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Canadian Solar, whose solar panels are seen in Guelph, Ont., has evolved into a company with a growing business building solar power plants for utilities and large power users.

The Globe and Mail

The sun has been shining on shares of solar energy companies this year as converging trends have heightened interest in the industry.

Case in point: the US$1.3-billion Invesco Solar ETF (TAN-A), which is a good proxy for the sector, is up 62 per cent year to date as of early September and 130 per cent since its mid-March low.

“Solar energy is a poster child for the life cycle of a new industry,” says Jason Bloom, director of global macro exchange-traded funds strategy at Invesco Ltd. in Chicago. “We had sky-high hopes 10 years ago, but everyone was wrong about the profitability timeline. Now, we have reached maturity.”

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Mr. Bloom and John Cook, president and chief executive officer at Greenchip Financial Corp., a Toronto-based asset-management firm that focuses on green investing, say several forces are behind the trend. Two decades ago, solar was a new technology going through rapid evolution and dependent on government subsidies to make economic sense. The industry no longer needs that financial support and technological improvements have made solar energy the cheapest source of energy in some parts of the world.

“Growth is going to be way bigger than people think,” says Mr. Cook, who believes we’re in the early stage of a historical transition away from fossil fuels. “Even after this year’s gains, there is value to be found.”

Greenchip Global Equity Fund has $130-million in assets under management (AUM) as of Aug. 31 and is held mostly by pension funds, endowment funds and corporations. Greenchip also subadvises Mackenzie Global Environmental Equity Fund, which has similar holdings, but with a smaller minimum purchase. The Mackenzie fund has $113-million in AUM as of Aug. 31.

Greenchip holds all renewable energy, not just solar, as well as technologies that improve energy efficiency in the funds. Solar and related components are about 19 per cent.

The Invesco ETF has 100 per cent of its holdings in solar and solar equipment, and the strategies between the two funds differ. About half of the Invesco ETF’s holdings are in the U.S., with roughly a quarter each in Asia and Europe. Greenchip’s allocation is reversed: 40 per cent is in Europe, followed by 23 per cent in Asia and 17 per cent in the U.S.

Mr. Bloom believes that China-based companies excel at the cheap manufacturing of solar panels but aren’t as good at making the equipment that controls power plants. That includes inverters, which are the brains of the systems that monitor and manage solar arrays. North American companies offer superior quality, he says.

“Chinese inverters tend to be less sophisticated and less reliable,” Mr. Bloom says.

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Both Mr. Cook and Mr. Bloom agree that the move by a handful of players, already listed in the U.S., to seek a dual listing in China, has helped push share prices up.

“Investors are looking at these companies with fresh eyes and seeing that they’re cheap relative to their assets and prospects. That’s given the stocks a huge lift,” Mr. Cook says.

Canadian Solar Inc. (CSIQ-Q), based in Guelph Ont., is part of the dual listing trend. Its stock has been trading on the Nasdaq Stock Market since 2006 and the company announced in late July that it’s seeking a listing for its modules and system solutions business on either the Shanghai Stock Exchange’s Science and Technology Innovation Board or the Shenzhen Stock Exchange’s ChiNext Market. Its shares jumped 8 per cent on the day of that announcement.

JinkoSolar Holding Co. Ltd. (JKS-N), the world’s largest manufacturer of solar panels, was listed on the New York Stock Exchange in 2010. It was added to the Shanghai Stock Exchange’s Science and Technology Innovation Board in May. Daqo New Energy Corp. (DQ-N), which makes polysilicon that companies like Jinko and Canadian Solar use to make solar panels, has also announced its intention to list on that exchange.

Mr. Cook says the dual listings have put the sector in a spotlight, which has helped create new perceptions of value for the companies.

For example, he says Canadian Solar has evolved from a company making solar panels to one with a growing business building solar power plants for utilities and large power users. It began construction of two solar power plants in Japan in February and has since signed commitments for two more each in Texas and Brazil.

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Yet, the value attributed to Canadian Solar is mainly from its solar panels business, says Mr. Cook, which ignores the power plant potential. In its latest reporting period, Canadian Solar beat estimates for revenue and earnings, but its price to earnings ratio sits at 8.

Solar energy has another edge when compared to other sources of renewable energy in that solar power plants are cheaper and faster to build than hydroelectric ones. That has made solar an increasingly attractive option for utilities, which are under pressure from activists to replace fossil fuels with renewable power.

“This trend is a huge tailwind,” Mr. Bloom says, “In Europe and the U.S., where there is a huge focus on reducing pollution and carbon emissions, you have a conviction among asset managers that this is the way to go. It’s forcing the transition.”

Favourable government policy around the world is another push. That includes U.S. presidential candidate Joe Biden’s US$3-trillion green energy plan.

Mr. Bloom says investors should keep an eye on other sources of renewable energy, including hydrogen fuel cells. He believes they’re a better bet for heavy transportation than the lithium-ion batteries used in electric cars.

“Lithium-ion batteries are not in the future of long-haul trucking or aviation,” he says. “That’s because it means stopping too often to charge.”

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He also sees opportunities beyond current trends.

“There’s an operating power plant in China that takes the pollution from a steel mill and feeds it bacteria that makes hydrogen,” Mr. Bloom says. “That’s incredible. Green energy is coming in a lot of different forms. It’s a very exciting sector.”

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.

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