The nuclear industry's woes are great news for solar stocks

Until recently, many people were predicting a renaissance for nuclear power. Japan's Fukushima disaster has put paid to that. The only credible option for the future, says Paul Hill, is solar power. Here, he looks at the prospects for the industry.

By Paul Hill

published 26 April 2011

in Features

Japan's Fukushima nuclear plant disaster has slipped from the headlines, but fears over the state of the reactors remain. Only time will tell how much damage is eventually done.

But the political repercussions are already becoming clear. In Germany, hundreds of thousands of protesters have taken to the streets holding placards that read: "Atomkraft Nein Danke!". Angela Merkel's government has shut down seven nuclear plants for safety screening. China has also scaled back its nuclear plans.

Which leaves us with one big question where's all our energy going to come from?

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A nuclear renaissance is looking unlikely

As recently as the start of this year, people were predicting a 'renaissance' for nuclear power. It was 'green' (in terms of carbon dioxide emissions at least). And it seemed the only realistic way to cut our reliance on fossil fuels quickly and without sending the world back into the Stone Age.

Fukushima has put an end to all that. And this presents the world with a conundrum. Nuclear power currently accounts for about 15% of global energy a percentage that many hoped would grow in the years ahead. But that seems less likely now.

Yet, as you can see from the chart below, our energy needs are growing exponentially. How are we going to meet them now?

Projected global energy demand (in million tonnes of oil equivalent).

(Source: World Energy Outlook (IAE))

We can no longer rely so heavily on fossil fuels at least, not if we want to tackle 'greenhouse gas' emissions too. I'm not going to get into the debate on climate change here. Suffice to say that the world's governments are taking it seriously enough when forming their energy policies. So investors need to consider it too.

Cheap oil is long gone, and it's dirty. Coal, which already represents about 40% of global electricity production, billows out too much carbon too. Part of the answer is to increase natural gas from its current 20% usage level. But even its abundant reserves can only take some of the strain, given booming demand from emerging markets.

Even renewable energy sources have their problems. Hydro-electric power only works in appropriate landscapes ie where you have a very large reservoir up a mountain. And the diversion of grains into biofuels inflates food prices, pushing the poor into greater poverty.

Solar is one of the only energy sources that's actually getting cheaper

I see only one credible solution solar power. Incredibly, in just six hours the world's deserts receive more energy from the sun than mankind uses up in a year. It's a resource we simply have to tap.

The industry has had a difficult time over the last few years. For years, solar panels were just too expensive. And businesses relied on government subsidies, which collapsed in the wake of the financial crisis. Prices of solar energy stocks plummeted and stayed there.

But solar energy is about to have its moment. Costs have been slashed. A solar panel now costs half of what it did in 2008. Large-scale manufacturing is cutting costs by 5%-8% per year on average.

Efficiency is improving all the time too. Photovoltaic solar energy cells convert sunlight directly into energy, rather than using its heat. Solar energy now costs 15c/kWh to produce this way, compared to 8c/kWh for wind, and between 3-7c/kWh for coal and gas. In fact, installations in certain regions have even achieved the Holy Grail of 'grid parity' producing electricity as cheaply as conventional grid power.

Given that solar prices are falling, while oil prices just keep going up, it can only become more attractive. Governments will eventually be jumping at the chance to raise their solar energy production.

Sure, it won't happen overnight. Even in the near term, the industry will still rely on subsidies. But with the costs both in financial and environmental terms of relying on fossil fuels rising, and nuclear plans being scaled back, demand for renewables can only grow.

I reckon we'll have reached a tipping point by the end of the decade, where replacing coal with solar can be justified on economic as well as environmental grounds. This would increase solar sales exponentially. No wonder some of the biggest names in the corporate world are fighting to get into the industry.

The big boys are piling into solar

Just look at what's happening in the Sahara plans are underway to build a colossal solar farm in the desert: mile after mile of solar panels, soaking up the sun's energy. And the Desertec Industrial Initiative is backed by heavyweights such as German insurer Munich Re, Deutsche Bank, Siemens and utilities RWE and Eon.

The project is likely to cost about €300bn. It aims to supply the Middle East and North Africa, and generate around 15% of Europe's electricity needs by 2050. This is a massive endorsement of the solar industry. It underpins why other global titans such as GE, 3M and Google have all recently announced big investments in the sector too.

Last year, solar installations more than doubled to 16GW as customers flocked to take advantage of generous subsidies in Germany and Italy. And encouragingly, even though the size of these handouts is set to fall this summer, 2011 growth should still be a creditable 10% as the US, China and the rest of the world ramp up their efforts.

We'll be looking into the renewable energy sector in more detail in a future issue of MoneyWeek magazine. But my colleague James McKeigue wrote about solar power just last month where he tipped a German company that should be able to cash in on growth in the sector.

And just another reminder: I'll be talking, along with other members of the MoneyWeek team, at our first conference: 2011 Crisis or Opportunity? on Friday 17 June, at One Whitehall Place in central London. Remember to note it in your diary. We'll be sending out full details and registration information in the next week or so.

Paul Hill writes the "Who's tipping what?" column in MoneyWeek, plus his own newsletter, Precision Guided Investments.

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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.