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Solar Stocks #1: Solar Indices

23.09.2017 — 0

Solar companies’ stocks have not been considered as a valid portfolio choice since the 2008/09 financial crisis, and then also suffered from the increased supply of Chinese producers in 2013–2015. However, some fundamental shifts have occurred since then that make investments into the solar stocks increasingly attractive.

First, since at least 2013 solar energy has become cost competitive with wind, and later also with traditional energy generation. As analysts described it,

For the first time, new solar power installations overtook wind energy capacity across the globe. That’s a huge win for the energy form and could finally signal solar’s return as a valid portfolio choice.

Typically, renewable energy has been regarded as too expensive and inefficient. Now it is becoming a viable option for consumers and businesses alike. While it is still more in demand when the price of fossil fuels is high, there are many ways to profit from renewables, and solar in particular, not necessarily by playing on oil fluctuations. Solar energy is gradually becoming more and more stable, detaching itself from both the prices of the fossil fuels and the involvement of governments in terms of subsidies and tariffs.

One of the signs of this evolution is the performance of solar financial assets. As solar industry acquire legitimacy, consumer acceptance, and governmental support, it is becoming more established in the financial markets. There are lots of solar companies listed on major stock exchanges, including NYSE, LSE, and NASDAQ, several major exchange-traded funds (ETFs) with stakes in the solar industry, and a plenty of indices in solar and renewable energy as a whole.

It is important to be in touch with conventional financial markets when investing in solar crypto-assets. With this article, Solar DAO begins a regular series of articles about solar finance, and how solar assets perform.

Key Factors to Solar Investments

There are many factors behind the recent misfortunes of solar industry, including a sharp decrease in demand from China and lowered tariffs in Japan, as well as the uncertainty surrounding the Trump’s administration’s policies in the field of renewables in the US, inter alia. However, there are more fundamental factors that suggest that solar is a viable option for the future, in spite of the conjunctural forces operating at the moment.

These include:

  • Clean solar energy promotes energy security, public health, and a cleaner and safer environment.
  • Solar energy is one of the very few long-term solutions for the world’s energy needs with zero operational pollution/CO2 emissions (versus fossil fuels), free fuel from sunlight (versus coal and natural gas fuel costs), and near-zero operational risk (versus nuclear disasters).
  • Solar is a distributed source of electricity that helps protects home and business owners from the grid disruptions and from electric utility rate increases.
  • $4 trillion in new global electricity generation is needed by 2030 (IEA), which means there is a huge market with decades of rapid potential growth for solar.
  • Solar energy has already become a major global industry with $77 billion of sales in 2012, according to IHS, representing compounded annual growth of 33% since 2000.
  • Solar energy costs have plunged in the past several years and will continue to decline in coming years in line with improved technology, thus dramatically improving solar economics for consumers and boosting global demand and unit sales.
  • Solar is becoming ever less dependent on government incentives due to falling solar costs and is already grid-competitive without subsidies in many geographical areas and in even more areas during peak electricity demand times.

Now let’s have a look at the two major solar indices.

Major Solar Indices

Similarly to other renewable energy / alternative energy indices, they share several important features worth bearing in mind:

  • Focussing on either clean energy or alternative/renewable energy more broadly
  • Focussing on pure play companies which are principally engaged in the field of alternative energy, thus excluding those firms which diversify by means of investing in this field and have main business elsewhere
  • Using a rule-based approach, that is, they rely on clearly defined methodology overseen by an impartial Index Committee, and employ a pre-defined screening methods that ensure consistency and transparency of index inclusion process
  • Striving to include all companies that fall under the pure play category within a given market, region, or on the global scale

The indices we’re going to look at are MAC Global Solar Energy Stock Index and Arbour Solar Energy Index.

Arbour Solar Energy Index

Arbour Solar Energy (SOLRX) consists of the stocks of 15 solar companies, most of which are classified as belonging to information technology (97.09%), and the rest is in industrials (2.91%). SOLRX portfolio is diverse and includes companies from China (33.97%), Taiwan (20.72%), and Thailand (0.69%), United States (21.35%) and Canada (10.87%), as well as some European countries such as Norway (5.36%) and Germany (7.03%). The index is most heavily invested in the chinese Jinko Solar Holdings Co Ltd and GCL-Poly Energy, the U.S.-based First Solar, and Canadian Solar. Compare this with the data from our recent post on the global value chain of photovoltaics!

The full list of the index constituents follows below.

MAC Global Solar Energy Stock Index

MAC Global Solar Energy Stock Index (ADSNRG) is a global passive solar energy index consisting of qualified solar stocks that are listed on exchanges in developed countries. It includes all solar technologies, including crystalline and thin-film photovoltaics and solar thermal energy, and covers the entire value chain from raw materials and manufacturing to installers, solar power plant operators, financing and others (see our recent post about the value chain in photovoltaics). It also covers related solar equipment like inverters, encapsulates etc. Liquidity minimums for initial inclusion in the index is at least $150 million market cap and $750,000 in 1-month average daily trading value. Quarterly index review are published on third Friday of March, June, Sep, Dec.

The following table shows the constituents of the index. In the aggregate terms, it is quite diverse: 40% of companies are headquartered in Asia, 40% in North America, and 20% are European. In terms of the exchange listings, the situation is biased towards North American exchanges, where 60% of the ADSNRG stocks are listed, while Europe and Asia have equal shares of 20% of companies on their exchanges. The distribution of stock currency reflects the geographical distribution of exchanges: 60% USD, 20% HKD, 8% EUR and 8% NOK, and 4% CHF. Similarly to SOLRX, 60% of the stocks in ADSNRG portfolio are in the field of information technology, while 28% are in renewable electricity, 8% industrials, and 4% REIT. Most of the companies (76%) included are small cap companies (less than $1 billion), while 24% are mid cap ($1 to $5 billion).

As seen from the charts above, both indices are gradually recovering, so it might be the time to bet on solar. Anyway, if you have invested in Solar DAO, it is good to have a look at the indices to see how the industry is going.

Next time we’ll post on solar Exchange Traded Funds and listed companies. Stay tuned with Solar DAO.

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