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Is Solar Sustainable?

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High energy costs, government rebates may be temporary.

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Despite being one of the most viable sources of alternative energy, the economics of solar power still don't add up.

Harnessing the sun's rays is more costly than tapping traditional sources of electricity. As a result, the solar industry is built on a shaky structure of government kickbacks and record fuel prices are pressuring regulators to extend tax credits.

Homeowners receive sizeable tax breaks and rebates for solar installations and investors can shelter income with environmentally friendly projects. Corporations can even participate: Google (GOOG) and Safeway (SWY) are making use of their rooftops by installing solar power systems.

But this dependence on rebates is dangerous. Tax revenues are falling and government coffers are being stretched thinner by the day. States offering generous solar rebate programs -- California for example -- could be forced to pull the plug if their finances don't get back on track.

For its part, the solar industry is making strides toward parity - where costs fall in line with dirty burning coal and somewhat cleaner natural gas. With new conversion technologies, slimmer panels and looming carbon regulation solar power may finally start to make fiscal sense.

Investors appear to be weighing the industry's prospects and potential leaders instead of the next spike in oil prices. This bodes well for stocks trading on fundamentals, not news stories.

First Solar (FSLR) manufactures a thin-film semiconductor technology that enhances the conversion of light into power. The company has defied critics that claim its lofty valuations are unsustainable and is one of the few solar stocks in the green this year.

SunPower (SPWR), a spin-off of Cypress Semiconductor (CY), installs solar systems on homes and office buildings. Its consumer business is particularly interesting if parity can be achieved and solar power starts to make sense for the common homeowner.

Speculators and day traders have flocked to companies like Suntech Power (STP), JA Solar (JASO) and LDK Solar (LDK) - all headquartered in China. Environmental concerns and booming infrastructure demand have led many to wonder if developing economies may finally release solar from the shackles of government dependency.

Even more traditional semiconductor companies like MEMC Electronics (WFR) that have embraced solar technologies have been caught up in the craze.

After solid returns in 2007, solar shares have by in large retreated this year. Speculators are moving on to new ground, focusing on agricultural stocks like Potash (POT), Mosaic (MOS) and Agrium (AGU). Investors are increasinly concerned that solar's growth is unsustainable. Deflationists argue that high energy prices are temporary and that solar may again prove to be fool's gold.

History reveals an alarming precedent. The 1973 oil embargo drove investment in solar technology, shepherding costs toward what many believed would be parity. A decade later oil prices collapsed and the industry went into hibernation.

Only recently have venture capitalists and macroeconomic pressures once again smiled on solar.

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No positions in stocks mentioned.

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