Blue Skies or Dark Clouds Ahead for Solar?

Joel Anderson |

solar, solar power, China, Solyndra, Steven Chu, DQ, F, FSLR, JKS, NSANY, SOLA, SPWRA, Obama, energy, energy and commerce committee, PV cells, panels, photo voltaic, polysiliconU.S. Energy Secretary Steven Chu appeared before the House Energy and Commerce Committee Thursday to answer questions on the decision by the energy department to award over $500 million in federally guaranteed loans to the now bankrupt solar company Solyndra. The company's public failure has given red meat to budget-conscious Republicans and renewable energy naysayers. However, digging deeper, what does the public failure of Solyndra really mean for the broader solar industry?

Solyndra Collapse

The bankruptcy of Solyndra has proven to be a political hand grenade for the Obama administration, and the embarrassing revelation of the promise of government loans despite a flawed business model has led to serious questions about what role government should play in the market. Solyndra's business model was oriented around one key factor: the high price of silicon. In 2008, polysilicon, a crucial component in the manufacture of traditional photo voltaic (PV) cells, was trading at $475 a kilogram. Solyndra had developed technology for a new tubular solar panel that did not utilize polysilicon. While the shape was also innovative, the company was clearly making a firm bet that their panels would be able to compete in a marketplace where the price of traditional PV cells remained high because of low polysilicon supply.

This was a poor decision. In the last three years, the top five producers of polysilicon all doubled their production and the price cratered, now trading at just over $30 a kilogram. Solyndra was left with a business model based around high-tech solar panels that, with dropping polysilicon prices, were much more expensive than those of their competitors. What's more, the tubular shape prevented the panels from being used on residential roofing or in large solar farms. With their panels essentially useless and completely priced out of the market, Solyndra collapsed, taking down the $500 million in loan guarantees with it.

Made in China

The collapse of Solyndra is clearly linked to another major issue for American solar companies: China. The availability of cheaper Chinese solar panels has devastated American companies that, for the most part, had been betting on success through better technology and higher quality product. Now, the industry is in a state of flux and struggling to make money. Deputy Secretary of Energy Daniel Poneman defended government investment in the industry and commented on Chinese competition in a USA Today editorial, stating, "Winning will require substantial investments. Last year, for example, the China Development Bank offered more than $30 billion in financing to Chinese solar manufacturers, about 20 times more than U.S.-backed loans to solar manufacturers. Unfortunately, expanding production has coincided with short-term softening demand, a product of the banking crisis in Europe and its wider economic effects. The combination has had a dramatic effect on the price of solar cells, which has plummeted 42 percent in the past nine months. This has taken a serious toll on solar manufacturers everywhere, including the U.S. ... When it comes to clean energy, we have a choice to make. We can compete in the global marketplace — creating American jobs and selling American products — or we can buy the technologies of tomorrow from abroad."

However, the prodigious production capacities of Chinese solar companies has created a low tide that is now sinking all ships. “The Chinese guys are building out capacity hoping the customers will come and that’s caused this huge oversupply situation,” said Hari Chandra Polavarapu, an analyst at Auriga USA in New York. Across, the board, solar companies have been lowering their guidance for 2011 and the upcoming quarter as market trends appear to be moving against them. China-based Yingli Green Energy Holding Co. (YGE)Renesola Ltd. (SOLA) and China Sunergy Co. (CSUN), and Americans First Solar Inc. (FSLR) and SunPower Corp. (SPWRA) all made cuts in their guidance as profits fell in the third quarter, and JinkoSolar Holding Co. (JKS) and Daqo New Energy Corp. (DQ) both saw their share value drop after missing sales targets in the third quarter. SunPower and FirstSolar have both announced major reorganization plans that will cut costs in order to continue competing with Chinese manufacturers.

Shake-Up Coming, Outlook Brighter

The over-saturation of the marketplace appears to mean that the industry is about to enter a period of great flux that will lead to consolidation and reorganization. “This is the decade of mergers and acquisitions,” Jifan Gao, chief executive officer of Changzhou, China-based Trina Solar Limited (TSL), said in an interview. “From now until 2015 is the first phase, when about two-thirds of the players will be shaken out.” And while a number of solar companies appear poised to collapse, the prospects for the near future may also be improving. The price wars with China may be hurting the bottom line of solar companies, but it appears to be dramatically increasing demand. Research by Solarbuzz.com points to the United States growing to 12 percent of global demand for solar panels, with the market for solar panels doubling in 2011 and increasing 47 percent each year until 2015.

Adding to this, more market visibility could be on the horizon. Silicon-Valley based SunPower has been in the news recently.  They announced a partnership with Ford Motor Company (F) earlier this year to offer discounted solar panels to electric vehicle customers, and recently announced a similar marketing deal with Nissan Motor Co., Ltd. (NSANY). They will also be featured on tonight's two-hour Extreme Makeover: Home Edition as their solar panels are installed at the Lewes, DE Jusst Sooup Ranch, powering the soup kitchen run there by Rev. Dale Dunning.

While the state of flux created by increased competition and lower prices looks to cull the field of solar companies in coming years, it also appears possible that the survivors that emerge from this battle will do so stronger and in a more competitive industry on the whole. Any solar companies that make it through the shake-up should be looking at a new market driven by higher demand for their products. While the Solyndra bankruptcy and pending budgets cuts may hurt available federal funding in the future, the underlying market potential could mean good things for solar companies in the near future.

Long, Long-Term Potential Strong

It's clear that the Obama administration and, arguably, American society as a whole have a vested interest in the success of solar panels as a viable source of power, and the sector's potential looking decades down the road is obvious. Concerns about global warming necessitate a shift to energy sources with lower carbon footprints, and solar offers a method for generating electricity that doesn't require the acquisition of external fuel sources like coal, oil, and natural gas. Over time, both of these elements should present clear economic advantages for solar power. However, precisely when the industry will be able to supply a product that can meet this increasing demand in a way that will necessitate a broader shift in the energy economy is difficult to predict, and investors appear to remain skeptical about solar companies until they show more concrete results.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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