BusinessWeek: Clouds Over the Solar Industry

By: TraderMark Sunday, December 21, 2008 4:14 AM

Symbols: MDS, NCI, SOLF, STP

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Retail prices for photovoltaic (PV) panels may fall by as much as one-third in 2009 because of a continued glut. Adding to the gloom: Spain and Germany, the world's top two markets for PV panels, have recently trimmed the subsidies they offered to jump-start local industries. "We're moving from a seller's to a buyer's market," says Adel El Gammal, secretary general of the European Photovoltaic Industry Assn. (EPIA).

The Claymore/MAC Global Solar Energy Index (TAN) has dropped 71% since its launch on Apr. 15 this year, and some leading companies have fared even worse.

Despite this carnage, industry observers remain bullish on solar's longer-term prospects. As the price of panels drops in the next 12 to 18 months, solar power will become more attractive compared with other forms of energy. Consolidation among companies in the industry—especially as weaker players drop out or get acquired—also should lower costs and improve profitability.

All told, figures energy consultancy Navigants (NCI), the total amount of electricity produced worldwide via solar should soar from 3 gigawatts this year to 15 GW in 2012, the equivalent of 19 coal-fired power plants. (amazing how small it is when you consider it in those terms)

Savvy investors are focusing most of their attention on two regions of the world, Europe and Asia. Sure, the U.S. spearheaded solar heating back in the 1970s and could see a new investment push during the Obama Administration, but over recent years it has been Europeans and Asians, particularly in Germany and China, who have led the pack in new technology, fast-growing startups, and increasing use of solar-generated electricity.

Germany alone will account for 38% of market demand for solar power equipment this year, while Western Europe as a whole constitutes three-quarters of the market. By comparison, China represents 11% of the market, and the U.S. 9%. (Drill baby drill!)

The problems begin with polysilicon, the raw material from which solar cells are made and that accounts for four-fifths of the cost of a solar module. When the solar boom began in 2004, polysilicon suppliers couldn't keep up with skyrocketing demand. To satisfy customers and cash in on surging prices—which reached $450 per kilogram on the spot market early this year—suppliers laid ambitious plans to boost output capacity. But with so many piling in at once, suppliers overshot the market, especially after demand softened for solar panels. Polysilicon prices now have fallen below $200 per kg and could drop to $120 per kg by the end of 2009.

The capacity mismatch won't be fixed anytime soon. Thanks to plants already set to come online, output of polysilicon will double next year, even as production of the solar cells that use it grows by a more modest 34%.

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