Investors in the solar industry have needed a strong stomach this year, and that’s unlikely to change soon.
Falling prices fo
r solar panels amid slackening demand in Europe and a faltering global economy helped to push three U.S. companies into bankruptcy, including Solyndra, the solar panel maker that received $535 million in federal loan guarantees.
The Market Vector Solar Energy exchange-traded fund, as of mid-October, was down some 58 percent compared with a 3 percent drop for the Standard & Poor’s 500.
For now, analysts expect solar will continue to struggle, and that several more firms in the U.S. and Europe could disappear.
That survival-of-the-fittest period should end by the second quarter of 2012, however, analysts expect the solar industry can turn around and eventually thrive as new markets in China, the U.S. as well as elsewhere in Asia, Southeast Asia and the Middle East begin to grow, and as solar becomes less reliant on government subsidies.
“What we’re seeing is that falling panel prices are making solar PV (photovoltaic) more cost-effective today,” says Colm O’Connor, portfolio manager at Kleinwort Benson Investors, subadvisor to the Calvert Global Alternative Energy Fund. “In some markets we see solar energy becoming competitive, minus subsidies, with retail electricity prices in 2012.”
For now the industry’s troubles are worse than the broader market because seven-tenths of the 100 percent growth the industry experienced in 2010 was driven by accelerated demand in Europe.
That demand has fallen off amid the euro-zone’s economic travails, shrinking bank lending in Europe, and a decrease in government solar subsidies in two of the industry’s biggest markets last year, Germany and Italy, say analysts.
To Jesse Pichel, a clean-tech analyst at Jefferies, the biggest culprit is a tight lending environment, in which banks “view solar as a low priority,” and buyers wait for panel prices to hit bottom.
“If we can get some improvement to consumer sentiment and financing, this industry should explode, and I would anticipate we would have very strong growth on the other end of this financial recession that we’re in,” Pichel says.
Prices And Profits
For now, profit margins for many companies are suffering from tumbling prices. The trend has been exacerbated by growth of efficient, low-cost producers in China, analysts say. (Some solar companies assert China is unfairly beating the U.S. on pricewith the help of government subsidies, and is dumping product here below cost).
Solyndra, for instance, “was based on a business model and was able to get funding for a $2 per kilowatt hour cost structure,” says Stephen Simko, as senior stock analyst at Morningstar. “Clearly that’s not a winning proposition.”
The other problem is investors and installers are reluctant to commit to new projects if they think prices are still falling, says O’Connor.
In 2008, the then-faltering solar market was lifted from the doldrums by generous subsidies in Italy. But governments struggling with weak finances are unlikely to step up and spur the market with subsidies today, analysts say.
Instead, analysts expect falling prices will eventually make solar a more cost-effective alternative energy source, widening its appeal and creating demand from a wider array of countries.
New demand will come from what O’Connor describes as emerging solar markets, mainly China and the U.S. Smaller markets in Malaysia, Thailand, India and the Middle East will also emerge.
“This is a healthy development as it reduces the concentration risk and subsidy risk associated with European installations,” says O’Connor.
Signs of a more diverse market are already emerging.
“This year you have potentially five to 10 markets that could install 200-500 megawatts (each). The UK has come out of nowhere and may install 300 megawatts this year. If you put those together you get to 1 to 5 gigawatts of demand which compares to the 2.3 gigawatts Italy installed last year,” says Matthew Page, a portfolio manager at the Guinness Atkinson Alternative Energy fund.
“The real bears will say no growth” in 2011, Page adds. “I think we can easily see 20 percent growth.”
US Vs. China
The companies destined to benefit from any turnaround will be low-cost, efficient producers, and companies that offer cutting edge, cost-effective, new technologies, analysts say.
U.S. companies can’t compete against the scale and efficiency offered by China’s low-cost, automated producers, such as Trina Solar, Yingli Green Energy, and Suntech, many analysts say, but they can offer advanced technologies.
O’Connor points to the thin-film technology developed by First Solar, a technology General Electric will be using in a new $300 million, 400-megawatt plant in Colorado.
Another is SunPower, which makes high-conversion efficiency solar modules, although some analysts view SunPower’s technology as too costly.
Simko at Morningstar believes the U.S. now has the technological edge, as companies pour resources into research and development. An example is MiaSolé, a Silicon Valley start-up, funded by venture capital, which makes copper indium gallium selenide, CIGS, thin-film solar modules and recently struck an agreement with Intel to build a factory
“If you take a longer view, you could start to see some improvement in existing solar technology start to emerge, and if it does, that will come from the U.S.,” he says.