Solar Industry Facing Supply Bubble: Analyst

The world is facing a massive over-supply of solar panel capacity, and one analyst says that’s likely to lead to big declines in solar panel prices and the stocks of solar companies this year.

Solar panels cover the rooftop of the Staples Center sports complex in Los Angeles, California.
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Solar panels cover the rooftop of the Staples Center sports complex in Los Angeles, California.

Gordon Johnson, Managing Director and senior equity research analyst at Axiom Capital says global solar capacity will jump from roughly 40 gigawatts in 2010 to about 61 gigawatts by the end of 2011. According to him, even by the most bullish of estimates, demand is only going to be 20 gigawatts this year.

As a result, he’s predicting big declines in earnings for the sector and recommends selling solar stocks.

“We're in a structurally over-supplied market and prices still have a long way to fall,” he told CNBC. “We think that's going to weigh on [earnings per share] and we think companies are going to have to revise down Q2 numbers.”

Despite the drop in prices, Johnson doesn’t expect demand to pick up. That’s because, he says, demand in the sector is inelastic and doesn’t change in the short-term. Solar technologies are long-term investments, and investors will wait for the lowest prices possible at a stable level before cashing in.

Optimism towards cleaner energy due to the backlash from the nuclear disaster in Japan will also do little to push solar demand higher, according to him. That’s because nuclear power is baseload power, meant to supply continuous energy at low marginal costs, while solar power is peakload, which supplies intermittent power at higher marginal costs.

“I think it's a big misconception by the investment community,” Johnson explains. “It's impossible to replace nuclear with solar, you can't replace baseload with intermittent power, any person who understands utility will tell you that.”