DFN: According to Wikkipedia, an exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.
ETFs may also be able to more easily attract capital, than any one individual plant or company. From an investor’s standpoint ownership of a basket of goods is its inherently less risky than owning a single good. Not sure what the state gets out of this. Also, company’s may not like this as it makes there power supply more risky.
Renewable Auction Mechanism May Boost Solar ETFs
By Kevin Grewal Aug 31, 2010 9:40 am
Recently, the State of California proposed a decision to adopt to a renewable auction mechanism (RAM) which enables rates to be set by market-pricing. This could lead to a new avenue of growth for ETFs like the Claymore/MAC Global Solar Energy Index (TAN), the Market Vectors Solar Energy ETF (KWT) and the Market Vectors Glb Alternative Energy ETF (GEX).
This proposed subsidy is expected to work as a feed-in tariff, which will use market-rate pricing that’s 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’s 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’ll 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’s 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.