Investing Daily Article of the Week

by Chad Fraser, Investing Daily

Reports of solar power's death are greatly exaggerated.

That's the thrust of two recent reports from the International Energy Agency (IEA). Taken together, they say solar could be the world's top electricity source by 2050, beating out wind, hydro, nuclear-even fossil fuels.

By the middle of the century, the global energy watchdog says solar photovoltaic systems-including household rooftop setups-could be quietly churning out up to 16% of the world's electricity. Concentrating solar power (CSP) plants would chip in another 11%.

Of course, any attempt to predict energy markets 35 years in the future is something less than a crapshoot, and the IEA is careful to point out that these aren't forecasts. Instead, it refers to them as "roadmaps" designed to show the policies and technological leaps needed to hit these targets.

But outlandish or no, these "roadmaps" did focus attention on the fact that the solar business is on the upswing-and investors ought to be paying attention.

Solar Power by the Numbers

The IEA's news comes after the June release of REN21's Renewables 2014 Global Status Report, which contained even sunnier figures. Robert Rapier, chief strategist at our Energy Forecaster service, calls this yearly report card "the most comprehensive report available when it comes to the renewable energy picture."

Here are four things it revealed about the solar photovoltaic industry's growth last year:

• Globally, installers added more than 39 gigawatts (GW) of solar PV capacity in 2013, bringing the total to 139 GW;
• U.S. installations rose 41%, spurred by falling prices and new financing arrangements, like those offered by rooftop panel provider SolarCity (NasdaqGS: SCTY), with low-to-no upfront payments;
• Almost half of all currently operating global solar PV capacity was added in the past two years; 98% has been installed since the beginning of 2004;
• 2013 marked the first year the world added more solar PV than wind capacity.

A big growth driver is, unsurprisingly, lower costs.

Consider that the price of a rooftop solar PV system has fallen 29% from 2010 to 2013. When you add tax credits, rebates and other incentives into the mix, the total bill can now come in below $10,000.

But that's not the only reason to be bullish on solar.

The industry is poised to benefit from the new U.S./China climate agreement, under which the U.S. aims to cut its greenhouse gas emissions to 26% to 28% below 2005 levels by 2025.

China, for its part, is targeting an emissions peak around 2030 and aims to boost renewables to 20% of its power mix by the same date. That means it will have to deploy 800 to 1,000 GW of renewable power-or about the same as America's total generation capacity today.

Why Investors Closed the Blinds on Solar Stocks

Despite its strong growth, many investors have written off solar-and with the turmoil that's gripped the industry since the Great Recession, it's hard to blame them.

For some, the solar business still starts and ends with the name "Solyndra." As you no doubt recall, that's the California-based startup that famously went bust in 2011 after securing $535 million of government loan guarantees. The situation quickly morphed into a political football that cast a shadow over public support for renewable power.

That was far from the worst of it, though: solar panel makers also faced the double-whammy of falling government subsidies, particularly in Europe, and a glut of cheap Chinese panels that forced some, including Solyndra, into bankruptcy.

The upside? The glut squeezed out weaker players and pushed others-includingEnergy Strategist recommendations SunEdison Inc. (NYSE: SUNE) and First Solar Inc. (NasdaqGS: FSLR)-into the more profitable business of building and operating utility-scale solar farms.

To be certain, solar investing isn't for the faint of heart, and the sector still faces significant risks, like competition from cheaper fossil fuels (including natural gas from the shale boom) and, of course, ever-shifting political winds.

But if you're looking to add solar exposure to your portfolio, Rapier feels SunEdison and FirstSolar are more than worthy of your attention.

2 Solar Flares for Your Portfolio

On the surface, First Solar and SunEdison look pretty similar. Both are solar project developers with a global reach (though First Solar retains a manufacturing business based on its own technology).

Both are also based in the western U.S. (First Solar in Arizona and SunEdison in Montana) and boast comparable market caps (about $5.0 billion for First Solar and $6.2 billion for SunEdison). Both stocks are also relatively volatile, with SunEdison sporting a beta rating at 4.95 and First Solar clocking in at 3.25. (Stocks with a beta of 1 are as volatile as the market, while those below are less volatile.)

But there are some key differences, as well.

One is each company's approach to so-called yieldcos, a relatively new phenomenon in the renewable power sector. SunEdison spun off its yieldco subsidiary, called TerraForm Power Inc. (NasdaqGS: TERP) in July, while First Solar is still deciding whether to follow suit.

Under the yieldco model, developers sell new projects to their yieldco subsidiary and use the proceeds to build additional plants. The yieldco, in turn, uses the cash flow from these projects to buy new plants (from the parent and other companies) and pay dividends to investors.

A Mighty Wind

On November 17, SunEdison shares soared 29% on news that the company and TerraForm are entering the wind business through their $2.4-billion acquisition of Boston-based First Wind.

SunEdison's cash outlay on the deal will total just $696 million, with another $340 million accounted for via a seller note-essentially an IOU from SunEdison. The company will pay an additional $510 million depending on the performance of the wind portfolio. TerraForm will chip in the remaining $862 million.

The deal increases the generating capacity of the renewable power plants SunEdison can complete in 2015 to about 2.2 GW from 1.7 GW.

"Effectively, the company is engaged in asset arbitrage, buying renewable projects on the cheap-ish and selling them for a lot to investors in the TerraPower yieldco,"wrote Rapier in a November 19 Energy Strategist article.

Analysts, for their part, lauded the deal, with Deutsche Bank estimating at least a 50% markup by SunEdison on the First Wind assets dropped down to TerraForm.

"The reception accorded to the deal illustrates the value of yieldcos to their sponsors. It's the reason we made SunEdison a Best Buy in the first place," wrote Rapier.

The bottom line? First Solar, a recommendation of the Energy Forecaster Growth Portfolio, rates a buy under $65. Aggressive Portfolio holding SunEdison is a buy under $25.

4 Terrific Stocks to Buy for 2015

2015 is shaping up to be a great year for solar-but it could be even better for oil stocks.

You read that right: oil stocks.

Many solid companies have been (unfairly) punished in the selloff-but they won't stay down for long. Energy investing expert Robert Rapier has zeroed in on four in perfect position for a huge profit bounce. Your average upside: 52% in 18 months or less.

Don't miss out.