Green Targets
The Government has an EU mandated target to provide up to 15% of energy from renewable resources by 2020. So, no surprise that green energy is a hot topic among investors as the future seems bright. But being a first mover into solar (or wind) power is a move into a niche and higher risk area when compared to mainstream energy firms.
For starters, the green energy companies traded on the UK stock market tend to be listed on the Alternative Investment Market (AIM) which is intended for small companies, often newly established. Rightly, AIM companies are seen as higher risk, and some die every year.
Diversifying holdings through green funds or trusts can reduce the risks of an investment in individual companies because, in practice, most funds have a wide spread of investment and rarely become insolvent, unlike companies.
The Subsidy Paradox
The industry is heavily reliant on government subsidies but these are becoming less generous. The UK government offers feed-in tariffs as an incentive to consumers to install solar panels, but these have now been cut from 40p per kilowatt to half that. Furthermore, many of the predictions for the future of solar (and wind) were made with the assumption that oil and gas prices would increase as these resources become scarce.
However, scarcity is no longer a serious concern, but costs may be. Renewable costs are falling too slowly and, with the current flat or lower fossil fuel prices, the crossover point at which renewables will be competitive is much further out than projected.
First (and Last) Moves
First movers don’t always win in the long-term. Take Xerox, which developed an early version of the PC: Apple and Microsoft are two of the big players in this arena, not Xerox. This also applies to solar power; in 2008 solar panel manufacturers looked poised to conquer the world. The 12 largest had a combined value totalling about $70billion but today they are worth about $6.4billion.
Subsidies have attracted competitors, particularly from China, so the market has been flooded with cheap panels. This may benefit households converting to solar, but it means falling profit margins and share prices for the trade and bankruptcy for some.
So What?
The bull case for solar power rests on prices low enough to compete without subsidies when the expansion of demand will boost the industry’s fortunes. But the winners won’t necessarily be the pioneers seen today. The mainstream investor would do best not to be an early mover, but to wait to see who will find their place in the sun (and, indeed, which way the wind blows). If eager to invest then a green fund will be best.
This material is published by Raymond James Investment Services Limited (RJIS) for information purposes only and should not be regarded as providing any specific advice. Opinions constitute our judgement of this date and are subject to change without warning.