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Monday, January 26, 2015

A Buying Opportunity in Solar

Recently, clean energy stocks such as SunEdison (SUNE), FirstSolar (FSLR), Opower (OPWR) and SolarCity (SCTY) have been trading well off their recent highs. This is a sympathy move to the 50%+ crash in oil prices. It's also a case of the dumb herd not understanding that oil and solar don't move to the beat of the same drummer. The smart money is doubling down on alternative energy. They know a great bargain when they see one.

As David Waserstein writes in What Does The Collapse In Oil Prices Really Tell Us About Alternative Energy?

If oil stays near $50/bbl, what happens to the alternative energy stocks — solar, wind, biofuels, etc? Let me give you a hint: most of them don't play the same sport.
In the developed world, oil is used primarily for one purpose — transportation. Coal, natural gas, hydro and renewables are used for electricity generation — the other primary method of energy consumption. The one overlap is heating when you have oil, gas and sometimes even electric competing. So as oil drops 50%, the knock-on effect on demand for things like wind and solar is negligible.
In the developing world, things are a little more complicated. Diesel gensets are used more frequently, especially for remote power applications and backup power when the local power grid is unreliable. With configurations like that, the equivalent rate per kWh is estimated at $0.44/kWh. While a drop in oil prices may lower that marginal cost, it's still pretty pricey power. And let's not forget that diesel gets stolen. So ultimately, solar is still in demand.

This is how the smart money wins—at the expense of the dumb money.