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Solar Stocks: Sound Investment or Dead End?

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Investing in solar stocks could be a wise long-term decision despite volatility and losses in the near term, but only if technology can make solar an economically viable alternative to coal.

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The promise of solar-company stocks appears to be fleeting and enticing all at once. On the one hand, solar is a clear and renewable source of energy that, once facilities are in place, is free to collect.

Given the clear benefits of the industry, one would assume that solar stocks would be a wise investment, particularly as the years roll on and the effects of global warming start to become more and more apparent. However, solar stocks have been anything but steady. Cheap competition from China and reduced subsidies in Germany have combined to knock the floor out from under major solar stocks. First Solar (FSLR), the industry leader, has lost over 80% of its share value over the last year, and other major solar-panel producers like SunPower (SPWR), Yingli Green Energy (YGE), and Suntech Power Holdings (STP) have also suffered similarly major losses over the same period.

So the question remains, are solar stocks a sound investment? While specific companies should each be considered independently, what does the future hold for the industry? If solar is in fact the default future of the energy industry as it shifts away from fossil fuels, solar stocks could be a wise investment in the long term despite volatility and losses in the near term. However, if the market continues to lack definition and the technology can't make solar an economically viable alternative to coal, investing in solar stocks could continue to be a frustrating and costly endeavor.

Don't Invest in Solar

According to the US Department of Energy, the levelized average cost per megawatt hour for solar energy, depending on the type of technology, is at least two to three times greater than conventional coal for plants beginning operation in 2016, and almost four to five times greater than natural gas. At its core, this remains the major issue with solar: The technology remains incapable of capturing enough of the sun's energy to produce energy with anywhere near the efficiency levels that plants fired by fossil fuels can reach. As such, it's hard to see a massive shift to solar energy until the cost of production goes down, the cost of coal goes up, or the consequences of global warming become so distinct that they cannot be ignored. What's more, solar inherently lacks the sort of capacity and consistency that any power grid needs. Solar plants can only generate power when the sun is shining, meaning that cloudy days or bad weather can throw a monkey wrench in the whole works. What's more, solar plants are incapable of producing energy at night while peak energy demand is typically in the early evening.

Of course, even if one does believe that solar is the future of electricity generation, concerns about the industry should persist. Regardless of the future of the technology, current solar companies appear riddled with issues. The markets took a tumble when Chinese solar panel producers flooded the market with cheap product, partially subsidized by the central government, that created a glut of supply and put prices into a freefall. This resulted in a massive hit for the bottom line of American companies and put the entire industry into free fall. Now, Germany's recent announcement that it would be rolling back subsidies far more and far sooner than previously anticipated resulted in another major drop in solar stocks that had been rebounding over the few months prior. Many analysts, like the Motley Fool's Travis Hoium, believe that the entire industry is due for a consolidation, with the smaller companies falling into bankruptcy while a few strong companies survive.

With this sort of flux, it's difficult to see investing in solar stocks as a wise move in the near future.

Investing in Solar

However, for all of the naysayers about the solar industry, there's also very real reasons to believe that the worst is behind the solar industry. The very fact that solar stocks continue to be battleground stocks speaks to the fact that most people can see the potential held in the technology. And it's also very possible that 2011 and the beginning of 2012 will ultimately represent the bottom for the industry. First Solar announced in last year's Q3 earnings report that it was moving away from subsidized markets and focusing on producing panels for power plants. The move is intended to prepare the company to move forward in a more sustainable direction for the future. If this is in fact a support level for the solar industry, that could mean that the lengthy swoon solar companies have been going through represents a buying opportunity as much as a cause of concern.

There's also the potential for continued political developments to push energy policies at home and abroad to invest more in solar. A state law in California now requires that the state generate one-third of its electricity from renewable sources by 2020. This created a real economic opportunity for First Solar, which signed a lucrative 25-year contract with Pacific Gas and Electric (PCG) for its Topaz plant before selling the plant to Warren Buffett's Berkshire Hathaway (BRK-A) for some $2 billion. Even if solar continues to lag behind coal in terms of short term economic costs, it's also possible that the long-term ecological costs of coal will push governments around the world to legislate changes that would be beneficial to solar stocks in the end.

This article was written by Joel Anderson.

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