Recently, the State of California proposed a decision to adopt to a renewable auction mechanism (RAM) which enables rates to be set my market-pricing, which could lead to a new avenue of growth for ETFs like the Claymore/MAC Global Solar Energy Index (NYSE:TAN), the Market Vectors Solar Energy ETF (NYSE:KWT) and the Market Vectors Glb Alternative Energy ETF (NYSE:GEX).
This proposed subsidy is expected to work as a feed-in-tariff, which will use market-rate pricing that is being set and driven by a bidding process, as opposed to utilizing rates that are being set and driven by the California Public Utilities Commission. A major goal of this new subsidy is to enable developers of solar power to furnish adequate returns and to soften the blow to ratepayers which are being overburdened by excessive subsidies. If this can be achieved, it is expected that the solar industry will see a massive expansion.
As for now, the program is expected to be relatively small with an initial scope of 1,000 megawatts over the first two years, with the electricity being delivered to one of California’s three primary utilities through standardized must-take contracts. As for the auctions, they will be scheduled to take place every 180 days, with each auction allocated 250 megawatts to each of the three California utilities.
Although hopes of this new subsidy are strong and are expected to enable solar power to further penetrate the alternative energy markets, it is equally important to consider the risks and volatility that come with the sector. Furthermore, this risk and volatility in the sector has been enhanced by companies that are unable to generate stable cash flows and the dependence on heavy technological advances in the future.
If investing in solar energy, it is important to have an exit strategy which identifies specific price points at which downward price pressure is likely to be seen. Such a strategy can be found at http://www.smartstops.net/.
As mentioned earlier, some diversified ways to gain access to companies set to benefit from the proposed subsidy such as First Solar (NYSE:FSLR), Yingli Green Energy Holdings (NYSE:YGE), Trina Solar (NYSE:TSL) and MEMC Electronic Materials (NYSE:WFR) include:
- Claymore/MAC Global Solar Energy Index (NYSE:TAN),
- Market Vectors Solar Energy ETF (NYSE:KWT)
- Market Vectors Glb Alternative Energy ETF (NYSE:GEX), which is a diversified play on alternative energy but include First Solar and Trina Solar Limited in its top holdings.
Written By Kevin Grewal from Smart Stops Disclosure: No Positions
Kevin Grewal serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton.