next four to five years."

"The California Public Utilities Commission recently approved a comprehensive proposal that provides $2.8 billion in incentives toward solar development for the next 11 years. China recently unveiled plans that could result in up to 100 gigawatts of renewable energy by 2020. And Germany's generous feed-in tariffs (where excess solar power can be sold back to utilities at a premium) made solar photovoltaics so popular that it led to module shortages around the world.

"In short, we have the world's second-, third-, and sixth-largest economies creating so much demand for solar energy products that we have a six-month backlog for most installers. This is the kind of demand wave we can ride for years.  And more and more states in the US are jumping on the Clean Power wave. Consumers are playing a part, too, with high heating and electricity bills driving solar panel demand.

"I'm recommending you overweight your exposure to the Solar Power Wave. The solar cells we are talking about are the same ones you've seen for years in things like calculators in watches, only on a bigger scale and with additional complexity. Larger systems have provided reliable service for water pumps to power communications equipment. In the simplest terms, solar cells-often referred to as photovoltaic systems- transform light into electricity. Solar electric power offers multiple benefits including reliability, low maintenance, zero emissions, and renewability.

"For those seeking to invest money in solar, we would start with MEMC Electronic Materials (WFR NYSE), the fourth-largest producer of silicon wafers. Unlike its rivals, MEMC produces most of its own silicon feedstock and sells extra to competitors, hence my attraction. The company benefits from the doubling of polysilicon wafer prices without the associated rise in raw material prices. Right now it sells through distributors, but this is just dumb- and MEMC now knows it. Going direct to the key players adds 15% additional margin to its bottom line. All in all, MEMC is in the right place at the right time.

"Evergreen Solar (ESLR NASDAQ) makes solar power products based on its proprietary, low-cost String Ribbon wafer technology, which cuts silicon in its cells by 35% compared to most other cells. In solar power, cost counts. For the full year, Evergreen narrowed its loss to 29 cents per share from 67 cents per share in the previous year. Revenue rose 87% to $44 million. Evergreen expects 2006 revenue to more than double.

"Meanwhile, Evergreen recently received a contract worth up to $100 million during the next four years to supply solar panels to a German firm SAG Solarstrom AG, which builds and operates solar energy stations and sells the power to corporations and utility companies. This is just another reason to love these guys- they win major contract after major contract because their cells are among the highest in power-to-price ratio.

"With increased demand for 'distributed energy', there is a fortune to be made if you know how to install and maintain renewable energy systems for the businesses that need to have control of their energy systems. And that's just what Distributed Energy Systems (DESC NASDAQ) does. They deliver a real economic alternative to traditional, utility-delivered power. The company is one of the only systems integrator plays in the public markets. I fully expect regional consolidation in this space, and DESC is well positioned to take advantage.

"The wild card at DESC is Proton Energy Systems, which makes proton exchange membrane industrial hydrogen generators and fuel cell-related products. Proton's hydrogen generators produce hydrogen from electricity and water, efficiently and without harmful by-products. Its regenerative fuel cell systems combine its hydrogen generation technology with a fuel cell power generator for uniquely pollution-free energy storage."

"A one-time spike in natural gas prices in the fourth quarter delayed some orders and investor concern over the one-quarter aberration is giving us a buying opportunity. These guys have been in the business for 25 years and have a great reputation for installing and servicing all kinds of green power plant systems. And demand for these systems is on a 40% annual growth rate cycle for many years to come. The recent sell-off is a gift, making the stock a table-pounding buy."

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