By Porter Stansberry

Saturday, January 17, 2009

This past week, I encouraged my Put Strategy Report subscribers to establish a short position in solar stocks.

Solar stocks are popular right now... so they have wildly inflated share prices. And I know the entire solar industry is a big con – it is impossible to efficiently use solar power and it always will be, thanks to the Second Law of Thermodynamics. Governments have tried to break the laws of physics because solar energy is popular, but all the subsidies in the world will never make solar energy viable as a reliable and efficient source of energy. That means solar stocks are ultimately doomed.

Meanwhile, even in the short term, so much money has been spent building solar-panel manufacturing facilities that the price of solar panels is falling below their cost of production – which will mean a terrible year for the makers of solar panels, especially the largest companies.

I'm facing a lot of skeptics who believe what Al Gore has told them about solar energy. But once you know the only real buyers of solar panels are governments (through subsidies and large direct purchases), you should immediately suspect the promise of solar power isn't what it's cracked up to be.

If everyone could power their homes by putting solar panels on the roof, everyone would want to do it. We wouldn't need tax incentives. Of course, that's not how it works. Instead, the cost to install and maintain a solar system far exceeds the economic value of what it provides. And the reason is basic physics, specifically the Second Law of Thermodynamics.

This is nature's version of "there's no such thing as a free lunch." The Second Law says energy moves from more useful forms to less useful forms, from more concentrated and powerful forms to more disparate and less powerful forms. In short, machines that promise to bring us the power of the sun by harnessing its rays won't work because by the time the sun's rays reach the Earth, not much useful energy is left. That energy won't return to a more concentrated form without the input of just as much additional power. You can't simply "reconcentrate" sunlight in any useful way. The concept breaks the fundamental laws of nature.

I'm not the only person who has doubted the functional utility of solar power. Another skeptic is Warren Meyer, who frequently blogs about free market economics, climate nonsense, and solar power, among other topics. Meyer is a Princeton and Harvard Business School graduate, but even those institutions didn't ruin his brain, which tells me he's a very smart guy indeed.

Al Gore has claimed, repeatedly, that if we were to build a 90-mile by 90-mile solar-panel facility in the Southwest desert, we would have enough electricity to power the entire United States. The claim is fantastic. If only we cared enough about the environment to build enough solar panels, then the world would be saved and power would be free! Al Gore is a masterful politician, which is to say he is a complete liar.

Meyer, who worked as an engineer for Exxon and an analyst with McKinsey, decided to run the actual numbers.

I assumed a third of the 8,100 square miles would be dead space between the panels, roads, transformers, access paths, etc. I assumed you put the installation in the best solar sites in the southwest, which yield on average about 6 peak-sun-hour-equivalents a day. I assumed a 20% loss in conversions and transformers. So 8,100 sq miles x 2/3 x 200 watt/12sq ft x 6 hours x 365 days x 80% (with necessary unit conversions thrown in) yields 4.08 billion Megawatt-Hours of electricity, which is about exactly our current US generating capacity. (Way to go! Al got a number right!).

But there's a significant catch. (Remember the Second Law of Thermodynamics...)

This does not cover elimination of fossil fuels in the transportation sector. And it does not address the problem of how you store this power at night, which of course is a catastrophic problem for the idea... Using the assumptions above and assuming that installation costs (with land acquisition, transformers, inverters, roads, mounting, installation, etc) is as much again as the panel costs themselves, the total installation would cost just under $21 trillion dollars. This is orders of magnitude [more than 10 times] more than a nuclear program of the same size would cost. And presupposes the environmentalists would let you cover 5 million acres of desert with metal and silicon.

Solar power isn't the answer to our country's energy needs – and it never will be.

While I don't know (and can't know) how long the current solar mania will last, I am convinced with oil selling for less than $50 a barrel again and with the economics of solar energy more and more apparent, we're near at least a short-term peak in the popularity of solar stocks. Most will fall 50%-75% in the next year or two.

How do you choose which solar stocks to bet against? Just like you would any other sector. Look for the most popular, high-profile players. Look for high price-to-book or price-to-sales ratios. But do it soon... A bet here is a bet on one of the surest trends in 2009.

Good investing,

Porter Stansberry

Market Notes

WHY NOBODY CARES ABOUT PENGUINS

A little punctuation on Porter's essay today... If you're betting against clean energy, you've got the trend on your side.

Our chart of the week – the past year's trading in the PowerShares Clean Energy ETF – shows this trend at work.

This "green" fund is loaded with inventive names like Suntech, Fuelcell, and Evergreen Solar. And as we highlighted several months ago, it's one of 2008's worst-performing investments... down 69%. Clean energy projects require huge sums of upfront investment... money that's running dry at the moment.

If the global economy continues to contract, expect demand for solar, wind, and geothermal
energy to go south. We'll say it again: When folks
are struggling to make mortgage and car payments,
penguins and ice caps take a backseat to coal and
crude oil.

– Brian Hunt

You Can Make Money from Al Gore's Big Lie

Market Notes

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