Solar stocks are certainly having their day in the sun, outperforming all other sub-indices in the global stock market to deliver the best returns over the past fifteen months.
After taking off in mid-2013, the 32 stocks in the global solar index monitored by global investment bank HSBC gained 65 percent in value for that calendar year, and the index is already up 23 percent in the first few months of 2014.
The 2014 return-to-date compares to 4.6 percent for the HSBC Global Climate Change Index, and 0.7 percent for the MSCI All Country World Index, one of the key global benchmarks. This graph below shows the comparative performance over the last fifteen months.
HSBC says there are a number of reasons for solar’s strong showing: a combination of favorable policy initiatives in key markets, increased investment flows (public market investment doubled to $6.3 billion in 2013) , and stabilization of prices of solar panels and attractive valuations, all of which have contributed to a supportive base for investors.
The overriding theme, however, is that of grid parity. As HSBC notes, the price of solar continues to move further toward grid parity -- at utility scale, not just at the socket -- in many regions, making the technology more affordable and viable with less support from governments. That means it can continue to grow even when subsidies are finally removed.
Between 2009 and 2014, HSBC estimates, the difference between the median levelized cost of electricity (LCOE) of solar and conventional coal has fallen by around 80 percent (see graph below). This, it notes, is a global average, and even includes regions with poor solar resources.
“The difference in the cost of electricity generated using solar power and electricity generated through conventional sources such as coal or natural gas also varies across regions,” it notes.
“HSBC equity research analysts believe that without considering the favorable effects of policies and supportive schemes, several states in the U.S. and markets in Europe have already reached retail grid parity.”
It notes that Grupo Enerpro, a privately held Spanish company, developed and connected the country’s first unsubsidized 1-megawatt utility-scale solar project to the grid, and it plans to develop ten more projects in 2014.
It also noted supportive policies in the world's three biggest economies -- the U.S., China, and Japan -- and in some key emerging markets such as Brazil, Peru and Chile.
Brazil recently conducted its first “solar auction” that allocated 123 MW of capacity at an average price of $97.80 per MWh; Peru has mandated solar for 500,000 off-grid homes by 2016; and Chile is the host of numerous large-scale solar projects, including the world’s largest “merchant” solar plant -- a project built to sell electricity into the open market.
Despite all this, HSBC says solar stocks still look attractive -- and offers an upside potential of 61 percent based on long-term relative price. In the graph below, the red line shows the potential upside on its trend-adjusted price earnings estimates, while the gray line shows the upside based on its price-to-book valuations. Both are key metrics in the world of financial analysts.
HSBC says another key factor is that finance for the solar market and the deployment of modules are both being facilitated by the issue of “green bonds” and the floating of numerous YieldCos, which offer attractive rates of return for investment in solar projects.
The solar market is forecast to grow 16 percent a year, and the twelve-month forward consensus earnings growth forecast for Global Solar is 87 percent.
HSBC notes that while in 2013, its climate change index was dominated by the energy efficiency and energy management subsectors, it is the low-carbon energy production index that has taken the lead in 2014.
Apart from solar, the wind index has delivered a return of 16.5 percent so far in 2014, while other renewables including the categories Diversified Renewables and Hydro/Geothermal/Marine are up 9.9 percent and 8.9 percent, respectively.