Why Solar Stocks Have Been Trending Lower

Solar stocks have seen a sharp sell-off of late, with the Guggenheim Solar ETF (NYSEARCA:TAN), a popular exchange traded fund comprising of solar stocks, falling by about 22% over the last month. Industry bellwethers SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) have declined by about 23% and 24% respectively over the same time frame, while Chinese solar majors Trina Solar (NYSE:TSL) and Yingli Green Energy (NYSE:YGE) have fallen by about 30% and 24%, respectively. In this note, we take a look at some of the factors that may have contributed to the decline.

See Our Complete Analysis For Solar Stocks Trina Solar| Yingli Green Energy | SunPower | First Solar

Oil prices have plummeted over the past few weeks on the back of global growth concerns and strong supply, with Brent crude approaching 4-year lows of about $84 per barrel. Although crude oil and solar energy aren’t direct substitutes, given that crude is primarily used to produce transportation fuels while solar is used to generate electricity, solar stocks have historically responded to fluctuations in oil prices. This could be due to the fact that the markets count oil prices as a proxy for the price of energy in general, which could reduce the economic incentive to invest in higher-cost energy sources such as solar. There could also be some specific factors at play. For instance, the price for liquefied natural gas is typically influenced by oil prices, and falling oil prices could stimulate utility companies in countries that import LNG, such as Japan, to utilize natural gas based electricity generation, while postponing the expansion of their renewables and solar projects. Additionally, if oil prices remain under pressure, there could be longer-term concerns that investments in areas such electric vehicles – which are sometimes charged with solar power – could be scaled back, reducing future demand for solar panels.

Growth Concerns For Solar Installations In Japan

The solar markets are typically characterized by boom and bust cycles brought about by government incentives, which influence demand, and capacity expansion plans by large players. The fundamentals of the industry have remained positive of late, with average selling prices flattening out and the supply-demand environment approaching equilibrium. However, there are some near-term concerns. While IHS estimates that photovoltaic installations will grow by around 20% this year to about 45.4 gigawatts (GW), the growth rate is likely to slow down to about 16% during 2015. ^[1] Moreover, installations in Japan, the world’s second largest solar market, are expected to peak this year. ^[1] The Japanese market has among the highest average selling prices for solar products and is important to most manufacturers from a margins perspective. Key concerns in Japan include the lack of availability of suitable land for utility-scale projects and the possibility that government could scale back its feed-in-tariffs for solar, resulting in lower demand. This could pose a challenge for manufacturers such as SunPower and Trina Solar, who have been increasing their exposure to the Japanese market.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Solar Installations To Rise 20% In 2014, Due To Strong Fourth Quarter, PV Buzz, October 2014 [↩] [↩]