Today is the big day. President Barack Obama is set to address the nation about how he proposes we create jobs and get the country back on track. Yesterday, fellow Fool David Lee Smith penned an article titled "Obama Should Avoid Green on Thursday" and as the resident green writer at The Motley Fool, I feel compelled to respond.
Stock prices don't make a business
Solar stocks have struggled this year for a variety of reasons. Earnings are down because of feed-in tariff uncertainty in Europe, profits are down, and some solar manufacturers have filed bankruptcy. But don't mistake that for the death of the industry.
1. A shakeout is not only good for the solar industry, it is absolutely necessary, and a normal part of the business cycle. Solyndra's technology never really stood a chance against the falling costs of more traditional cells and panels from the likes of LDK Solar (NYSE: LDK), Trina Solar (NYSE: TSL), and Yingli Green Energy (NYSE: YGE). More companies will file for bankruptcy, leaving stronger manufacturers with a bigger piece of the pie.
2. Profits are falling because module prices are down. Falling module prices mean lower costs for each kilowatt-hour of solar electricity. Lower electricity costs will lead to higher demand for solar power. It's a reinforcing loop we should promote.
3. Solar stocks have always been volatile and don't always reflect the strength of the industry. Most Chinese manufacturers like Suntech Power (NYSE: STP) trade with single-digit P/E ratios, unheard of for a business growing double digits every year. That's value, not a vanishing industry.
4. The solar industry now employs 93,500 people directly or indirectly in the U.S. and is one of the few good things we have going. With installations up 66% over the past year, job growth is strong while the rest of the economy is slashing jobs or holding steady. Why not invest more in an area actually creating jobs?
Misinformation and dated information on subsidies continues
Renewable energy bashers like to point to "unsustainable subsidies" as a major reason renewable energy isn't worth investing in. However, they fail to remember that most coal and natural gas power plants were built decades ago, so cost comparisons are irrelevant. And no one likes to mention that coal (ahem, railroad giveaways) and nuclear plants (cough, limited liabilities) benefited greatly from government subsidies. But most troubling, very few understand what renewable energy really costs.
In 2007, when David Lee Smith cited $24.34 per megawatt-hour in subsidies for solar, First Solar's (Nasdaq: FSLR) panels cost $1.23/watt to manufacture. That figure has since fallen 39% to $0.75/watt. And in the last two years, the balance of system costs have fallen 29.3% from $1.40/watt to $0.99/watt. 2007 might as well have been a half-century ago in the eyes of solar.
So what does solar really cost? Of course, it varies by location. A common figure often quoted for cost to install a watt of solar is $3. If an investor expects a 10% return on investment and a panel was at a 20% capacity factor, that investor would be paying $0.17 per kwh for solar power, about $0.02 higher than retail prices in California, for solar power. First Solar thinks it will bring that cost of energy to between $0.10 and $0.12 in the next three years, lower than retail electricity in much of the country.
With solar power generating 0.5% of our electricity today, how much would it cost to increase that to 2.5%? Based on a $0.17 cost per watt, the average bill would go up $1.23 per month. A total of $2.1 billion per year. This would have the effect of lowering the cost per watt in the future, by the way.
Getting subsidies right
What Obama should focus on is getting subsidies for renewable energy right to create jobs. We've demonstrated that giving loan guarantees or grants to solar manufacturers to build manufacturing plants in the U.S. is the wrong approach. We should let the market decide where manufacturing takes place; we should focus on where installation takes place.
Installation will have not only a direct effect of creating temporary and permanent jobs to build and maintain plants, it will also have positive side effects. As manufacturing costs continue to fall, manufacturers are already moving operations closer to demand sources. First Solar is building another U.S. plant in Arizona, while SunPower (Nasdaq: SPWRA) and Suntech both operate U.S. plants.
As solar power becomes less expensive and gains market share, new technologies will also be needed to store power and eliminate the need for backup, a beneficial side effect. A123 Systems (Nasdaq: AONE) is among the companies working on grid storage, but until solar or wind are a significant portion of generation we won't need energy storage, a key to making it a reality.
What we should do
How should we invest in green jobs? We can start by building transmission lines to parts of the country that are windiest and sunniest to eliminate that roadblock from investment. Second, we can set up a renewable energy reverse auction for medium-sized projects, modeled after California's new system, in which states would set their own renewable energy goals. Finally, we need to encourage homeowners to take the leap into renewable energy. The government could do this by setting feed-in tariff rates for rooftop solar with a standard reduction in the rate based on how much is installed every six months, a la Germany's new feed-in tariffs. This would put construction workers to work, ease demands on an aging grid, and eventually bring manufacturing jobs to the U.S.
I hope President Obama outlines some smart investments in green energy tonight. It's the right thing to do, and it's long overdue.
What would you like to hear from Obama tonight?
