Trouble Ahead For Solar Stocks?

November 26, 2021
By The Investing Insider Staff

Despite one of the biggest climate summits in history resulting in some of the world's top polluters committing to big changes, there are some warning signs for one of investor's favorite green industries...

At the COP26, countries raised their climate ambitions and built on their current climate pledges.

China, Japan, South Korea, France, and the UK have already set deadlines for their economies to become “carbon neutral”.

Other major economies are expected to take further action to change the trajectory of their emissions growth towards a clean energy transition.

So what does it mean for us investors?

One word: opportunity.

Solar, wind, tidal, geothermal, EV, and battery companies all stand to benefit from the commitments.

That said, it won’t be a straight shot higher.  And if you’re looking at solar stocks, there are some headwinds to be aware of…

Growth has decelerated recently as it faces a slew of challenges, including rising materials costs, claims of forced labor, and a widening trade war.

As a result, panel costs are increasing for the first time since 2007.

The two main cost components of solar panels are Equipment costs and Shipping Costs. While demand has kept up, the supply chain hasn’t been able to match it.

A key selling point that made solar energy the fastest-growing power source in the world was rapidly decreasing costs – however, that’s hit a speed bump.

Essential components of solar panels are becoming more expensive and, as a result, driving up their prices.

A significant driver of this surge is Polysilicon.

Ironically, Silicon is the second most abundant element on earth. However, manufacturing Polysilicon is a highly energy-intensive process. It is an ultra-conductive substance created in factories, especially in China, with caustic chemicals and vast amounts of principally coal-derived energy.

Recent coal shortages in China have left the country rationing power, the bulk of which comes from these fossil fuels. Therefore, the power deficit caused by a lack of coal has now reduced the supply of the metal required to create polysilicon, driving up costs even further.

Of course, another culprit behind the rising costs is the pandemic.

There was an oversupply of essential components before the pandemic. However, lockdown measures across the world caused manufacturing plants to scale down their operations.

As economic activity bounced back, manufacturing and mining companies have been struggling to keep up with the roaring demand.

A slew of issues, including rising demand, container scarcity, overburdened ports, a shortage of ships and dock employees, have all contributed to the tightening of transportation capacity on all freight routes.

Earlier, transportation costs had a minimal impact on the overall production costs.

The cost of shipping continues to rise, playing more of a role in overall production capital expenditure. Covid outbreaks in Asian export hubs like China –  which follow a “Zero Covid policy” – have exacerbated the problem. Longer-distance routes bear the brunt of the pain.

The Shanghai Freight Index, which measures the cost of shipping a container from Shanghai to a number of different ports across the world, has risen by almost 500% since the beginning of the pandemic.

Who is most impacted, Households or Businesses?

So far, increased costs haven't had as much of an impact on households as they have on power generation businesses. This is because the cost of shipping and materials in a solar plant project is substantially higher than in a residential one. Furthermore, most households spend a greater proportion of the solar energy expenses on the installation of solar panels.

Another aspect of solar projects that we must not forget is that Solar power plants produce energy for 20 years or more. Thereby, they are usually financed for a long period as well.

Current low-interest rates mean future cash flows are more valuable, making a solar project more viable. Government subsidies have always been important to the success of the solar sector, and at a time when competing energy costs are already high, they could be much more beneficial.

Future of Solar Projects

The US is currently working on reducing its dependence on a single source for solar panels by adding more locations not vulnerable to the same risks.

The US-China trade war has motivated some firms to shift to a “China plus one” strategy of spreading production between China and another country such as Vietnam, Indonesia, or Thailand. Diversifying the sources of production will have a major impact on reducing the geographic risks of solar panels.

These impediments may only be temporary, with installation delays mostly likely to be overcome by the end of 2022 as new solar manufacturers assist in alleviating supply chain concerns.

-Investing Insider Staff
This article is informational purposes only and is not investment advice.  See full disclaimer here
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