Renewable energy has been a hot political topic, but it has also been just as hot as an investment. We have seen tremendous growth in wind, hydro and geothermal energy production, but one of the more recent markets to catch fire has been solar. To see just how explosive this market really is, there is no need to look any further than a couple of solar module producers, Trina Solar (TSL: NYSE) and First Solar (FSLR: NASDAQ). These two companies have recently signed some major deals, and it has shown in their stock prices. These companies have seen huge run-ups in the past few months.

Let’s first take a look at Trina Solar. It has recently signed contracts with a German company and three Italian companies. These contracts have TSL set to deliver solar modules that will produce approximately 88-99 megawatts of power over the next three years.

Just on the news of these contracts, Trina’s stock jumped 16%, but this company was hot before these contracts even came out. TSL is up over 47% since the middle of June! But it isn’t the only one taking advantage of the solar boom. In fact, the story for First Solar is even more impressive…

First Solar, like Trina, produces solar modules. With the signing of its recent contracts, FSLR is set to manufacture and sell enough solar modules to create 658 megawatts of power by 2012. To make this number relevant to you, the total amount of solar energy produced in the U.S. amounts to approximately 400 megawatts.

This is an enormous deal, and to help make good on its end, First Solar has announced the production of a manufacturing plant in Malaysia that will have an annual production of solar modules producing 120 megawatts of power. This plant is set to come online in the first half of 2009.

After the news release of its most recent contracts, First Solar shares jumped 24%, but even more impressive is that it is up more than 180% since the beginning of May.

The solar market is still young, and there are still some amazing gains to be had. However, there is a completely different way to play this market and experience what might turn out to be the greatest gains of the solar rally yet to come…

What Do Commodities Have to Do with Solar Energy?

Commodities aren’t the first things that come to mind when you think of the solar market. Why should they be? The whole notion of renewable energy is based on the fact that it doesn’t use oil, coal, natural gas or other tangible assets to produce electricity. But there is big money to be made in gray gold…

Gray gold, or silicon, is the base semiconductor used in the production of over 85% of solar cells. Rapid growth in the use of solar energy has led to a very large increase in the demand for silicon. The problem is that refiners are really having a hard time in keeping up with this sudden increase in demand…

So Why Not Use a Substitute?

The idea of substitutes is very important because it can act as a price cap for certain items. For example, if the price of beef gets too high, people will start eating more poultry. If there is a feasible substitute, there is a limit to how high the price of an item can go before consumers switch to something else.

There is no reasonable substitute for silicon. It is the same reason that silicon-based semiconductors make up over 85% of the solar cell market.

The preferred form of integrated circuit is called a complementary metal-oxide semiconductor (CMOS) logic circuit. Producers use this kind of circuit because it has a much lower level of energy consumption than any other form of integrated circuit used in the solar industry. In other words, it becomes much more economical in the production of electricity when the integrated circuit consumes less energy.

Here’s the kicker: Silicon-based semiconductors are the only way you can make a CMOS logic circuit.

This is a very important notion, because it will allow for the price of silicon to run up as long as supply-and-demand fundamentals favor a bull market.

We’ll be closely monitoring how this all plays out…

Regards,
Nick Jones
October 31, 2007

P.S: One of the best in the business, Byron King, heads up Hulbert’s #1 ranked advisory letter of the past five years, Outstanding Investments. He is one of the absolute best supply-and-demand guys you will ever find.

Byron has been following this trend — along with everything else energy-related — for quite a while. He has worked hard to bring his Outstanding readers gains of 532%, 631% and even 749%.

Investing in Solar Energy was originally featured in the Penny Sleuth.

While the ultimate source of solar power may be solar power satellites (SPS) — a source quite capable of single-handedly supplying all the power humanity could ever want — MIT Technology Review reports that a new Earth-bound approach is causing quite a stir.

The silicon used to make most solar photovoltaic (PV) cells is costly. Researchers have attempted to reduce the use of silicon via solar concentrators. However, being large and conspicuous, these are hard to integrate into housing designs.

Prism Solar Technologies has figured out how to use holograms to concentrate light. This should reduce the silicon required by up to 85%, thereby making solar panels cost-competitive with fossil fuels.

That’s at today’s prices — as India and China rocket upwards in their demand for oil and related products, solar will begin to look cheap by comparison.

Instead of large concentrators, the Prism systems use flat panels that contain holograms. Not only do they fit on rooftops, but they also can even be built into windows and glass doors.

Also, they are beautiful, giving off pleasant shifting rainbows of color when viewed.

Unlike conventional solar panels, the PV material is arranged in rows. Specially designed holograms capture the sunlight and redirect it until it reaches a strip of photovoltaics. Researchers estimate this will reduce costs from about $4 per watt to $1.50.

The company seeks $6 million from venture capitalists this year, and plans to start manufacturing first-generation products before 2007. It will sell them at $2.40 per watt.

At least two more opportunities to strengthen this product offering exist. First, I am aware of a VC-backed startup that has developed PV material that sprays on like paint. This material, while probably not as durable as the Prism approach, could supplement it by capturing sunlight in odd locations and on curved surfaces.

Second, holograms are not as powerful as conventional concentrators. They currently multiply the light reaching solar cells up to tenfold. Lens-based concentrators have been demonstrated to be up to 100 times more effective.

I believe it’s just a matter of time before researchers devise ways to make holograms more closely approach the efficacy of concentrators. That will drop the cost of solar even further.

It’s fascinating to watch recent developments in solar power. Just a few years ago, I heard scientists and engineers decrying attempts to milk more power from photovoltaics. They simply didn’t think the technology was amenable to major improvement.

We now know that view was wrong. It’s reminiscent of the U.S. Patent Commissioner who once opined that everything worth inventing had been invented (this was a century ago).

Solar power is coming. I’m continuing to scan the horizon for the most commercially promising applications of technology.

On the business side, companies are ever figuring out newer and better ways to make the return on an investment in solar arrays viable. I currently have a solar power holding like this in my Emerging Capital Report portfolio and will be adding another shortly.

To your profitable future,
Jonathan Kolber
July 24, 2007

P.S.: If these ideas interest you I urge you to check out my newsletter, which is packed with all kinds of these plays. I also focus on small pharmaceutical companies that have some kind of secret competitive advantage.

Investing in Solar Energy was originally featured in the Penny Sleuth.