(January 2009)

The investment case for technologies that harness the sun’s power has become murkier as the economic landscape has darkened and oil prices have declined. While few experts expect the kind of pulling back that has occurred in previous economic downturns, solar energy is an area in which risk and reward will require both careful assessment of individual companies and commitment to the long term.

That said, there are reasons to be optimistic. U.S. president-elect Barack Obama has indicated he wants to spend as much as US$15 billion annually on non-carbon energy generation. That is particularly good news for the solar sector because, when it comes to producing power from solar energy, government subsidies are crucial. Subsidies have put relatively gloomy Germany into the lead in solar power, compared with the far sunnier U.S.

Perhaps the most recognizable form of solar energy — and the largest segment of the market — is photovoltaic solar energy: the flat, translucent panels perched on rooftops big and small and powering everything from satellites to road signs.

But the outlook for PV solar energy is mixed. Government subsidies could be trimmed in parts of Europe and the U.S., and oil prices have plummeted, removing the financial push for moving to solar. In PV’s favour, manufacturers have been going full tilt, creating high inventories of both refined silicon for solar panels and the panels themselves.

“We may see the price of solar panels drop materially,” says Duncan Stewart, president of Toronto-based Duncan Stewart Asset Management Inc., Canada’s only private cleantech fund.

As a result, Stewart advises investors to steer clear of companies that make PV solar panels, because margins are declining. And there are other ways to participate in the growth of solar. A Stewart favourite is Toronto-based Timminco Ltd. , which has hit upon a low-cost way to produce solar-grade silicon, the most important ingredient of a solar cell, which is the heart of a PV panel. Timminco shares were recently trading in the $3- to $4-a-share range, well off their 52-week high of $35.69 a share.

Stewart also likes Quebec-based 5NPlus Inc. , which makes the cadmium telluride that goes into thin-film solar panels and is used in many medical devices. Both applications appear less affected by the current economic crisis than conventional solar panel manufacturers. 5NPlus’s stock was trading in the $5-a-share range recently, down from a 52-week high of $13.49 a share.

Internationally, solar power has been growing by 40% annually since the beginning of this decade, ramping up in the past five years to almost 3,000 megawatts in 2008 — the equivalent of three conventional power plants — from approximately 600 MW in 2003. A recent study by green-economy, non-profit Green America of Washington, D.C., says that solar energy generation could realistically account for 10% of power in the U.S. by 2025, through a combination of solar PVs and concentrating solar power (CSP).

The report predicts that the cost of PV and thin-film PV systems will fall by about half in the next decade, while CSP costs will drop by an even greater amount. The main driver of lower costs, the report adds, are large-scale solar deployment plans announced by major utilities such as California-based Southern California Edison. SCE recently announced a 250-MW rooftop installation program. The project was possible, SCE says, because recent advances in areas such as PV module technology, inverters, system installation practices and design standards have cut in half the traditional cost of installed solar generation in California. Arizona-based First Solar Inc., a developer of an advanced thin-film PV technology, was selected to supply 33,000 panels in SCE’s first of many installations.

Other potential solar customers include homeowners, who can harness the sun’s power themselves. Besides bolting PV panels onto a roof to convert sunlight directly into electricity, a less expensive alternative is solar thermal. This method uses fluid pumped through flat plates or tubes during daylight. The heat absorbed by the fluid is transferred to water in a solar storage mechanism (usually a hot-water tank), either directly or via a heat exchanger. A common application is to heat water partially, thereby lowering total water-heating costs. About 25% of home energy use is for heating water.

One firm active in this area is Toronto-based Mondial Energy Inc. , which recently won a contract with the City of Toronto to install, own and operate solar thermal systems in 15 buildings and sell the metered solar thermal energy to the city under a long-term power-purchase agreement.

@page_break@Mondial president Alex Winch says his firm has carved out a unique niche for itself. Utilities in Ontario are now exploring solar thermal systems similar to Mondial’s. But, Winch says, Mondial is currently the only company with installed generating capacity. Winch, a CFA and former hedge fund manager, notes that his firm takes all the risk on its projects — it covers installation and maintenance costs, and gets paid only for the power it delivers. But, he notes, solar thermal projects are “less risky than people perceive them to be.”

Then there’s the expanding market for small and mobile applications. There has been a boom in solar-powered remote fixed devices — for example, parking meters, emergency telephones, temporary traffic signs and remote guard posts, and navigation buoys — in situations in which solar can provide a cheaper solution than plugging into grid power.

Many of the world’s electronics giants, including Sharp Corp. and Coleman Co. Inc. , make backup solar-power systems and smaller units to power computers, cellphones and other devices.

And while the market may seem limited in developed regions, says Stewart, there’s a great need for such systems in much of the developing world: “There are places where you can’t count on the electrical grid.” IE