The latter part of 2014 turned out to be a nightmare for solar stocks in the wake of plunging oil prices that began in Jun 2014 and has continued into 2015. It created a lot of confusion among investors eyeing the impact on renewables, particularly solar photovoltaic (“PV”). The decline in oil prices has made renewable energy stocks unattractive, dragging down both U.S. and Chinese solar stocks on the whole.
The drop in crude oil prices was due to sluggish consumption growth, the Organization of the Petroleum Exporting Countries' (OPEC) decision to maintain production at the current level as well as robust production from North American shale fields.
However, demand for solar energy is strengthening at a rapid clip and analysts see no fundamental co-relation between the oil plunge and solar share losses. It is important to remember that 39.1% of U.S. electricity is coal-generated, 27.4% comes from natural gas, 19% from nuclear, 7% hydro, 6% renewables and 1% oil.
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 41% year-over-year growth in the third quarter 2014, as per the Solar Energy Industries Association and GTM Research.
Apart from the recent oil price scenario, other weaknesses that can impact the renewable industry at large are discussed below.
Anti-Dumping Duties: The latest 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 if implemented 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. According to Boston-based GTM Research, panels made in China were used in more than 50% of U.S. rooftop installations.
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, sales of solar players from the above countries witnessed a sharp rise mainly fueled by the rush to complete projects ahead of subsidy roll-backs.
The alternative energy players may receive another jolt from one of the prime solar markets. 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. In Apr 2012, an amendment of the EEG came into force that introduced a monthly reduction in feed-in tariffs (FiTs) by 1%, which can rise or fall depending on solar growth.
As of July 2014, feed-in tariffs for PV systems range from 12.88 euro cents per kilowatt hour (kWh) for small roof-top system, down to 8.92 euro cents per kWh for large utility scaled solar parks. Also, FiTs are restricted to PV system with a maximum capacity of 10 MW.
These FiT changes particularly affected the competitiveness of large-scale free field PV systems and modules. Any further policy changes wrought by the German Environment and Economy Ministers and approved by the German Parliament will negatively affect the long-term demand and price levels for PV products in Germany.
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. On the other hand, European PV markets experienced a slowdown in 2013 due to the declining political support for PV. Notably, Italy witnessed a 70% market decline year over year. Germany also experienced a steep PV market decline of 57%.
So, 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. China is targeting to install 70 GW of solar power by 2017; India is aiming to install 20 GW of solar power by 2022; and Japan is stepping up its solar panel installation post the deactivation of its nuclear reactors. The long-term outlook on the whole looks bright. This is especially true as global warming and high fuel emission issues are leading to rising popularity of clean energy sources.
Though the recent proposal from the DOC, if implemented, will prove to be unfavorable for Chinese solar companies, Malaysia could emerge as a major beneficiary. Malaysia now stands out as the second-largest exporter of solar panels to the U.S., following China. This Southeast Asian country is a little ahead of Taiwan.
The U.S., Japanese and Korean solar companies are investing heavily in Malaysia. First Solar Inc is mostly reliant on its facilities in the country to manufacture solar panels. Other companies like SunPower Corporation (NASDAQ:SPWR) and Hanwha SolarOne Co Ltd (NASDAQ:HSOL) also own facilities there.
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.