Ethical investment: Articles

According to some pundits, 2004 may well be remembered as the watershed year for solar energy.

It was the 50th anniversary of the solar cell, but it was also a year when the solar energy industry showed clear signs that it was approaching the so-called 'tipping point' between being a niche alternative energy source, and a commonly used technology.

Experts say the market for solar photovoltaics (PVs) will grow from the current $7 billion to in excess of $30 billion by 2010. With annual growth rates exceeding 30%, and expanding profit margins, solar PV has the potential to become one of the world's fast-growth, profitable industries.

The word 'photovoltaic' is a marriage of the words 'photo' (light) and 'voltaic' (which refers to the production of electricity). Electricity, as we all learned in physics classes, is the existence of negatively-charged particles called electrons, and certain materials (semi-conductors) can be used to release electrons when they are exposed to the light. One of the most common of such materials is silicon, employed by 98% of PVs today. All PV cells have at least two layers of such semi-conductors: one which is positively charged, and one which is negatively charged. When light shines on the semi-conductor, the electric field across the junction between these two layers causes electricity to flow - the greater the intensity of light, the greater the flow of electricity.

The industry is expanding rapidly, and attracting high profile interest. In November last year UK Prime Minister Tony Blair turned up in Manchester to switch on the lights at the Cooperative Insurance Society Solar Tower, the largest solar project of its kind to be undertaken in Europe. It incorporates 7000 PV panels and can generate enough electricity to make 9m cups of tea.

But landmark solar energy projects aside, in 2004 the world's 24 publicly traded solar companies saw their shares jump by almost 185%, and in 2005 there were 20 IPOs scheduled for other firms in this area of technology. Good examples of major players in this sector include Sharp, Kyocera, and Tokoyama in Japan, SolarWorld in Germany, and Q-Cells and Evergreen Solar in the US.

"Until recently, few analysts followed this industry," says Rona Fried, editor with Progressive Investors, the US-based sustainable investment newsletter. "Now, especially because Sharp is investing heavily in the field - with an impressive annual growth rate of 63%, and with solar contributing to about 15% of operating profit by the end of next year - they are incorporating solar into their financial models. Institutional investors are also showing great interest."

According to Fried, the arrival of solar energy on the mainstream radar will take several more years, and while total installations are still a speck on the landscape of the mammoth amounts of energy consumed by the world's population, all the pieces now seem to be in place for it to break through to rapid commercialisation. Interest in solar energy is now growing rapidly, thanks to advances in the technology, combined with the rising costs of fossil fuels. "The industry is ready to hurtle through the barriers of demand, cost, and capacity that have been holding it back," Fried argues.

For every doubling of megawatts of manufacturing output, the cost of producing PV modules decreases by about 20%. If the market experiences the forecast annual 30% growth over this decade, costs would drop by more than 5% per year. Solar plants are also becoming increasingly automated and are using fewer materials, thus cutting costs. Solar costs are themselves actually now competitive in many markets when compared to the retail cost of electricity, rather than the cost of generation. In Japan, for example, where the retail rate runs at about $0.25 per kilowatt hour, solar energy looks great.

Tony Blair's presence at the CIS Tower in Manchester is significant, however. Government policy is seen as being a key driver in the ongoing growth of the solar PV industry. In the 10 years since the Japanese government started backing PV production, the country has positioned itself as the world leader in both production and installation of solar cells. Solar installations in Japan account for half the global total.

Japan's 70,000 Roofs Program was launched in 1994 with the government paying for half the cost of installing residential solar panels. As production increased, the cost of solar panels fell, and central government was thereby able to reduce the subsidy. It currently stands at 10%, and there are plans to phase it out this year. The Japanese government has also extensively supported research and development, demonstration programs, and net metering (paying for excess energy fed back into the grid). Even without subsidies, growth continues at a 30% clip, with Japanese banks lowering mortgage rates by 1-2% for house buyers that install PVs.

Closer to Europe, Germany has also enthusiastically embraced PVs, again via the generous payment of government subsidies. The fact that manufacturing solar cells is more labour-intensive has also pleased Germans, with their high unemployment rate. In Germany's case, the government offered low-cost loans to purchase solar panels under its 100,000 roofs campaign, but also under its 1999 Electricity Feed-in Law, it purchased solar energy at €0.574 per kWh, a rate it guaranteed for 20 years. The average German solar installation has grown from 2.5kWh to 7.5kWh as citizens turn their homes into power plants.

The upshot of all this is that the European parliament is now looking at the German model with a view to introducing an EU-wide scheme. Government intervention is seen as decisive in helping to kick-start a solar energy industry, which thus far seems to be one evolving from the grass roots enthusiasm of retail consumers for 'clean' energy in the developed world. Whether the likes of the UK or indeed the US choose to follow the Japanese experience remains to be seen, but for investors keen to ensure their portfolios are taking on a more environmentally responsible caste, such a sector may well be worth a closer look.