A number of economists have pointed out that at least part of the problem with the subprime mortgage crisis was government attempts to make housing affordable to more people by pushing for lower lending standards. This helped to create a bubble in the housing market that eventually popped. It looks now like a new bubble may be ready to pop in the solar energy market. Once again, the government has intervened to skew the market and create a bubble. In this case it comes in the form of favoritism and subsidies to “renewable energy” companies in general, and solar power in particular. Yesterday’s online edition of the Wall Street Journal carried an article entitled “SolarCity IPO Review: Is Solar Power The Next Subprime Crisis?” Here is his take on the overvaluation of solar stocks:
In early October, I wrote: “The time to invest in solar stocks is not now.”
Well, it’s still not time. And I say that based on the technicals and the fundamentals.
The Bloomberg Global Large Solar Index (BISOLAR) continues to trade sideways, after plummeting more than 60% from its early February high.
And solar power’s still way too expensive. Even if we factor in steep government subsidies and falling panel costs.
(Editors note: a big reason why solar is so expensive is that it has a very low “energy density”. In other words, it takes a lot to convert a sufficient amount of stored potential energy in diffuse sunlight into usable energy. That makes it very expensing even though the sunlight itself is free. This is a basic engineering problem that holds true for several renewable energy sources. Oil and nuclear power, on the other hand have a high energy density. This makes the conversion process relatively inexpensive for the same amount of usable energy produced. Until this fundamental engineering problem is solved, renewables cannot be expected to live up to its billing as a replacement for coal, oil, and nuclear power.) It looks like the long term trend is not offering any indication that things are about to get better on the economic end:
Countless cleantech companies have already postponed or withdrawn IPO plans, as Greentech Media’s Senior Analyst, Eric Wesoff, points out. Like BrightSource Energy, Elevance Renewable Sciences, Genomatica, Fallbrook Technologies and the now defunct Solyndra.
Plus, as I shared before, the price performance for solar companies hardly smacks of a trend worth embracing in 2012, either. Major solar power companies First Solar (FSLR) and SunPower Corp. (SPWR) are still down by more than 20% this year. And China-based LDK Solar (LDK) and Yingli Green Energy (YGE) are off by more than 55%.
Of course, the problem lies not just in unwise government policy, but in the almost “religious-like fervor” to embrace alternative energy concepts despite economic and engineering reality:
Despite possessing zero hallmarks of a hot IPO, investors are bound to be interested in the deal, simply because of the popularity and religious-like fervor for all things related to alternative energy.
Don’t be similarly misguided.