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VIDEORenewable Auction Mechanism May Boost Solar ETFs
Here, some diversified ways to gain access to companies like First Solar, Trina Solar, and MEMC which could benefit from the proposed subsidy.
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Editor's Note: This article was written by Kevin Grewal, editor of SmartStops.net.
Recently, the State of California proposed a decision to adopt to a renewable auction mechanism (RAM) which enables rates to be set by market-pricing. This could lead to a new avenue of growth for ETFs like the Claymore/MAC Global Solar Energy Index (TAN), the Market Vectors Solar Energy ETF (KWT) and the Market Vectors Glb Alternative Energy ETF (GEX).
This proposed subsidy is expected to work as a feed-in tariff, which will use market-rate pricing that's being set and driven by a bidding process, as opposed to utilizing rates that are being set and driven by the California Public Utilities Commission. A major goal of this new subsidy is to enable developers of solar power to furnish adequate returns and to soften the blow to ratepayers which are being overburdened by excessive subsidies. If this can be achieved, it's expected that the solar industry will see a massive expansion.
As for now, the program is expected to be relatively small with an initial scope of 1,000 megawatts over the first two years, with the electricity being delivered to one of California’s three primary utilities through standardized must-take contracts. As for the auctions, they'll be scheduled to take place every 180 days, with each auction allocated 250 megawatts to each of the three California utilities.
Although hopes of this new subsidy are strong and are expected to enable solar power to further penetrate the alternative-energy markets, it's equally important to consider the risks and volatility that come with the sector. Furthermore, this risk and volatility in the sector has been enhanced by companies that are unable to generate stable cash flows and the dependence on heavy technological advances in the future.
If investing in solar energy, it's important to have an exit strategy that identifies specific price points at which downward price pressure is likely to be seen. Such a strategy can be found at www.SmartStops.net.
As mentioned earlier, some diversified ways to gain access to companies set to benefit from the proposed subsidy such as First Solar (FSLR), Yingli Green Energy Holdings (YGE), Trina Solar (TSL) and MEMC Electronic Materials (WFR) include:
- Claymore/MAC Global Solar Energy Index
- Market Vectors Solar Energy ETF
- Market Vectors Glb Alternative Energy ETF, which is a diversified play on alternative energy but includes First Solar and Trina Solar Limited in its top holdings.
- PowerShares Global Steel, which holds steel giants such as Posco (PKX), ArcelorMital (MT), and Companhia Siderurgica Nacional (SID).
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