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How to cut your risk in solar power stocks

Solar power stocks have come a long way, but they expose investors to unique risks.

The attraction of solar power stocks is obvious—it offers a source of clean, endlessly renewable energy that has the potential to replace fossil fuels like oil, coal and natural gas. However, like many alternative energy sources, solar power’s vast potential has risk to match.

High costs mean many solar power stocks must rely on government subsidies

Right now, the technology used in solar power isn’t efficient or cheap enough to match the price of oil or natural gas—especially with today’s low oil and gas prices.    

Because of that price disparity, solar power relies heavily on government subsidies and political support. That support is based on environmental “clean” energy concerns and perceptions of climate-change urgency, as well as a push toward energy independence.

Many of these subsidies for solar power stocks seem likely to continue, at least for now, in China, Japan and the U.S., and that’s fuelling demand from utilities for large-scale solar plants. However, solar subsidies have lost support in many countries, including Germany and Spain. Meanwhile, low prices for oil, natural gas and coal make solar power less cost-competitive.

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Solar power has competition from alternative power sources. Short of radical advances in solar-energy technology, the long-term prospect for “grid parity”—the price at which it will be equally cheap to produce a kilowatt-hour of electricity from solar as from fossil fuels—relies in large part on the prospect of higher oil and gas prices pushing up the cost of electricity generated from those sources. When oil and natural gas prices fall, it makes investment in solar power less attractive.

Three solar power stock investing tips:

  1. Solar power is a rapidly changing technology. Solar power has attracted a lot of investment in recent years. That has quickly moved the technology forward. For example, advances in manufacturing techniques continue to steadily push down the prices of solar cells and solar panels. At the same time, alternatives to costly silicon, which is currently used in most solar cells, are emerging. These include copper-indium-gallium-selenium solar cells. Technology advances add considerably to the risk of solar-power companies that are focused on developing or making a single technology. That’s because they constantly risk being overtaken by competitors with a superior product.
  2. Solar power stocks have added risks compared to other companies. These include objections to the large amount of land needed for mass-power generation, and technical challenges surrounding power demand and variation. One way to lower that risk is to invest in green stocks that have a broad base of other business to offset solar-power risks.
  3. Solar power stocks and other green stocks are very tempting to environmentally minded investors. The idea of making money while helping the environment is noble, but it shouldn’t distract you from your core financial goals. After all, if you don’t care if you lose the money, you might as well donate it to an environmental charity and get a tax receipt for it.

Cut your risk by sticking with solar power stocks with a sound base of other operations

Risks like subsidy cuts are one of the main reasons why we continue to recommend that you focus on solar energy stocks that have a sound base of other operations to offset the added risks involved with investing in solar power. An energy company that is solely developing technology in solar power can be a very risky investment.

We encourage you to look at traditional energy companies that may also be using their research and development dollars to diversify into solar energy technology. We’ve written about finding hidden assets and research and development (R&D) in the past. Hidden assets and R&D can be very profitable for investors in the longer term.

Solar power stocks rely on subsidies

Solar energy is very reliant on government subsidies. Even though sunlight is free, solar power costs more to generate than power from traditional fossil fuels. The main reason is the high cost of building solar plants. This includes the cost of solar panels, mirrors, transmission lines and generators, as well as the cost to buy or lease the land to put them on.

Have you invested in solar power stocks? Have they been profitable for you? Have you found a traditional energy company that is spending money on solar energy technology development? Share your thoughts and experiences with us in the comments.

This post was originally published on May 31st, 2016 and has been updated.