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 Canaccord Genuity Corp.

NATURAL LIGHTING: Investing in Solar Energy

Delwin Graham - Mar 17, 2021
One of the drivers for strong growth in the solar sector has been a phenomenal demand for environmental, social, and corporate governance (ESG) investments.

Solar stocks, represented by Invesco Solar ETF (TAN:NYSE), have dramatically outperformed the market over the past year. TAN has provided a total return of approximately 325 percent over the last 12 months, well above the S&P 500’s total return of approximately 30 percent, as of March 12, 2021. What is going on?

One of the drivers for strong growth in the solar sector has been a phenomenal demand for environmental, social, and corporate governance (ESG) investments. TAN, which is Invesco’s top-selling ESG EFT, had 2020 third-quarter net inflows of about US$400 million, roughly 20 percent of current assets. Furthermore, the election of Joe Biden and a Democrat-controlled senate is thought to be supportive of renewable power sources in general and tax credits for solar projects in particular. (Cf., Jonathan Ponciano, “Solar Stocks Soared This Year, but Now They’re Feeling the Market’s Heat – Could the Boom Be Over?”, www.forbes.com, November 10, 2020)

Of course, bullishness for the solar sector is nothing new. In 2011, the International Energy Agency (IEA) said that, “the development of affordable, inexhaustible and clean solar energy technologies will have huge longer-term benefits. It will increase countries’ energy security through reliance on an indigenous, inexhaustible and mostly import-independent resource; enhance sustainability; reduce pollution; lower the costs of mitigating global warming; and keep fossil fuel prices lower than otherwise. These advantages are global. Hence the additional costs of the incentives for early deployment should be considered learning investments; they must be wisely spent and need to be widely shared”. (“Solar Energy Perspectives: Executive Summary”, www.iea.org, January 13, 2012)

In this quote then, we have the two major features of investments in the solar sector. The first is the massive hope that the energy self-sufficiency gained by solar power will provide environmental remediation and economic growth and protect national sovereignty. The second feature follows from the first – that the public good afforded by solar energy development should be supported by the public purse, and governments must provide tax credits, subsidies, and other economic incentives.

The solar sector is still all about the future. Solar accounts for only 0.1 percent of Canada’s total renewable energy use. But solar power seems to hold the most potential, as it is estimated that about half of Canada’s residential electricity requirements could be met by installing solar panels on the roofs of residential buildings. (Cf., “About Renewable Energy,” www.nrcan.gc.ca, December 13, 2017)

Governments have been investing in renewable energy and solar power for quite some time now. Global investment in renewable energy reached almost US$280 billion in 2017, with China outspending the U.S. on clean energy by three to one (US$126.6 billion vs. US$40.5 billion respectively). (Cf., Rob Smith, “For Every $1 the US Spent on Clean Energy in 2017, China Spent $3”, www.weforum.org, April 11, 2018). We can expect that U.S. President Joe Biden’s pledge to put the U.S. on a path towards an emission-free future will ramp up American investment in clean energy and the solar sector.

Broadly speaking, there are two methods of using solar energy: passive and active. Passive solar methods are those that use sunlight directly (e.g., lighting and heating a room though a window). Active methods use technology to convert solar energy into a secondary form (e.g., electricity) that has its own use. Photovoltaics (PV) is the conversion of light into electricity using semi-conductor materials that exhibit the photovoltaic effect whereby light is converted into electricity at the atomic level. PV cells are the main components that make up solar panels. Because solar photovoltaics only works during the day when the sun is out, some sort of storage system is also needed (e.g., a DC battery), or the system must be connected into the conventional power grid.

The solar industry builds and installs devices to capture the energy from the sun and convert it into electric energy. The sector encompasses a wide variety of companies with the following functions:

  • Manufacturing components and panels
  • Installing solar panels
  • Operating solar energy generating facilities
 

There are investment opportunities with companies serving each of these functions. Canadian Solar Inc. (CSIQ:NASDAQ), headquartered in Guelph, and JinkoSolar Holding Company Ltd (JKS:NYSE), based in China, manufacture solar cells and solar modules. First Solar Inc. (FSLR:NASDAQ) is based in the U.S. and manufactures thin-film solar modules, which perform particularly well in low-light and warm-weather conditions.

SolarEdge Technologies (SEDG:NASDAQ) manufactures power optimizers and inverters used to convert DC power produced by the sun into the AC electricity used by the electrical grid.

Brookfield Renewable (BEP.UN:TSX; BEPC:TSX) generates renewable energy via hydroelectric power, wind, and solar assets. It sells power to its customers under long‑term power purchase agreements, providing a steady stream of dividends for its investors.

These are a few candidates – each must be considered in terms of the dynamics of the solar industry itself. Please contact me at dgraham@cgf.com or 780-408-1518 for more background information and a few more ideas.


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