Sunny Side Up - Black Enterprise

Sunny Side Up

Gordon Johnson of Hapoalim Securities says solar energy stocks hold promise. (Photo by Jerry Jack)

The sun is always shining in Gordon Johnson’s world. As an analyst at New York-based Hapoalim Securities, he spends his days seeking out investment-worthy companies in the solar technology industry. It’s a hot field (pun intended) that’s generating plenty of buzz as the Obama administration promotes green energy as a pillar of its efforts to reduce greenhouse gas emissions while creating jobs in the recovering economy.

The solar energy industry is made up of hundreds of public and private companies that produce the equipment used to convert sunlight into electricity. The main component in that conversion is a polysilicon wafer that contains photovoltaic cells. These wafers are pieced together to form the mirror-like solar modules that are appearing increasingly on the rooftops of homes and businesses around the world. Photovoltaic solar cell production has doubled every two years since 2002, making it the world’s fastest growing energy technology, according to business research firm GlobalData.

Johnson’s job is to synthesize the science and economics of the solar market and make that information useful to investors. He talked to Black Enterprise about the industry and its future.

We keep hearing about green technologies. Does that mean investors can simply pick a good solar energy company and ride the stock into the stratosphere?
No, but that’s been the general thought process. In the U.S., that kind of thinking is what’s driving solar stocks higher. Many governments around the world are talking up solar energy, outlining plans to make investments in solar energy projects. Some countries claim they want their energy to be 20% solar by, say, 2020. In anticipation of that spending, some producers began growing supply. As a result, prices for solar modules have fallen by more than 50% in less than two quarters because of oversupply. So some caution is warranted. This year, and next, will be defined by industry oversupply, which will weigh on margins for many players in this industry due to pricing pressures. I do, however, see a couple of companies that are positioned to benefit.

Before investors jump in, what are some important factors to understand about the solar market right now?
In 2006, more than 30 opportunistic Chinese chemical companies began building polysilicon plants to take advantage of an explosion of solar demand in the world’s No.1 market, Spain. Consequently, the price of polysilicon was expected to soar from $40 per kilogram in mid-2006 to a projected $450 per kilogram by mid-2008. Today, numbers have fallen back to $60 to $70 per kilogram. On the other hand, it costs about $30 per kilogram to produce your own polysilicon. Companies that had the capital and ability to build polysilicon plants saw this market as a sure thing. [Margins were close to 95%.]

The price of a solar module is determined by: (1) the cost of polysilicon and (2) labor- electricity costs to run your plant. The Chinese solar module vendors have the lowest labor-electricity costs in the world. However, in 2006, 2007, and 2008, most of the Chinese module vendors were at a significant disadvantage to their U.S. and European peers, because they had to buy more expensive polysilicon while many of the U.S. and European solar module vendors had previously signed long-term contracts for much lower prices. But now polysilicon prices have come down. So, the Chinese module guys have seen a massive increase in demand for their modules, and taken share.