I first discussed the long-term bull case for solar power on RiskReversal in this CotD post in the spring of 2013, with the following conclusion (the whole post is worth a read):
Sounds to me like another “hot” industry where investors were just too early, but the long-term story is as attractive as ever. This theme of course hit my radar because of the recent excitement in the solar space, most notably in FSLR. But in the long run, the real key will be picking the winners from the solar industry’s rubble. Previous internet fallen angels like JDSU and JNPR never made much of a move, while AMZN and PCLN now trade at multiples of where they traded in 2004 or 2005.
My point was that solar industry costs were coming down rapidly, and if that trend continued for the next 5 years, the economic argument in favor of solar power would be much more attractive.
However, in the past year, we have seen fossil fuel prices decline substantially. Coal and oil price drops have hurt the industry players (coal producers and oil drillers are two of the worst-performing sectors year-to-date), but those price drops are a significant positive for long-term consumers.
On the other hand, the biggest risk to the renewable industry over the next 5 years is probably cheap energy prices. Coal, oil, and natural gas look to be oversupplied after a binge of investment in the past 10 years (driven by unsustainable Chinese demand), so I expect that lower fossil fuel prices will lead consumers towards using more fossil fuels and less renewables. Of course, commodity cycles are very cyclical, so eventually demand growth in fossil fuels and underinvestment over the next 5-10 years will lead prices to rise again (let’s say after 2020), and the pendulum will swing back towards renewables.
In the meantime, the recent drop in commodity prices could be a serious headwind for solar power installation growth globally over the next few years. In that sense, it’s not surprising that the bounce in the solar sector ETF, TAN, has been anemic in the past 10 days compared to other high beta sectors:
TAN daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg
I took off a bearish trade (too early) in TAN for a nice profit at the start of October, but that original thesis was more based on a technical view at the time. However, as oil has declined, my near-term fundamental view on the sector has gotten more bearish (though I still think the long-term outlook is very positive). I would be more interested in a bearish trade entry if TAN rallied close to $40, but the other issue is that TAN options are very wide. I ran into trouble getting out of my position earlier this month, so I don’t plan on entering a new trade in the etf anytime soon.
