Impact of Oil Price on Solar Industry

The economics of solar electricity depend on one hand on public policy (through enforcement or subsidies) and on the other on the price of its alternatives, namely fossil fuels. To measure the dependence on the price for fossile fuels, we have compared share prices of solar and other companies with crude oil. Although electricity prices are more closely linked to natural gas, oil has the advantage of being a globally traded commodity and reflects the price changes of other fossile fuels well enough for this purpose.

Correlations

Based on weekly closes of share prices from January 2008 to March 2009 we calculated their correlation to the prices for Brent crude oil (North Sea) as well as West Texas Intermediate crude (USA).

We calculated correlations for nine solar pure-play companies: Q-Cells, First Solar, SolarWorld, Evergreen Solar, GT Solar, PV Crystalox, JA Solar, SMA Solar and Yingli Green Energy and also one closely related company, Linde. Correlations for these companies range from 89% - 96%. Note that "100% correlation" means prices would always move in step.

In comparison, Tesco's share price is much less dependant on oil with a correlation of 60%.

Surprisingly, the share prices of oil & gas companies BP and Shell do not strongly correlated to the oil price. Why is this? Firstly, the demand for oil does not vary much with changes in its price. Secondly, in most countries, oil companies do not profit from marginal price rises, as their profits are capped by national governments.

Conclusion

The share prices of solar companies are closely correlated to the price of crude oil. This probably reflects the capital markets' belief that the demand for solar electricity is mainly driven by the price of oil (as a proxy for price of energy). This strong correlation also means that Solar is a highly volatile sector. And indeed, the sector has seen some spectacular falls in 2008/09.