Solar energy is taking off in the Middle East and Africa. In 2014 their PV demand is expected to grow 50%. By 2018 annual demand is expected to reach 4.4 GW, but it could go as high as 10 GW. SunPower (NASDAQ: SPWR ) expects that by 2016 the region's demand will be greater than Japan's and slightly less than the rest of the Asia Pacific (APAC) region excluding China and Japan. SunPower is set up to succeed, with 22.2% of its power plant pipeline in the Middle East and Africa.
Reasons to be bullish
Solar can easily flourish in the Middle East and Africa because these regions have very high levels of solar radiation. All things held equal, more sunshine means more energy and a higher ROI. Also, high population growth is pushing the regions' absolute energy demand upward.
There are number of Middle East-specific factors that work in solar's favor. Big oil producing nations like Saudi Arabia use crude-derived products to power themselves. If Saudi Arabia can replace ancient oil-based power plants with solar systems then they can decrease the amount of oil that is sucked into the domestic market, thereby lining the royal coffers with more crude exports. It is estimated that Saudi Arabia could release an extra 500,000 barrels of oil equivalent per day (mboepd) into the export market if it can de-carbonize half of its electricity generation by 2020.
Secondly, the Middle East has huge sums of money that could easily be put into the solar industry to diversify local economies. The Saudis are already aiming to grow their local economy with 24 GW of installed renewable energy by 2020. SunEdison (NYSE: SUNE ) has arranged a feasibility study with the Saudi government for the construction of a $6.4 billion solar manufacturing plant in Wa'ad Al Shammal, Saudi Arabia.
Many parts of Africa do not have the deep pockets of the Middle East, but this doesn't mean that they will be shut out of the growing solar market. Installment plans are already being used to sell small rooftop systems without costly transmission hookups to rural consumers.
Investments to consider
SunPower is one of the best Middle Eastern and African plays around. It has a strong gross margin of 27%, a developing utility pipeline in the region and is in a good position to use Total's African connections.
SunEdison is another company to watch, but treat it with caution. Its margins are low, and it may undergo big changes in the near future. There is talk of spinning off its semiconductor segment and creating a new utility company to hold and operate some of the solar plants SunEdison constructs. Its Q1 2014 gross margin of 8.6% could be stronger, and its semiconductor segment is a drag on earnings with an operating loss of $16.9 million in the quarter.
Canadian Solar (NASDAQ: CSIQ ) has a 4.5 GW DC pipeline, but the Middle East and Africa are of secondary importance. Canada, Japan and China comprise the majority of its late-stage pipeline. It does have some long-term interest in Saudi Arabia and medium-term interest in South Africa, but its eyes are focused elsewhere.
The most worrying part of Canadian Solar is its total debt to equity ratio of 3.3. Now that the solar industry is on the upturn the company has less to worry about, but Canadian Solar will need to spend big bucks to keep up with advances in manufacturing. Upgrading its manufacturing capacity will not be cheap as it is the third largest module manufacturer in the world.
First Solar's (NASDAQ: FSLR ) bread and butter is utility solar, and the Middle East and Africa are big parts of its long-term pipeline. Its potential bookings in the region are much bigger than its opportunities in Europe or APAC.
In addition to the encouraging geographical make-up of its pipeline, First Solar's Q1 2014 was much stronger than competitors like SunEdison. First Solar posted a gross margin of 24.9% and an operating income margin of 14.7%. If First Solar can achieve its goal of boosting its practical manufactured efficiencies to 19.6% in 2017, then it should remain one of the top global solar manufacturers.
Stick with the best
Yet again SunPower and First Solar are the cream of the crop. They have fat margins, and their pipelines are already slanted toward the growth in the Middle East and Africa. Additionally, SunPower should be able to use Total's existing relationship with a number of oil producing countries to its advantage. On the other hand Canadian Solar and SunEdison have little exposure to African and Middle Eastern growth.
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