Is solar energy a good investment? Learn the best ways to evaluate investments in solar and other alternative energies while discovering how much you already know

The attraction of solar power is obvious for alternative energy stock investing—it offers a source of clean, endlessly renewable energy that has the potential to replace fossil fuels like oil, coal and natural gas. However, like many alternative energy sources, solar power’s vast potential has risks to match. High costs mean many solar power stocks must for the most part rely on government subsidies.

Is solar energy a good investment? Test your knowledge below.

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 A. What are some of the main reasons driving investor interest in solar energy as an investment?

1. There is a lot of conceptual and emotional appeal
2. Alternative energy stocks are very profitable
3. Speculating in these stocks always pays off
4. All of the above

You are correct if you answered 1.

Wind power, solar power and other alternative energy sources have a lot of conceptual and emotional appeal as clean, renewable and environmentally friendly power sources.

However, while the technologies do have real prospects for contributing to power needs, they generally offer limited investment potential.

B. Is solar energy a good investment for extremely conservative investors looking for energy stocks?

1. Yes, because they have a lot of potential
2. No, because they are too speculative
3. More often than not because they are safe investments
4. Yes, because it is important to diversify energy sources

You are correct if you answered 2.

Solar stocks may attract a lot of investor interest and go through flurries of speculation that can drive up share prices, at least temporarily. But many smaller companies have yet to generate the return on capital that you need for a profitable long-term investment.

Solar power stocks are very tempting to environmentally minded investors. The idea of making money while helping the environment is noble, but it shouldn’t distract you from your core financial goals. After all, if you don’t care if you lose the money, you might as well donate it to an environmental charity and get a tax receipt for it.

 C. True or false: Solar energy investing is a form of theme investing?

You are correct if you answered “True.”

An interest in solar energy stocks is an example of theme investing. Theme investing can pay off from time to time. However, theme investing can turn out badly for investors, especially those who get in late or forget about investment quality.

Themes like alternative energy stocks can cause you to overlook crucial details. A key problem is that if the theme is your overriding investment consideration, it’s all too easy to get sloppy about the details. You may be interested in environmental preservation, but that doesn’t mean you should invest.

 D. Some common risks associated with solar investing include:

1. Reliance on government subsidies
2. Competition from alternative power sources
3. Rapidly changing technology
4. All of the above

You are correct if you answered 4.

Solar power relies heavily on government subsidies and political support. That support is based on environmental “clean” energy concerns and perceptions of climate-change urgency, as well as a push toward energy independence.

When oil and natural gas prices fall, consumers are less likely to invest in solar power companies. Solar power also faces competition from nuclear power. Right now, nuclear is largely out of favour in the U.S., but China and India are steadily moving ahead with their plans to build a large number of nuclear power plants.

Technological advances add considerably to the risk of solar-power companies that are focused on developing or making a single technology. That’s because they constantly risk being overtaken by competitors with a superior product. As well, customers may hold off purchasing solar equipment if they believe a new technology is about to emerge.

 E. A worthy renewable energy investment should involve which of the following?

1. A well-financed company with no need to sell shares cheaply
2. An experienced management team with proven ability
3. A company that is investing in research and development and the latest technology
4. All of the above

You are correct if you answered 4.

While selecting top renewable energy investments, look for well-financed companies with no immediate need to sell shares at low prices. These stocks typically have strong balance sheets with low debt.

We look for an experienced management team with a proven ability to develop renewable energy. We also make sure they’re not in any insecure or politically unstable regions.

Successful renewable and “green chip” stocks use steady research spending to come up with pioneering technological advances—and successful investors now recognize that research and development spending is a valuable hidden asset. When they do it right, research and development spending is more like a long-term investment than an expense. In some cases, the seemingly high-priced renewable energy investments may be cheaper than they appear at first glance, if you give them some credit for the funds they invest every year in research and development.

Use our three-part Successful Investor approach to make better stock picks—including energy stocks

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

Solar energy use has increased significantly over the past decade. Does this spur you to invest in it?

What do you think is the most pervasive problem with solar energy investments?