FT.com
Green stocks get whacked
Wednesday January 16, 10:55 am ET


Investors in renewable energy stocks have long been on a journey to the promised land, with the European sector almost doubling in 2007. But this year has begun in retreat, with most stocks down 20-30 per cent from their December peaks, led by the solar panel manufacturers.

In part this reflects a broader change in attitudes to risk as markets wobble. But there may also be a reassessment of the heroic assumptions share prices embody. Société Générale, for example, takes the forecasts of the trade body, EPIA, for growth for the solar power market out to 2030, and then assumes that operating margins can be sustained at a hefty 20 per cent. Even then the bank finds that bellwethers Q-Cells and SolarWorld are over valued.

Small changes in the variables produce big swings in valuation, and solar stocks are largely a bet that solar can eventually reach the point of "grid parity" - where its cost matches that of fossil fuel-based power generation. Yet even if one assumes that solar power becomes a mainstream source of energy, the manufacturers of equipment face two problems in the shorter term.

First, the easing of supply side restraints. The shortage of key raw material polysilicon, used to make most panels, has supported manufacturers' prices and margins. But most observers expect supply of polysilicon to rise from 2009 onwards. Second, manufacturers' capacity may soon exceed immediate demand. EPIA's optimistic scenario assumes annual global demand for new generating capacity of about 7GW by 2010. Yet manufacturers' annual productive capacity by then will be about 12GW, according to consensus forecasts. If manufacturers continue to chase scale and market share, the short term overhang could be larger.

There are solid arguments for rapid growth in green energy stocks. But the LCD and memory chip markets offer clear parallels for an emergent technology sector hit by overcapacity. A detour in the wilderness may lie ahead.